Applying for a home loan makes it easier for all to accomplish their dream of being a homeowner. While many lenders offer home loans at competitive interest rates, the affordability greatly depends on the EMI (equated monthly instalments) that you must repay the lender every month till the end of loan tenure.
EMIs, help you pay back the principal amount and the interest in smaller instalments and in a way that you don’t feel the pinch on your monthly budget. However, the EMI you repay greatly depends on the interest rate levied by the lender. Many factors affect the interest rate, which vary from one lender to the other. Some of the fixed components such as the repo rate are fixed by the RBI (Reserve Bank of India), while other factors are variable.
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MCLR Rates
The Marginal Cost of Funds based Lending Rates is the minimum interest rate at which the lenders can offer home loans. Although the lenders may have unique home loan offers, they cannot reduce the interest rate below MCLR rates.
The RBI determines the MCLR rate and it is reset every year, and the reset interest rates remain applicable until the next year. This means the interest rate on your home loan can increase or decrease based on the changes in the MCLR rate.
Type of interest
Generally, the lenders give you the flexibility to choose between fixed rate or floating rate. In floating rate home loans, the interest rate changes based on various external factors and the changes introduced by the RBI. If the RBI lowers the interest rate, then your EMI will be lower and vice-versa.
In fixed interest rate loans, the interest rate is fixed at the time of loan approval and it remains unchanged throughout the loan tenure.
Credit score
Credit score is a three-digit number ranging from 300 to 900 that reflects your creditworthiness. It is a statement of your repayment history, and financial discipline. If your credit score is low, the lender would consider you a high-risk borrower and charge a higher interest rate than others who have a high credit score.
However, if you have a high credit score of more than 750, the lender will be more willing to offer you a loan at a lower interest rate.
Property location
The area where the property you want to purchase is located plays a vital role in determining the interest rate of your home loan. Generally, homes in a good locality that has excellent connectivity will have higher resale value than the properties located in a remote location.
Typically, lenders view properties with high resale value as a lucrative property and charge lower interest rate for it. While you compare the home loan offers from different rates, you can check the current home loan interest rates offered by the lenders for the property you want to buy based on its location and choose the right lender accordingly that offers the loan at the lowest interest.
Loan tenure
Generally, home loans with shorter tenure attract lower interest rates than loans with higher tenure. You can use the home loan EMI calculator to find the best tenure for your loan so that the EMI is affordable.
Final Word
The factors discussed above are some of the major factors that affect the home loan interest rates. Keep all these factors in mind while looking for the best home loan offer and get the best value loan that suits your needs and budget.
