A housing loan is a loan taken by people who do not have enough funds to buy a home upfront. The borrower must return the housing loan amount with interest to the lender in a fixed tenure.Â
Besides the housing loan amount (principal amount), borrowers also pay interest charges to lenders. A home loan is more expensive when the interest rate is high, and it is affordable when the interest rate is low.
Are you planning to take a housing loan in 2023? Read on to understand the factors that affect current home loan interest rates.
Factors Affecting the Home Loan Interest Rates
Below are the most critical factors which influence home loan interest rates.
Value of The Property
The property’s value plays a significant role in deciding the home loan interest rate. If the current home loan interest rates in a city are significantly high, it means the market value of properties in the given city is also high.
The location and age of the property decide the interest rate applied to your housing loan. When the property is in a prime location, the interest rate on a housing loan is less.
The interest rate is also less when the property is comparatively new. On the other hand, the rate of interest on a home loan for a property in a remote location might be high. This is because the lender knows that the market value of a property in a remote location is less.
Lenders calculate the loan-to-value (LTV) ratio before offering a personal loan.Â
When the ratio is on the higher side, the chances of getting an affordable interest rate are high. On the other hand, the interest rate will be high when the LTV ratio is low.
CIBIL Score
CIBIL score is the credit score of an individual that denotes their repayment capacity. When you don’t pay EMIs timely, your credit score goes down. Someone with many pending debts will have a poor credit score.
The credit score range is 300 – 900, and anything above 611 is considered a good score. Even if the current home loan interest rates in a city are high, one will get an affordable rate with a good credit score.
Lenders consider the risk is more with someone having a poor credit score. There are chances that the borrower might not repay the entire housing loan timely. For the same reason, lenders apply high interest on the loan to minimise risk.
Income and Job Stability
The monthly income of the borrower decides the housing loan interest rate.Â
Lenders know that someone with a high monthly salary will pay the EMIs easily. It is why they apply a low interest to someone with a high monthly salary. The risk associated is less.Â
The job location also plays a role in deciding the interest rate for a housing loan. For example, you can get a housing loan in Bangalore at low interest with a high salary.
Occupational stability is another factor considered to decide the housing loan interest rate. The longer you have worked, the more credible you are to the lender.
The lender may apply a high interest if you have not worked for long (say only a year or two).Â
People with government jobs usually get lower interest rates as their jobs are stable.
Type of Interest Rate
There are two types of interest rates: fixed and floating. The fixed rate does not change no matter the market conditions, whereas the floating rate does, based on benchmarks like the repo rate.
There is a general assumption that a floating interest rate is more affordable than a fixed interest rate for a housing loan. However, note that this type of interest rate might also be a burden when market rates rise continuously.
Final Words
Several factors, including your credit score, loan-to-value ratio, employment and income, and type of loan, determine the interest rate on home loans. It is essential to understand these factors to secure a better interest rate and save money over the life of the loan.
With lenders like PNB Housing, one can get a housing loan at an interest of 8.50% per annum. Submit your housing loan application now to avail the low rates, or reach out to learn more!
