Those planning to buy a home must avail of a home loan to fund their purchase. Home loans allow borrowers to keep their savings safe for a rainy day and still be able to afford the home of their dream. Further, home loans come with home loan tax benefits that allow borrowers to save a lot of money over the tenor of the loan. 

The home loan interest rates offered to a borrower determine how easy or difficult it will be for the borrower to repay the loan as well as the total interest they will have to pay on the loan. Borrowers are therefore advised to negotiate hard with their lender and try to avail of the lowest home loan interest rate possible. In this article, we take a deep look at factors that affect home loan interest rates as well as home loan eligibility. 

Top Factors That Affect Home Loan Interest Rates 

Credit Score 

Your credit score is one of the first things that your lender will check about you after you apply for a home loan. A credit score is a three-digit number between 300 and 900 that signifies a borrower’s creditworthiness and repayment capacity. The higher your credit score, the better. Lenders sanction their best home loan interest rates to borrowers whose credit score is 750 or above. 

Income and Job Stability 

While assessing home loan eligibility, lenders essentially try their best to weed out any chances of loan default. Thus, people who have a stable income and job get approved for a loan quickly as these people are less likely to default on loan repayment. This is also the reason why lenders extend lower home loan interest rates to such individuals. 

Loan Amount

Before applying for a loan, borrowers should use the home loan calculator to figure out the loan amount that one is eligible for. Applying for a loan amount that one is eligible for or an amount slightly lower than one qualifies for leads to lenders offering a lower interest rate to borrowers as this convinces lenders of a borrower’s repayment capacity. 

Loan Tenor 

The loan tenor also affects the home loan interest rates. Long loan tenor loans carry a higher risk for lenders and therefore, lenders charge a high rate of interest on these loans. On the other hand, short-tenor loans do not carry much risk for the lender and therefore, lenders charge a low rate of interest on these loans. 

External Factors 

In India, lenders offer home loans at two different types of interest rates: fixed and floating. In the case of fixed-interest rate loans, the rate of interest remains the same through the tenor of the loan. However, in the case of floating interest rate loans, the rate of interest varies based on external market conditions. When the Reserve Bank of India (RBI) increases the Repo Rate, home loans become expensive and when the RBI reduces the Repo Rate, home loans become cheaper. 

Know the difference between fixed vs floating interest rates. 

Loan-to-Value Ratio

The loan-to-value ratio refers to the percentage of the property value that one can finance through a loan. Lenders sanction up to 85% of a property’s value as a loan. However, when borrowers reduce the loan-to-value ratio by increasing the down payment, they increase their stake in the property and therefore, decrease the risk involved for the lender in lending money to the borrower. Thus, in the case of low loan-to-value ratio loans, borrowers get lower home loan interest rates. 

It is crucial to develop an understanding of factors that affect your home loan interest rates if you wish to avail of the lowest interest rates possible. We hope this article helped in this regard.

For more information read here: What Factors Affect Home Loan Interest Rates In India?