A home loan makes it possible to own your dream home right now. The affordability of the loan depends on the Equated Monthly Instalments (EMI) that you will have to pay. EMIs help you pay back the principal and interest amount in a way that does not add stress your monthly budget. However, this will depend a great deal on the interest rate. There are many factors that influence the interest rate which will vary from lender to lender. Some of these factors are fixed (such as the RBI’s repo rate or the bank’s MCLR rate) but some are variable.
MCLR is the Marginal Cost of Funds based Lending Rate. This interest rate is the minimum that a bank can lend at. It depends on other factors too such as the operating cost, marginal cost of funds, the Cash Reserve Ratio (CRR) and any negative carry on it, and tenor premium. There is an annual reset date for the MCLR during which banks review the rate for existing home loan borrowers. The MCLR on the reset date remains applicable until the next year’s reset date, even if there are changes in the MCLR in between. This means that your interest rate can increase or decrease based on the changes in the MCLR rate.
You can choose between a fixed rate, floating rate, and mixed interest rate. Floating interest rates change based on changes by the Reserve Bank of India (RBI). If the latest RBI norms result in lower interest rates, then your EMIs will be lower and vice versa. With a fixed interest rate, you get the same rate of interest throughout the tenure of your loan. Loans with mixed interest rates start off with a fixed rate of interest for a specific time period and then switch over to a floating interest rate.
LTV refers to the percentage of the property value that can be financed through the loan. A larger quantum of loan attracts a higher rate of interest because it is a higher credit risk. Putting down a larger down-payment can help bring down the quantum of loan which in turn will reduce the interest rates as well.
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This has a significant impact on your interest rates. Your credit score is a statement of your repayment history, financial discipline or habits, and your creditworthiness. A lower credit score shows portrays a high credit risk, which would cause lenders to charge a higher rate of interest in order to cover their risks. A higher credit score, on the other hand, shows a lower credit-risk individual which would lead to lenders being more willing to offer lower interest rates.
The location of the property that you are considering will play a role in the interest rates that you are charged. Homes which are in a locality with good amenities and connectivity will have higher resale value. Homes which are in a less desired neighborhood may be cheaper but would have lower resale value. Likewise, newer properties are considered more valuable while older properties are considered to have lower resale value. Lenders view homes which have a good resale value as a lucrative property and so charge lower rates of interest for it. For homes with a lower resale value, interest rates will be higher.
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Individuals who have a stable income source are considered low-risk while those who have an unstable income source are considered high-risk. Lower interest rates are thus offered to those with a stable income, which would include salaried professionals, PSU and government employees, and those working in leading private sector firms. Doctors and chartered accountants are considered low-risk among the self-employed category.
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Loans with a shorter tenure attract a lower rate of interest (even if the EMIs are higher) than loans with a longer tenure (which will have lower EMIs but a higher interest rate). With a simple online home loan emi calculator it is easy to find the best tenure for your loan.
The factors listed above are the major factors that influence the interest rate on your home loan. While some of these are within your control, others are influenced by the economy. Keeping all these factors in mind when deciding on a home loan will help you get the best value loan for your budget and requirements.
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