What Are Factors That Influence Home Loan Interest Rates

Owning a dream home is no longer a distant dream with the availability of home loans. However, understanding and managing the financial aspects of a home loan can be overwhelming, especially when it comes to the interest rate. The interest rate plays a crucial role in determining your loan's affordability and the Equated Monthly Instalments (EMIs) you'll have to pay.

In this article, we will explore the various factors that influence home loan interest rates in India. By understanding these factors, you can make informed decisions about your mortgage and navigate through the complexities of borrowing.

7 Factors that influence home loan interest rates

1. MCLR rates

The Marginal Cost of Funds Lending Rate (MCLR) is one of the most important factors affecting interest rates. It is the minimum rate below which a bank cannot lend. MCLR depends on factors such as operating costs, marginal cost of funds, Cash Reserve Ratio (CRR), and tenor premium. 

Banks review their MCLR rates annually, but changes in MCLR throughout the year do not affect existing borrowers until the next reset date. This means that your housing loan interest rate can increase or decrease based on changes in MCLR rates.

2. Type of interest

When availing a home loan, you have different options for the type of interest rate – fixed, floating, or mixed. A fixed interest rate remains constant throughout the tenure of your loan, providing stability in your monthly repayments. 

On the other hand, floating interest rates fluctuate based on changes in the Reserve Bank of India's (RBI) policy rates. Opting for a mixed housing loan interest rate allows you to enjoy the stability of a fixed rate for an initial period, followed by a floating rate.

3. Loan-to-value (LTV) ratio

The Loan-to-Value (LTV) ratio refers to the percentage of the property value that can be financed through the loan. A higher LTV ratio indicates a higher credit risk for the lender, which results in a higher housing loan interest rate. 

By making a larger down-payment, you can reduce the quantum of the loan and lower the interest rates as well.

4. Credit score

Your credit score plays a crucial role in determining your home loan interest rates. It reflects your repayment history, financial discipline, and creditworthiness. A lower credit score indicates a higher credit risk, leading to lenders charging a higher interest rate to cover their risks. 

Conversely, a higher credit score portrays you as a low-risk borrower and makes lenders more willing to offer lower interest rates.

5. Location of the property

The location of the property you intend to purchase also impacts your home loan interest rate. Properties in localities with good amenities and connectivity tend to have higher resale value, resulting in lower interest rates. 

On the other hand, properties in less desirable neighbourhoods may be cheaper but have lower resale value, leading to a higher housing loan interest rate.

6. Job profile

Your job profile and income source influence your home loan interest rate change as well. Individuals with stable income sources are considered low-risk borrowers and are offered lower interest rates. Salaried professionals, government employees, PSU employees, doctors, and chartered accountants fall into this category. 

On the other hand, those with unstable income sources are considered high-risk borrowers and may have to pay higher interest rates.

7. Tenure of the loan

The tenure of your home loan also affects the home loan interest rates. Loans with shorter tenures usually attract lower interest rates, even though the EMIs may be higher. 

Conversely, loans with longer tenures have lower EMIs but higher interest rates. To find the best tenure for your loan, you can use an online home loan EMI calculator.

Conclusion

Understanding the factors affecting interest rates enables prospective you to strategically time your purchase and secure the most favorable mortgage terms. Do not forget to use a home loan interest rate calculator to estimate your EMIs. 

If you are looking for a home loan with low interest rate, look no further than Mahindra Finance. We provide financing for up to 75% of the construction costs (excluding land) for a period of up to 20 years that too without any additional fees for early repayment.

FAQs

1) Do home loan interest rate change over time?

Yes, home loan interest rate change based on various factors such as market conditions, RBI policies, and changes in the lender's internal guidelines.

2) What are the factors affecting interest rates?

MCLR rates, type of interest rate chosen (fixed or floating), LTV ratio, credit score, property location, job profile, and tenure of the loan are some factors affecting interest rates.

3) How can I calculate my housing loan EMI?

You can use an online home loan interest rate calculator to determine your monthly repayments. Simply input the loan amount, interest rate, and tenure on the home loan interest rate calculator to get an accurate estimate of your EMI.

4) How often does a home loan interest rate increase?

Home loan interest rate increase based on various economic factors. It is essential to keep track of market trends and consult with your lender for the most up-to-date information.