How Your Home Loan Interest Rate is Decided

How Your Home Loan Interest Rate is Decided

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Buying a house can be a challenging task due to India’s high realty rates, but as it is a basic necessity, a person struggles all his life to buy a house. Some people have the capacity to buy a house with the help of their savings and various other funding options, as they think a Home Loan can be a burden and make them pay more than the real value of the house. However, a Home Loan, if managed efficiently, can be beneficial to buy a house.

Home Loan Interest Rate

Home Loan is a lending product offered by banks and Non-Banking Financial Companies (NBFCs), which can help you buy a house. These loans are a combination of the principal amount, Interest rate, and tenor. To make it simple:

Principal amount: The amount taken as a loan.

Interest rate: The interest rate is a fee charged by the lender, added to your repayment amount every year.

Tenor: The time decided by the applicant and the lender to repay the loan.

All three play a vital role in Home Loans, but the interest rate is the most important factor. The interest rate on Home Loans may vary from lender to lender, but the base rate of interest remains the same. So before you apply for a Home Loan, you must know how your Home Loan interest rates are calculated.

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Base rate: The base rate for Home Loans is decided by the financial institutions based on:

  • Economic outlook: The performance and revenue generation expected by the lenders on a half-yearly or annual basis, while considering factors like inflation, the productivity of growth, unemployment, and trade exchange.
  • Financial health: The financial institution’s fiscal health depends on its performance in the stock market and the revenue generated from it. If a financial institution goes into bad financial health, they will increase the loans’ interest rates to generate more income.

The base rate for a Home Loan is kept the same for every financial institution. However, the lending rates for the Home Loan is set by the lender. Here are the things that a lender checks while setting your interest rate:

  1. Credit Score: The Credit score is given to an applicant for the repayment of his previous loan. The ideal credit score for loan approval is 750 points, while some NBFCs provide you with a loan at a credit score of 650 points. Credit scores are like credibility proof to the lenders; a high credit score provides proof of payment security to the lender. If an applicant has a high credit score, the lender might provide him with a Home Loan somewhere around the base rate of interest.
  2. Down payment: When you apply for a Home Loan, the lender only provides you 60 to 80 percent of the property value, due to which the applicant has to manage the rest of the amount for the loan. The remaining amount to be managed by the applicant is known as a down payment. To reduce your credit rate, you can choose to pay a higher down payment, due to which the lender will have to reduce the interest rate below the average interest rate level.
  3. Interest type: There are two types of interest rates that you can choose from fixed interest rate and floating interest rate. In a fixed interest rate, factors like credit score and down payment would help you lower your interest rate. On the other hand, the Floating interest rate keeps fluctuating according to the market rates, which means if the interest rate in the market falls, the applicant has to bear a lower interest rate. Still, if the market’s interest rate rises, the applicant will have to pay the high-interest rate.

You must choose a Home Loan with a low-interest rate, as the interest rate is the important factor that can affect your final repayment amount. To know how much interest you can pay every month, you can use the Home Loan calculator, which will help you find out the perfect interest amount that will suit your budget.

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