Given that lenders consider a variety of factors when determining lending rates for home loans, knowing these elements will help you find the best home loan package with the lowest interest rate based on your eligibility.
Credit score: Many lenders have begun to use risk-based pricing, in which the credit score of house loan applicants is taken into account when determining the loan interest rate. Lenders lure consumers with a strong credit score by giving reduced interest rates on home loans since those with a good credit score are regarded as creditworthy due to their disciplined repayment history. Those interested in obtaining a house loan should obtain their credit report at least 6 months prior to completing an application.
Loan amount: Because a larger loan amount entails greater credit risk for the lender, higher interest rates are charged on house loans with larger loan amounts. As a result, borrowers should aim to save more money for a larger down payment or margin contribution if it will help them get a home loan with a lower interest rate.
Interest rate type: Floating, fixed, and blended interest rates are the three categories of home loan interest rates. Floating interest rates fluctuate in response to changes in the lender’s interest rate benchmark, whereas fixed-rate home loans remain consistent throughout the loan term. Mixed/hybrid rate home loans are fixed for a predetermined length of time, usually two or three years, after which they become variable rate home loans.
Due to the higher risks associated with mixed and fixed interest rates, banks and HFCs charge a higher interest rate to compensate for the loss of interest income resulting from adverse changes in the interest rate regime if any.
Loan to value (LTV) ratio: The LTV ratio of a house loan is the percentage of the property value that the lender approves as a loan. The remaining sum must be paid for out of your own pocket as a down payment.
Because banks must set aside more money for house loans with higher LTV percentages, they compensate by charging a higher interest rate on those loans. As a result, borrowers should aim to choose a lower LTV ratio in order to cut their interest costs.
Job profile: When determining the interest rate on a house loan, many banks and HFCs consider the applicant’s source of income. Salaried workers are typically charged a lower interest rate than self-employed professionals because of the salaried individuals’ increased income predictability. Government and PSU personnel are the most desired among paid applicants, owing to increased job and income security. They are followed by those who work for reputable and large private sector organizations, as these corporations are thought to be more stable and have a greater ability to endure economic downturns than other private sector firms.
Because lenders’ credit risk appetite and the parameters used to establish interest rates vary greatly, borrowers should examine as many home loan possibilities as possible before settling on one.