Five factors that impact home loan interest rates

home loan tax benefits

Among other financial products, a home loan is one of the biggest financial commitments as repayment is another liability that borrowers need to undertake. The lending terms that a borrower agrees to will determine how financially stable or distressed you are in the coming years. The affordability of housing loans primarily depends on the interest that varies across lenders.

Home loan interest rates are the most essential among multiple factors that affect lending terms. Although some factors are not in our control, the interest rate is something that one can impact to a certain extent.

Read on to know the factors affecting the interest rate of housing loans.

5 factors impacting housing loan interest rates

Type of interest rate

To avoid the hassle of interest rate fluctuations, borrowers can choose fixed home loan interest rates. The market or economic condition will not impact such an interest rate, and one can plan his/her repayment with certainty. However, fixed rates are slightly higher than floating rates under certain circumstances.

On the other hand, floating rates can benefit borrowers with the repo rate cuts. Moreover, there are no prepayment charges in this type of interest rate. However, the disadvantage is that home loan interest rates can increase, and there is no certainty involved.

Credit score

This is one of the crucial deciding factors that one must consider when planning to apply for a home loan. With this score, lenders measure a borrower’s creditworthiness and assess his/her repayment ability. This score usually ranges from 300-900, and individuals with a score above 750 will get the leverage to negotiate with the lender for a better interest rate. Nonetheless, one can maintain his/her credit score by limiting the credit utilisation ratio to at least 30%, paying EMIs on time etc.

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Income stability

A home loan applicant working in a reputed organisation and earning a stable income is considered reliable in the eyes of the lender. This is because if the borrower frequently changes jobs and has no stable income, he/she becomes a risky candidate. Therefore, salaried individuals with a stable job profile can avail competitive home loan interest rates from the lender.

Loan amount and tenor

If a borrower applies for a substantial home loan amount, a lender usually levies a higher interest rate as it implies a risk to the lender. In this regard, paying a sizeable down payment effectively reduces the interest rate on housing loans.

On the other hand, choosing a shorter tenor will allow borrowers to pay interest component for a lesser period, however, EMIs will get higher. Besides, another technique to avail lower interest rates for housing loans is by choosing a home loan balance transfer. In such a facility, individuals transfer their outstanding principal amount to some other financial institution offering better interest rates.

Property location and valuation

Another important factor that can significantly impact home loan interest rates is the location and valuation of property. If the property is located in a prime location and well maintained, the resale value will be higher and vice-versa.

Apart from these factors, borrowers must also learn about the current home loan eligibility criteria and meet them successfully to negotiate with the lender for better rates.

Moreover, one can save substantially from home loan tax benefits by claiming a deduction on paid interest amounts of up to Rs.2 lakh under Section 24 of the ITA Act.

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Also, acquiring housing loan from reputed financial institutions will also allow borrowers to avail of attractive interest rates, an easy application process and prompt approval. Moreover, one can get the benefit of pre-approved offers on a range of financial products such as loan against property, home loan, etc. 

These offers significantly eliminate the hassle of lengthy documentation and save time. Therefore, existing borrowers can check their pre-approved offers by mentioning their names and contact details.

Now that borrowers know the factors impacting home loan interest rates take the right measures to obtain a cost-effective loan. Keeping these aspects in mind and conducting proper research on the lenders will allow borrowers to choose a good property and acquire an affordable home loan.

By Hammad Hassan

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