The interest rate charged on a home loan is an important determinant of the EMI amount. The RBI (Reserve Bank of India) has recently maintained its policy rate at 4%. As a result, it enabled numerous lending institutions to keep low-interest rates on home loans.
Prominent lenders are offering home loans to new applicants at current home loan interest rates beginning as low as 6.5 % per annum. However, before applying for a home loan, it is essential to understand the different factors that affect the interest rate.
The relation between credit score and interest rate on home loan
A home loan applicant’s credit score is a significant factor that determines the interest rate on the home loan. For example, lenders may provide special interest rates on home loans to borrowers with very high credit scores due to their better credit repayment history.
Age, income, and other important factors
Apart from the credit score, age, income, employment status, and existing debt information related to the borrower are essential factors for a home loan.
Age: Age is a significant factor because lenders like to know if you have enough working years left that you can repay the loan. Hence, age also becomes an essential consideration while formulating the tenure period for the home loan.
Income: Every lender specifies a minimum salary amount to be eligible for a home loan. Therefore, your monthly and yearly salary will help a lender assess whether you are capable of repaying the loan amount.
Debt: Even if you have previous debts, you may still apply for a home loan. However, if you have bad repayment history and unpaid debts, this can drastically affect your loan application.
How do external benchmarks like repo rates affect home loan interest rates?
Repo rate is the interest that lenders have to pay to the RBI or central banking authority against the credit they receive. This repo rate determines the interest rates various lending institutions offer on home loans. If the RBI reduces the repo rates, the effect on the lenders is passed on to the applicants who receive home loans at a lower interest rate.
As the demand for home loans went down during the pandemic, RBI lowered the repo rate to 4 %, indicating a 200-basis-point reduction in just one year. Hence, home loan lenders also reduced the interest rate. Now leading lenders offer current home loan interest rates at 6.5% per annum.
Different types of interest rates
The interest rate on your home loan is an essential factor that helps you infer whether you should take the loan or not and which lender you should opt for. You should carry out extensive research before finalizing a lender. Aside from that, you must be familiar with the different current home loan interest rates offered by lending institutions and other online home loan lenders.
- Floating interest rate – The floating rate, also called the variable interest rate, may alter during the loan term because it is affected by the market situation and government policies. Therefore, your EMIs will fluctuate in response to changes in the interest rate.
- Fixed interest rate – As the name implies, the fixed interest rate stays constant throughout the loan term and isn’t affected by the market fluctuations; therefore, your EMIs do not alter.
- Hybrid interest rate –A hybrid interest rate, also known as a combination interest rate, is a rate that combines both floating interest rates and fixed interest rates. In this scenario, several lenders deliver a fixed rate for a set duration, after which it can be changed to a variable interest rate.
Processing fee and prepayment charges
The lender will also charge a processing fee to process a home loan application. The online home loan processing fee is typically between 0.5 percent and 1 percent of the total loan amount.
Most lenders and housing finance firms waive prepayment and foreclosure fees (depending on the interest rate types) after a time or after a distinct proportion of the total loan is paid off. But some lenders take a fee for prepayments and have restrictions on the number and amount of prepayments you can do.
Apart from the above factors, it is also essential to know the benefits of home loans. An online home loan through a leading financial institution not only helps you achieve your dream of owning your home but also provides you with tax benefits.