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Factors Affecting the Interest Rate on Your Home Loan

For many of us, owning a home is both a personal and financial goal. Many people save for years, invest in high-yielding assets, and work lots of jobs in order to achieve their aim. However, as property prices in India keep rising, it is becoming increasingly hard for people to pay for their houses out of their own money. However, this is not the end of their estate dreams.

Home loans are relatively widespread and simple to obtain in India. These have low interest rates, convenient EMI alternatives, and long payment terms. While this is an appealing and reasonably safe choice, it is still necessary to have a deep understanding of mortgage loans before applying for one. When it comes to long-term payments, the interest rate on your house loan is the deciding factor. As a result, it is critical for everyone to be aware of the elements that may have a positive or negative effect on their home loan interest rate in India.

The most prevalent factors that influence your home loan interest rate are listed below.

Rates for various types of home loans

Because of the high property value, home loans normally have a higher principal amount. If you take out a house loan, you may have choices about how your interest is calculated. There are two types of loans available: fixed-rate loans and floating-rate loans. Your interest rate is unaffected by market movements or macroeconomic factors when you have a fixed-rate mortgage. Floating rates, on the other hand, introduce some risk because the interest rate may rise or fall depending on market conditions.

Fixed-rate loans, on the other hand, are slightly more expensive than their counterparts due to the added certainty. In the event of a default, they also face prepayment penalties. You can benefit from a rapid repo rate decrease or a policy rate cut if you have a floating rate home loan. There are no prepayment penalties with this loan type. So, before selecting an interest-rate regime, research the market, learn about its trends, and select the rate type that ’s convenient.

For a home loan, you’ll need a CIBIL score

The CIBIL score is a financial indicator that measures a person’s creditworthiness, or capacity to repay a debt. When banks examine a loan applicant’s financial background, this is a crucial indicator to look for. This score ranges from 300 to 900, with a CIBIL score of above 750 considered optimum for a home loan. Boosting your CIBIL score in the short term can help you secure a loan in the long run. Focus on fixing your credit score, paying off short-term loans on time, keeping up with EMI payments, and limiting your credit card usage.

Property Estimates

The property for which the loan is being taken out is also taken into account when calculating the home loan interest rate. Your property will have a high resale value if it is in a nice neighborhood, is close to amenities, and is relatively new. On the other hand, houses in remote places or those that are slightly older do not have significant resale value. In comparison to a property with a lower resale value, a building with a high resale value will have a reduced interest rate.

LTV (Loan-to-Value) Ratio

The LTV Ratio is the percentage of the property’s value that is financed by the loan. The interest rate on your loan will be high if the loan amount is considerable. Making a high down payment reduces the amount of loan that must be accumulated, therefore cutting the interest rate. As a result, lowering your home loan EMI helps to accelerate a better interest rate. The term of the loan has a similar effect on the interest rate. A longer tenor typically generates higher rates, whilst a shorter tenor may give a more accurate deal.

Rates of the MCLR

MCLR rates stand for Marginal Cost of Fund-based Lending Rates. Simply put, it’s the lowest interest rate a bank can charge. The bank assesses its MCLR rate on an annual basis, based on various other criteria such as the Cash Reserve Ratio (CRR) and the bank’s operational expenses. This is also the moment when the lender reassesses the interest rates of existing borrowers. As a result, changes in the MCLR rate can affect the interest rate on your home loan.

Home loans are significant financial investments that demand careful consideration and coordination. Understanding your home loan qualifying criteria will lead to significant savings and have your loan paid off quicker. Get to know these factors of your mortgage interest rate before you start your path to your dream home.

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