These days it has become easier to purchase a home with the help of home loans and their affordable monthly instalments, interest rates, and long-term tenors. Applying for a home loan is no longer the strenuous process that it once was. With multiple banks and lenders offering affordable home loan options, borrowers have a number of attractive and hassle-free options to choose from.
Before you approach a bank or a lender for a home loan, it is best to understand the factors that affect your interest rate and how they may hinder the affordability of your home loan. Some of these factors vary from one lender to another and some are fixed by the Reserve Bank of India and are out of your control.
Here are the top 8 factors:
- CIBIL Rating (Credit score)
CIBIL rating, which is also commonly known as ‘Credit Score,’ is a three-digit score between 300 to 900. The score is given by TransUnion CIBIL Limited, a company that collates the information and grades your credit profile.
|CIBIL Rating||Credit Status|
A high credit score of 750 and above means that you will have a higher chance of home loan approval with a low interest rate. At the same time, a CIBIL rating of less than 750 has a low chance of getting approved and even if it is approved, the interest rates are likely to be high.
Hence, it is important to maintain a good CIBIL score that will help you secure a low interest and sizeable sanction. You can maintain a high CIBIL rating by not defaulting on payments, not taking unnecessarily long-term loans, clearing your outstanding dues, and clearing your EMIs on time.
- Interest Type
There are two types of interest rates, floating interest rate and fixed interest rate. A floating interest rate keeps fluctuating based on the market trend. Although a floating interest rate can be lucrative, as it is relatively lower than a fixed interest rate, it is subject to fluctuation and may prove steep in unfavourable market conditions.
It is in your best interest to use an EMI calculator to understand your interest affordability by leaving some margin for fluctuation. On the other hand, a fixed interest rate does not fluctuate and remains the same throughout the tenor of the loan (or till a reset date).
- Loan-To-Value (LTV) Ratio
LTV is the percentage of the property value that can be financed via a home loan. The balance payment needs to be furnished by the borrower. While LTV does not directly affect home loan interest rates, it affects the interest outflow in absolute terms. A higher loan amount directly leads to a higher interest payout over the loan tenor.
- Property Location
Property location plays a major role in the interest rate for the loan you are applying for. Houses that are situated in a good locality and have best-in-class amenities have a higher resale value compared to properties situated in a less desirable location. The same rationale applies to properties that are new and well maintained compared to properties that are old and unkempt. The interest rates for new homes are likely to be lower than those for older, debilitated properties.
The most important factor when apply for home loan and its interest rate is the income source of the borrower. If a borrower has an unstable source of income, s/he is considered a higher risk profile as compared to someone who has a stable source of income, such as a salaried job at a reputed organisation. CAs or doctors or employees at large enterprises or MNCs are considered as low risk and hence, offered a lower interest rate.
You can always opt for a home loan with a co-applicant, such as a spouse or a family member. This will not only reduce your financial burden by reducing the monthly instalments, but it will also provide you with an opportunity to enhance your application. For instance, applying with someone who have a high credit score and sizeable monthly income increased your joint eligibility.