4 Factors That Can Affect Home Loan Interest Rates

 

While home loan interest rates in 2021 have been reduced to their historic lowest, there are several factors that borrowers must account for to enjoy a minimal cost of borrowing.

A host of parameters are taken into consideration which are calculating the home loan interest rate. Given that it is one of the biggest financial commitments that you would be making in your life, it would help you to get the most out of a home loan if you are aware of these factors -

1. Loan amount 

Most financial institutions levy a higher interest rate for a larger loan quantum. Hence, it is advised to make a higher down payment on your housing loan if you want the monthly instalment outgo to reduce. 

2. Credit score

Application for a home loan will only be considered if the borrowers' CIBIL score is 750 or above. With a high credit score, there is a greater chance of loan approval at a lower rate of interest. The same is also applicable if you are applying for a home loan with a co-applicant having a high CIBIL score.

Incidentally, if you apply for a home loan with your spouse, you are also eligible to enjoy home loan interest tax benefits.

3. Loan to value ratio

The loan to value ratio or LTV is the percentage of property value financed through the loan amount. The remainder has to be funded out of the borrower's pocket. 

As per the RBI circular, the LTV is capped at 75% for a loan amount upward of Rs.75 lakh. Accordingly, the interest rate charged is also high. You can use a home loan EMI calculator to determine your monthly outgo to avail such a loan amount. 

4. Type of rate of interest 

Borrowers can opt for a fixed rate or floating rate of interest for a home loan. For a fixed-rate loan option, the interest levied is higher owing to a higher risk to lenders. 

One must note that these factors that impact home loan interest rate will vary from one lender to another. Find out the applicable factors to avail the best interest rates. 

Read Also: Know the Benefits of using Home loan Calculator

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Know How to Deal with Hiked Home Loan Rates With Calm

 Home loan interest rate is determined based on the current market scenario. For instance, RBI controls the repo rate that further influences this rate. On top of that, lenders add their spread, and finally, a rate is proposed to borrowers. 

Thus, individuals who want to get rid of fluctuating home loan interest rates can adopt the following measures. 

• Part-payment 

Individuals can make full use of the surplus cash if they have to pay off a considerable portion of the loan. It will allow individuals to save substantially in interest payment and shorten the tenure. Selected financial institutions also facilitate part-payment with minimal charges. 

In this respect, they can use an annual bonus, interest income from fixed deposits, maturity and the likes. 

• Increase EMIs

Generally, lenders tend to increase the loan tenure if interest rate hikes. Even if it temporarily lowers EMI outgo, the cost of borrowing rises exponentially. Thus, it will be wiser for borrowers to opt for a high EMI and reduce the tenure. 

However, set home loan EMI amount as per repayment capacity, which will ensure smooth loan repayment. 

• Pre-payment

Paying off debts quickly allows borrowers to carry on other financial liabilities with ease. Thus, they can pre-pay EMIs to reduce the principal outstanding, in turn, lowering EMI and interest outgo. 

• Home loan balance transfer 

Another effective way to tackle hiked home loan rates is by choosing loan balance transfer. Existing borrowers can transfer their outstanding loan balance to a new lender, which offers better services and lower interest rates. To maximise the benefits, borrowers should opt for this option in the initial phase of repayment when the interest rate generally remains on a higher side. 

However, this transfer also accompanies several charges that borrowers have to pay both to new and existing lenders. Thus, before selecting, assess the need for the transfer and cost of it. 

These are some of the possible ways to manage hiked home loan interest rate with efficiency. 

Read Also: What factors Affect Your Home Loan Interest Rate

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These Factors are Going to Affect Your Home Loan Interest Rates

 Housing loan interest plays a crucial role in determining the cost of borrowing. Thus, it is imperative for borrowers to know the factors that may affect the home loan interest rates. 

Following are some of them. 

1. Loan amount 

Generally, lenders charge higher interest on borrowing a significant loan amount. Since the interest rates vary with lenders, borrowers need to compare financial institutions to get the best deal. Moreover, they can also opt for a substantial down payment to reduce their EMI component. 

2. Interest type 

Home loans generally come with three types of interest rates, fixed, floating and mixed. While the first two types are self-explanatory, a mixed option contains a fixed interest rate for a specific period, and the rest of the tenure accompanies floating interest rates. 

Typically, lenders levy higher interest rates on fixed and mixed interest rates. 

3. External benchmark of financial institutions 

From October 1, 2019, RBI mandated the financial institutions to link their floating interest rates with any external benchmark like repo rate, Treasury bill rates, and the like. Thus, the interest rate varies depending on this benchmark.

On top of that, lenders also decide their spread which is added to the interest rates. 

4. LTV ratio 

It refers to the percentage of value of a property that is extended to borrowers. RBI has specified that the LTV will be 90% for a loan amount of up to Rs.30 lakh, 80% for a loan amount of up to Rs.75 lakh and 75% for a loan value above Rs.75 lakh. 

Since the loan amount is determined based on this factor, the interest rate and EMI depend on it.

5. Credit score 

Since credit score shows a borrower's creditworthiness, lenders check for this parameter before sanctioning loans. For instance, individuals with a credit score of 750 and above are considered eligible to service a home loan.  

6. Job profile 

The income or type of employment of borrowers determines the interest rate of a home loan. For instance, lenders generally offer lower interest rates to salaried individuals. 

Thus, individuals can look out for these factors to get the best housing loan interest.

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Are you worried about the EMIs? Follow this Guide to Manage your Home Loan EMIs

 Availing a home loan from HFCs has become convenient, thanks to relaxed eligibility criteria. Borrowers searching for a substantial fund to purchase a residence or invest in home construction can apply for a home loan. Nonetheless, EMI repayment and interest payment is a monthly exertion.

This repayment burden can be tackled efficiently by employing specific ways for healthy savings. Individuals can compare different lenders in the market and opt for the competitive interest rate to reduce home loan EMI amounts.

Tips to reduce the EMI repayments on your home loan

• Go for a longer tenure

The repayment tenure significantly affects EMI and interest cost. One can reduce monthly instalments if an individual can opt for a longer home loan tenure. Nevertheless, it is essential to know that longer tenure can increase the burden of interest payment. Hence, this option should be chosen when an applicant is comfortable to repay a high interest rate.

• Make a substantial down payment

Applicants can increase the down payment to manage the EMI of a home loan. Through this process, a borrower can efficiently pay a substantial loan amount and reduce the outstanding balance. Moreover, this also helps to maintain low LTV ratio. 

• Estimate the EMI before applying

Borrowers should calculate the payable amount before opting for a home loan. This will help in understanding one’s capability of EMI repayment. In such scenarios, using a home loan EMI calculator can be helpful. With this tool, borrowers can estimate their instalments by entering interest rate, principal amount and the suitable tenure. 

• Opt for loan refinancing 

Financial institutions set their loan interest rate based on the current lending rate or Repo Rate of the RBI. Hence, existing borrowers who pay a higher interest rate against the home loan can opt for refinancing. Choosing a lender that offers a reasonable home loan interest rate helps in reducing EMIs significantly.

• Try negotiating with your lender

Individuals who maintain a 750+ CIBIL score can negotiate with a lender regarding interest rate reduction. 

Opting for these steps can help an individual to save significantly on their disposable amount. 

Read Also: Things to keep in mind while applying for a home loan

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When is the Ideal Time for Refinancing Home Loan

 When a borrower has an active home loan, EMIs of such credit are categorised under regular liabilities. Due to its long-term repayment, home loan refinancing is an option, which many borrowers tend to explore. A home loan balance transfer can reduce one’s liabilities effectively by reducing the amount of interest charged on the outstanding principal amount.

What does a home loan balance transfer mean?

The home loan balance transfer involves transferring one’s current home loan principal outstanding to a new lender, charging a restricted interest rate. This helps a borrower to save efficiently and manage monthly expenses smoothly.

Moreover, this facility comes with a top up loan facility. It ensures that existing housing loan borrowers are eligible to receive a substantial amount as an additional advance.

Factors to consider when opting for refinancing

• Choose a lender offering low-interest rate

The foremost rule to a successful refinancing is comparing different market lenders. An individual must evaluate the interest rate offered by the various lending institution. This helps in decision-making and opting for the one levying a lower interest rate.

• Find out the charges involved

An applicant must be aware of the fact that balance transferring of home loan account is not free. There are several charges linked with the process. Hence, an individual must assess and analyse the fees charged carefully. A borrower must shift his/her loan only when the interest rate payment becomes unbearable. 

• Determine the tenure left

Opting for a home loan balance transfer is useful when a significant portion of loan tenure remains. Shifting the balance when only 1-2 years of the period is left limits or nullifies any savings. The charges levied by a current lender would be relatively higher when compared to interest savings.

Keep in mind that, as per the amortisation schedule, financial institutions tend to charge the maximum interest during the first half of a loan’s repayment period.

Read Also: Tips to Consider before Applying For a Housing Loan

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Factors that may Determine you Choose the Right Home Loan Tenure

 Home loan presents a convenient way to purchase a house. On the other hand, they are a long term financial commitment as well. It requires careful planning and execution to repay a housing loan without any default. Typically, home loan tenure ranges between 18-20 years, and in some cases, it can go beyond that as well.

Therefore, it requires you to prepare, and you can consider the following facts before choosing your home loan tenure.

3 factors to look out for during the selection of home loan tenure

1. Your age

One of the most crucial factor to consider here is the age of an applicant. If you are in your 20’s or 30’s you can opt for a loan tenure of 20 years or beyond. However, borrowers of an advanced age need to pick limited tenures to ensure repayment before retirement.

According to the experts, it is always better to close a home loan before retirement, or till the point, you have access to regular income. The reason being, housing loan EMIs are typically high value, and without a steady income, it is not easy to meet it.

2. Your income

Once you have sorted out the ‘age’ factor, you need to consider your monthly income next. As mentioned above, home loan EMI are sizeable amount, and they will take out a significant portion of your salary. Along with that, you need to meet the other household expenses as well. Therefore, careful planning for the home loan tenure selection is crucial. Here is an example for better understanding.

Now, if you opt for short loan tenure like 10 years for an advance of Rs.25 lakh at 12% interest, your EMI will be around Rs.35000. On the other hand, you take the same amount on 20 years repayment tenure, the instalment will reduce to around Rs.27000, which is a significant saving.

3. Interest rate

The interest rate charged on home loans is calculated on a yearly basis. It means if you opt for a longer tenure, you need to pay more interest, and vice-versa.

However, a point to note here is that you need to pay a higher EMI with a short tenure. Thus, consider that as well.

Selecting the right home loan tenure is not easy. However, if you think you have made a mistake a few years after paying EMIs, you can always opt for a balance transfer facility to rectify it.

Read Also: Top factors which influence your home loan’s interest rate

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Know Everything About the Home Loan Eligibility

The home loan is a handy solution to help you avail an amount as per your eligibility to buy your dream home. 

But not many people are unaware of the home loan eligibility inside out. 

Hence, when they apply, their home loan applications are rejected. It is where this short post may help you as it discusses the home loan eligibility!

Standard home loan eligibility at a glance 

1. You need to be a resident citizen of India. 

2. Your age should be between 23 and 62 years. 

3. You need to be employed and must have work expertise of minimum of 3 years. 

4. Your cibil score should be higher – having a credit score of 750 or more can help you get the home loan approval and at a lower rate. A robust credit score is the mirror of your creditworthiness that you could be relied on for timely repayments.    

Along with meeting these home loan eligibility conditions, you also need to submit a few documents. Take a look: 

• KYC Documents. 

• Address proof. 

• Identity proof. 

• Recently clicked colored photographs. 

• Latest Salary slips or Form 16. 

• Last 6 months’ Salaried account bank statements. 

You are now aware of the standard home loan eligibility criteria that you need to furnish. 

Along with these aspects, you should also check out the home loan eligibility calculator on a lender’s website for free. 

It is an online tool that can help you an exact amount that you will be eligible for based on your income and current obligations. 

Once you know the precise eligible loan amount, you can apply for the same. This way, you can get loan approval without issues. 

Nowadays, the facility of the home loan eligibility calculator is available on most leading banks and NBFCs in India offering home loans.  

Must Read: Top Factors Pushing Housing Loan Market in India

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Will Shifting Home Loan to Repo Linked Loan Reduce EMI?

 The home loan is a unique funding option that lets you get the required amount to buy your own home. 

However, the home loan is a long-term commitment. And it demands adequate planning from borrowers so that the repayment happens easily. 

Before and after availing the home loan, borrowers resort to various ways to repay lower house loan EMI. They do that so that they are able to save enough to meet other monetary needs. 

By going for a longer tenure, maintaining a robust cibil score and going for the home loan balance transfer, they lower the EMIs. 

But many borrowers think if shifting their home loan to repo linked loan will reduce their housing loan EMIs or not. Read on and explore now!

If you have an ongoing home loan account, then you can get your housing loan linked to the repo rate. In this regard, the home loan interest rate may not reduce considerably. But the loan that is linked to the repo rate is considered more transparent in passing on the changes of the interest rate to the borrower. In earlier debts, the entire benefit of the lowering of the interest rate by the Reserve Bank of India (RBI) was not given to borrowers. And the portion of it was also pocketed by the financial institutes. If you want to go with this option, then you should enquire with your current lender only. This facility may be less cumbersome in terms of paperwork and logistics. You should ask your lender with a rate that they are offering to new applicants. Analyze it lower than your existing one and if it is the housing loan low interest rate in the end, then you should go for it. 

Overall, if you want to shift your home loan to repo linked loan, it may help you reduce your housing loan EMIs.   

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Myths to Ignore While Getting a Home Loan

Many people may have the required eligibility to apply for the home loan, but they still don’t apply for it. 

Other than facing different issues, they also don’t do that owing to some home loan myths. 

Let’s check them out in today’s post so that you can ignore them and apply for the housing finance confidently!

1. Shorter loan tenure is good 

Yes, when you avail shorter loan tenure, then it means saving on the home loan interest rates. But you also need to understand that it means paying a bigger loan EMI amount that may affect your outlays. It can leave little scope to concentrate on other outlays. 

2. Good cibil score comes with the loan approval 

Yes, the cibil score is one of the key factors while determining the home loan eligibility of the applicant. If it is higher, then you may get the loan approval. But factors like your income, age, job stability, employer credential, property location also matter.

3. Home loan rates are not negotiable 

You may still believe that home loan interest rates are not negotiable. But this is far from true! If you are not satisfied by the home loan rates by lenders, then you can always negotiate for a lower rate. Having a good cibil score, repayment and employment history may help you get an affordable rate of interest. 

4. Lenders levy heavy penalties for making prepayments and foreclosure

Another myth doing the round is that if you make prepayments and foreclose the loan earlier than the tenure, then you need to pay exorbitant charges. It is not true! Lenders are not supposed to charge any amount on floating rate loans. For fixed rate based housing loans, your lenders may ask for some money. It may vary from one lender to another. 

You are now aware of the leading home loan myths that you can now ignore and apply for a home loan with confidence. If you are ready, then you can now apply for the housing loan by comparing different loan offers online. This way, you can pick the best deal matching your needs and repayment capacities.   

Must Read: Home Loan EMI: 6 Ways You Can Reduce It Easily

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Know What is top up on a Home Loan

 Have you ever wondered what the top up loan is? If you are carrying the home loan balance transfer, then you can meet your multiple needs with top-up loans. 

The top-up loan is a financial facility that is given to borrowers opting for the loan balance transfer. If you want to know about top-up loan, then this post is for you!

What is the home top-up loan?

If you want to switch your home loan account from one lender to another offering a lower rate, then it is called the home loan balance transfer. Leading lenders reward you with the top-up loan when you switch your home loan to them. If you have been repaying your home loan EMIs on time, then you can avail the top-up loan facility. 

What are the benefits of the top-up loan?

When you have an active home loan account and if you have some other financial needs to fulfil, then you can cater to all with the top-up loan. The benefits of a top-up loan are many. Take a look: 

• The top-up loan’s documentation process is simple and the loan approval time is less time-consuming. 

• The disbursement for the top-up loan is fast. 

• The rate of interest for the top-up loan is affordable and is almost the same as that of the housing loan rate. 

• You are free to use the top-up loan amount for anything as per your needs. Be it the debt consolidation loan, marriages, home improvements, business expansions and more, you are free to use the top-up loan money for anything. 

• There is no need to submit any collateral for availing the top-up loan. It is because the loan is linked with your home loan profile only. 

Depending on the lender that you apply for top up loan with, you can get higher or the higher top-up loan amount.   

Read Also: Top Five Things to Check about Home Loan Balance Transfer

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