Top 5 Factors That Affect Home Loan Interest Rate

The idea of having a home where your family lives and grows old together is appealing to each individual. It can be a reality with the help of a Home Loan. But before you acquire a Home Loan, it is imperative to research and understand the best lender that will give the right loan for a cheap interest rate.

Let us look at the factors that determine the interest rate of a Home Loans.

Table of Contents

Credit Score

A credit score is an important factor influencing your current Home Loan interest rates. This score is a reflection of your financial discipline and decision-making. Your score is decided based on every financial decision you make, including – credit card bills to your EMI payment.

A higher credit creates a good impression on your lenders and makes them believe you can handle and repay a loan. Your credit score reflects your creditworthiness. If you have a lower credit score, your lender will be hesitant to provide you with a loan and will charge you a higher interest rate.

There are methods of improving your credit score, and most are about making good financial choices. You will have a good credit score if you regularly pay your EMI and credit card bill.

Job Profile

Your job profile also determines the interest rate you get from your lender. A stable job means that you have an excellent financial record as you have a regular income. It is what the lenders want.

And a stable and secure job improves your chances of getting a loan with a lower interest rate.

For banks, government employees are considered safe options to provide a loan among all salaried employees. For self-employed individuals, doctors and Chartered Accountants are considered safer options.

The reason why your job impacts your loan rate is that it is a reflection of your financial stability. A stable financial status means you’ll repay the loan without any hassle.

Location of Property

The location of your property is yet another factor in deciding your Home Loans interest rate. For example, if your home is situated at a low-value location, with low amenities and poor construction, the resale value of your home decreases. It will lead to banks charging higher interest rates, as they have to take the risk. In the same way, a house in a good locality and amenities will have a higher resale value and gives the lender more confidence. It will result in a lower interest rate for you.

Type of Interest Rate

There are three interest rate types when it comes to loans. These are- fixed interest rates, floating interest rates, and mixed interest rates. In a fixed interest rate, you will pay the same interest rate throughout. A floating interest rate means that the rate of interest will change with the market. A mixed interest rate is a combination of floating and fixed interest rates.

You get a lower interest rate when you opt for a floating interest rate on your Home Loan. It is because the bank gets absolute sovereignty in your interest rate. They can adjust it according to their needs. It means lower risk for them. Therefore, you get a lower interest rate when you opt for a floating interest rate. A fixed or mixed interest rate is risky and less profitable to the bank. Hence, they charge you a higher interest rate in this case.

Loan Amount and Tenure

The loan amount you take, and the tenure you need to repay it, are obvious factors that influence the interest rate. A higher loan amount will get you a relatively higher interest rate than a low-rate amount. Similarly, if you opt for a longer term, you will be charged a higher interest rate. A shorter term means the bank gets to recover its money quickly, so they give a lower rate of interest when you opt for this.