A home loan is a long term financial commitment made a little difference in the interest rate makes a significant difference in the payout in the long run. Earlier the moneylenders used to fix an interest rate for home loans on the basis of the cost of their funds and nowadays many money lenders have started analysing the risk factor with their applicants. This means that the applicants who have a strong profile gets a loan at a lower interest rate and on the other hand the applicants with high-risk analysis are either rejected by the lenders or the loan is passed at a very high rate of interest.
Now let us see what are the major factors that influence the interest rates of home loans.
- MCLR of a Bank: The home loan rate of a bank is determined on the basis of the marginal cost of funds based lending rate. This is calculated on the basis of four main components that is the marginal cost of funds, tenor premium, operating cost and negative carry on account of cash reserve ratio (CRR). It is mandatory for the banks to review their MCLR every month on a specified date and on the same date their lending rates are reviewed as well. Banks are required to review home loan interest rates mandatorily at least once in a year. The marginal cost of funds based lending rate remains applicable on this date for the home loan till the next date irrespective of changes in interim months.
- Credit score: The banks and the non-banking financial companies consider the credit score of an applicant to be one of the most important factors to evaluate the applications. A Credit score of the person gives a clear picture of how he or she have behaved while paying the earlier loans. A person with a low credit score of 600 and below is considered to be risky by the money lenders and are either rejected or offered Loan at a higher interest rate. Some lenders offer concessions to applicants with a higher credit score of over 700. The home loan borrowers must know that most of the money lenders take into account the credit score of all the Co-owners of the property and not just the applicant.
- Loan Amount: The money lenders mostly charge a higher interest rate if the loan amount is big. For example, the rate of interest for a loan amount up to INR 30 lakh starts at 8.7 % per annum whereas loan amount of above INR 75 lakh will have an interest rate of 9% per annum. Therefore it is advisable that you pay a bigger amount as the down payment of your property, so that you don’t have to depend more on the loan amount and pay more interest rate.
- Type of interest rate: home loans come with three kinds of interest rate types such as fixed, mixed and floating rates. The floating interest rate depends upon the market ups and downs while the fixed rate is fixed at a percentage for the entire tenure of the home loan. However, mixed rate of interest is fixed for a specific period of time after which they turn into floating rates. Banks and Housing Finance Companies have higher interest rate risk regarding fixed and mixed rate home loans so they charge more interest on these loans for compensating their future loss in the interest income, if any that arises out of the interest rate volatility.
- LTV Ratio: LTV or the loan to value ratio is the proportion of the property value that one can disburse through a home loan. The remaining Property value has to be borne by the borrowers. According to the Reserve Bank of India, the home loans up to INR 30 lakh has a loan to value ratio of 90% while 80% for the loans ranging from between INR 30 lakh to INR 75 lakh and for above 75 lakh it is 75%.
- Job Profile: Banks and non-banking financial companies sanction home loans to the applicants who have a stable income and job. The salaried professionals are given home loans at lower interest rates while those who are self-employed have to pay a higher rate of interest. The most preferred applicants among the salaried class are those working in government and public sector followed by employees of the top private sector. Among the self-employed group, Chartered Accountants and doctors are considered as the low-risk applicants, therefore, some of the lenders try to target a specific customer base by offering concessional home loan rates.
- Women Applicants get concession: Some of the banks provide concession on home loan interest rate to the women applicants across all home loan categories and amount.