For most, taking out a home loan would probably be the biggest financial commitment of their life. As the loan term easily spans at least 15 years, even a slight difference in their interest rates can make a significant difference in the overall interest cost of the loan. As banks and HFCs take a range of factors into account when setting the interest rates on your home loans, being aware of these factors can help you get the best deal with the lowest interest charges. low.
Here is a list of the main factors that can influence your mortgage interest rates:
MCLR: It is one of the most important factors that determines the rate on your home loan. MCLR is calculated after taking into account four main factors: marginal cost of funds, operating costs, tenor premium, and negative carry-over of the cash reserve ratio (CRR). As these factors can vary from bank to bank, their MCLR also varies widely. Banks with a lower MCLR generally have lower mortgage rates for customers with the same credit profile.
The banks’ MCLR will also continue to influence your interest rate after the sanction. Banks are required to revise the interest rate on mortgage loans from their existing customers at least once a year on a predefined reset date. The MCLR on the reset date will remain applicable on your home loan until the next reset date, regardless of any change in their MCLR during the intervening months.
Credit score: Banks and HFCs take the applicant’s credit rating into account while assessing the creditworthiness of mortgage loan applicants. Those with a credit score of 750 and above are considered more creditworthy and therefore have a higher likelihood of loan approval.
However, many lenders have also started to factor in credit score while setting interest rates for their loan seekers, charging lower interest rates for those with higher scores. For example, the Union Bank of India charges an interest rate of 8.65% per annum to applicants with a CIBIL score of 700 and above for home loans up to Rs 75 lakh. For those with a score below 700, the bank charges 8.75% per year for the same mortgage amount. The interest rate difference of 10 basis points also applies to home loans above Rs 75 lakh for those with a credit rating of 700 and above and below.
Therefore, get your free credit report from the credit bureaus at least six months before you apply for the home loan and aim to have a credit score of 750 and above. Alternatively, you can also benefit from a free online financial market credit report with regular monthly updates. This could also get pre-approved home loan offers available on your credit score and other eligibility criteria.
Amount of the loan: Banks and HFCs charge higher interest rates for larger loan amounts. For example, HDFC’s interest rates for home loans up to Rs 30 lakh start from 8.55% per annum, while their interest rate for home loans above Rs 30 lakh to Rs 75 lakh and those above Rs 75 lakh start at 8.80 per year and 8.85 per hundred pa respectively. So, try paying a higher down payment if it helps you get your mortgage at lower interest rates.
Type of interest rate: When it comes to the type of interest rate, home loans come in three varieties: fixed, variable, and blended interest rate home loans. While both fixed rate and variable rate home loans are self-explanatory, mixed rate loans have fixed interest rates for a predetermined period after which they charge variable interest rates. Since both fixed and blended rate home loans have a higher interest rate risk, lenders charge higher interest on these loans to compensate for their future loss of interest income, if any, due to the volatility of interest rates. For example, the interest rates for Union Bank of India variable rate home loans start from 8.65 percent per annum, while their interest rates for mixed rate home loans (fixed up to ‘at 5 years) start at 11.40 percent per year.
Ready to value (LTV ratio): This ratio refers to the proportion of the property’s value that can be financed by the proceeds of your loan. The rest should be funded from your own resources. Currently, this ratio is 90 percent for home loans up to Rs 30 lakh by the RBI; 80% for loans over Rs 30 lakh to Rs 75 lakh; and 75 percent for home loans over Rs 75 lakh.
Banks and HFCs encourage a lower LTV ratio by charging lower interest rates, as this lowers their credit risk. For example, in the case of home loans up to Rs 30 lakh, SBI charges interest rates 10 basis points lower on an LTV ratio of less than 80% compared to those with an LTV ratio of 80 to 90%.
Job profile: Lenders prefer home loan applicants with a job or a stable source of income. As a result, many lenders try to target specific customer segments with a stable source of income by offering them home loans at lower interest rates. Salaried professionals are generally billed at lower interest rates than self-employed workers. Among employees, government and PSU employees are most preferred, followed by employees working in top private sector companies. Among the self-employed, accountants and doctors are generally considered to be the least “risky” professions.
As each bank and HFC have their own mechanism for setting differential rates for their mortgage applicants, be sure to compare all of the different mortgage options before you make the final request. The best way to do this is to visit online financial marketplaces, which will find you various home loan options available based on your credit score, monthly income, and other eligibility criteria.