A housing loan interest rate is the rate at which you borrow money to purchase a home. It is the cost you pay to the lender for the money they lend you. When you apply for a home loan, several aspects come into play that determines the interest rate. Let’s take a closer look at the most important factors that affect your housing loan interest rate:
Credit score
Your credit score is the first thing that lenders check before approving your housing loan. It is a measure of your creditworthiness and reflects how well you have managed credit in the past. A higher credit score implies that you are less of a risk to the lender and can qualify for a lower housing loan interest rate. On the other hand, a lower credit score can result in a higher interest rate or even loan rejection.
Loan amount and tenure
The loan amount and tenure are also significant factors that determine your home loan interest rate. Typically, lenders offer lower interest rates on higher loan amounts and longer tenures. This is because they stand to earn more interest over a longer tenure period, and a larger loan amount has a lower risk of default.
Income and employment stability
Lenders also look at your income and employment stability to determine your housing loan interest rate. A stable job and a regular income show that you are less likely to default on your loan. This reduces the risk to the lender and can qualify you for a lower interest rate. On the other hand, if you have a fluctuating income or unstable employment, lenders may consider you a higher risk and charge a higher interest rate.
Type of interest rate
Housing loans can have either a fixed or a floating interest rate. A fixed interest rate remains the same throughout the loan tenure, while a floating interest rate fluctuates with market conditions. Generally, a fixed interest rate is slightly higher than a floating interest rate, but it offers more stability and predictability. If you expect interest rates to rise, a fixed interest rate may be a better option, whereas if you expect interest rates to fall, a floating interest rate may be preferable.
Down payment
The down payment you make on your home also affects your housing loan interest rate. A higher down payment means that you are borrowing less, which reduces the risk to the lender. Conversely, a lower down payment means that you are borrowing more, which increases the risk to the lender and can result in a higher interest rate.
Debt-to-income ratio
Debt-to-income ratio used by lenders to assess your ability to repay your loan. A lower DTI implies that you have a higher capacity to repay your loan and can qualify for a lower interest rate. A higher DTI indicates that you may struggle to make your loan payments which may result in a higher interest rate or loan rejection.
Loan-to-value ratio
The loan-to-value (LTV) ratio is the ratio of the loan amount to the value of the property you intend to purchase. A lower LTV ratio implies that you have a higher equity in your home and are less likely to default on your loan. A higher LTV ratio means that you have less equity in your home and are more likely to default on your loan. This can result in a higher interest rate or loan rejection.
Home Loan Eligibility
Your home loan eligibility is determined by your income, credit score, and other factors. If you’re eligible for a home loan, you may be able to secure a lower interest rate. However, if you don’t meet the eligibility criteria, you may be charged a higher interest rate.
Understanding these factors can help you improve your chances of securing a lower interest rate on your home loan. As you are looking to apply for a home loan, it is essential to research the various lenders in the market and compare their interest rates, loan amounts, tenure, and other terms and conditions. This will help you identify the lender that offers the most favourable terms for your needs.
Finally, when applying for a housing loan, it is crucial, to be honest, and transparent.
