Lenders factor in an array of parameters while setting lending rates for home loans. So, understanding these factors can get you a suitable home loan deal with lowest interest cost.
Given that lenders factor in an array of parameters while setting lending rates for home loans, understanding these factors can get you a suitable home loan deal with lowest interest cost as per your eligibility.
These are some of the key factors that determine your home loan interest rate:
Many lenders have begun adopting risk-based pricing wherein they factor in the credit score of home loan applicants while setting the loan interest rate. As those with a good credit score are considered as creditworthy due to their disciplined repayment history, lenders entice them by offering lower interest on home loans. Hence, those planning to avail home loans should fetch their credit report at least 6 months before submitting their application.
Doing so would give them sufficient time to take required measures to improve their credit scores before submitting their application. This would also help detect clerical errors or wrong information, if any, in credit reports. Once such error or misinformation is reported to the concerned bureau or lender, the rectified credit report will automatically reflect a higher credit score.
A higher loan amount can mean higher credit risks for the lenders and hence, they levy comparatively higher interest rates for home loans involving a higher loan amount. For example, SBI home loan interest rate for amount up to Rs 30 lakh starts from 6.75% p.a. onwards, while the interest rate for loan amount above Rs 30 lakh and Rs 75 lakh starts from 7.00% p.a. and 7.10% p.a., respectively. Hence, borrowers should try to accumulate higher down payment or margin contribution if doing so would help them avail a home loan at a lower interest rate.
Interest rate type
Home loan interest rates are categorized into 3 types – floating, fixed and mixed interest rate. Floating interest rate varies as per the changes in the interest rate benchmark followed by the lender whereas fixed rate home loans remain constant throughout the loan tenure. As far as mixed/hybrid rate home loans are concerned, these remain fixed for a pre-set period, usually for 2 or 3 years, after which they become floating rate home loans. Given that mixed and fixed interest rates tend to involve higher risks for the lenders, banks and HFCs charge a higher interest rate to compensate for their loss in interest income arising from adverse changes, if any, in the interest rate regime.
Loan to Value (LTV) ratio
LTV ratio of a home loan is the proportion of property value sanctioned as loan by the lender. The remaining amount has to be financed through your own funds in the form of down payment. As banks have to make higher provisions for home loans with higher LTV ratio, they compensate for it by charging a higher interest rate for loans with higher LTV ratios. Hence, borrowers should try to opt for a lower LTV ratio to reduce their interest cost.
Many banks and HFCs factor in the income source of home loan applicants when setting the interest rate. Generally, salaried individuals are charged a lower interest rate as compared to self-employed professionals due to higher income certainty of the salaried individuals. Among salaried applicants, government and PSU employees are most preferred owing to higher job and income certainty. They are followed by those working in reputed and large private sector organizations as such companies are considered to be more stable with higher potential to withstand economic downturns as compared to other private sector companies.
As the credit risk appetite of lenders and the parameter for setting interest rates tend to vary widely, borrowers must compare as many home loan options as possible before zeroing in on any offer. They must first approach banks or NBFCs/HFCs with whom they have an existing relationship as many lenders offer preferential interest rate to existing consumers. Then, follow it up by visiting online financial marketplaces to compare interest rates offered by other lenders.
(By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com)