Home loans can have a huge impact on your financial health and even your long-term quality of life. The loan terms you accept will dictate your financial comfort or financial hardship for many years to come. Finding the right EMI amount, which is feasible and guarantees early repayment, is crucial to borrowing smartly. Among the many factors that determine the loan terms, the interest rate of the home loan is of the utmost importance. While other factors, such as the economic situation, inflation, and your income, are beyond your control, the interest rate is something you can influence to some degree.
The type of mortgage interest rate
To avoid any fluctuation in interest rates, you can take out a fixed rate mortgage. The benefit here is that your rate won’t be affected by economic and market conditions, and you can plan for repayment with great certainty. However, fixed interest rates are usually a notch higher than variable rates and prepayments under certain conditions are subject to prepayment penalties.
Floating rate loans, on the other hand, help you benefit from falling repo rates, and if you expect key rates to fall, you should side with floating interest rates. In addition, prepayment penalties are waived for variable rate loans. However, the downside here is that the interest rate on your home loan could go up and there is some level of uncertainty.
The interest rate regime
Variable-rate home loans are linked to an internal or external benchmark index, the latter ensuring better transmission of changes in the key rate. Many older loans are based on the lenders’ MCLRs, while many newer loans are based on the RBI’s repo rate. In comparison, RLLR-based loans are more like the reverse repo rate, as the MCLR depends on the internal mechanism of the lender.
If you have an RLLR loan, you can expect faster and more transparent transmission of repo rate cuts. However, the interest rate on your home loan could also become more volatile and can also have the opposite impact in a rate increase scenario. With both schemes, remember that the actual interest rate you get is subject to a margin and sometimes a risk premium as well.
Your financial profile
Lenders are allowed to include in the home loan interest rate a spread or risk premium to reflect your risk profile. In short, the riskier you are as a borrower, the more lenders may have to charge to offset lending risk. Two ways to reduce loan risk are:
1. Maintaining a high CIBIL score: This score ranges between 300 and 900, and you should aim for a score above 750, which indicates that you are creditworthy and have a reliable history of paying off your debts. This metric can tip the scales in your favor, so be sure to check your CIBIL score and improve it by paying your current EMIs on time, limiting your credit card usage to 30%, fixing errors in your credit file, etc.
The amount and duration of the loan
Larger loans carry more loan risk and, therefore, higher interest rates. The solution is to make a larger down payment. Opting for a larger down payment and therefore a lower loan-to-value (LTV) ratio, gives the lender additional comfort and can help you get a better interest rate.
Likewise, be careful with the tenor you choose. A longer term can help make your EMIs affordable, but a shorter term can help you get a lower rate and reduce the net interest payment on your home loan. This is because your financial profile is more likely to remain constant in the short term.
The resale value of the property
The home loan interest rate varies depending on location, amenities, condition of the property, and other factors, such as connectivity. Newer properties, with a higher resale value, will likely attract a low interest rate. High-value properties can be easily liquidated in the event of mortgage default and as such invite better interest rates as they reduce loan risk.
Now that you know the key factors that affect your home loan interest rate, take the right steps to qualify for a profitable loan, such as Bajaj Housing Finance Limited home loan. Here you are assured of some of the most attractive interest rates for a large loan amount. You can repay your loan over a maximum of 30 years and benefit from a PMAY interest subsidy as an eligible first-time buyer. For cost-effective financing, apply online today!
