How are Home Loan Interest Rates Determined

The monthly instalments and borrowing costs are significantly impacted by interest rates. Therefore, borrowers should possess a thorough knowledge of the key factors influencing home loan interest rates in India before applying for this credit option.

How Do Financial Institutions Determine the Home Loan Interest Rates

Lending institutions consider the following factors while determining the home loan interest rates for a particular borrower:

Location of the property

The property’s location also impacts the interest rates on a home loan. If a property is located in a posh location with amenities, such as railway stations, grocery shops, hospitals, schools, etc., in proximity, it will have a high resale value.

Consequently, financial institutions will charge a lower interest rate for such properties. On the other hand, choosing a property in an area with poor facilities will result in a higher interest rate.

Income stability of a borrower

The interest rates charged by any financial institution depend heavily on a borrower’s income status. Lenders favour borrowers with a stable source of income. Therefore, salaried people are given lower interest rates because their steady income indicates the ability to pay back loans on time.

Loan quantum

Borrowers should give equal weightage to loan principal. High loan amount will increase home loan EMI burden for a borrower, thus increasing the risks of credit defaults. Hence, financial institution charges a higher interest rate for a greater loan amount.

Borrowers must make sure to pay a sizable down payment if they require a sizable loan principal. A sizable down payment will lower the loan balance, resulting in a lower home loan interest rate.

Type of home loan interest rate

Borrowers should choose between a fixed interest rate and a floating interest rate based on their repayment capabilities. Fixed interest rates are optimal for borrowers who desire security and want to stay away from market fluctuations. A fixed interest rate stays the same throughout the repayment tenure of a home loan, as the name implies.

The floating interest rate, however, changes with the fluctuations in the market. Therefore, borrowers can opt for a floating interest rate if they want to benefit from changing base rates and reduced repo rates.

Home loan repayment tenure

Home loan interest also depends on the borrower’s chosen repayment tenure. A shorter repayment tenure attracts a lower interest rate. However, a longer repayment tenure results in a higher interest rate, raising the entire cost of borrowing.

Credit score or CIBIL score

The credit score or CIBIL score is the numerical evaluation of a borrower’s repayment history and creditworthiness. Low-risk borrowers are those who have a CIBIL score of 750 or higher, and as a result, they pay are liable to pay lower interest rates for home loans.

Borrowers with poor CIBIL scores are levied higher interest rates because of the high risks of credit defaults. As a result, willing applicants should make sure they have a good credit score before applying for a housing loan.

That said, willing borrowers should also check the eligibility parameters and documents required for a home loan while applying for credit. A home loan eligibility calculator can come in handy during such circumstances. Knowing the eligibility criteria and keeping the documents ready ensures a hassle-free home loan application process.

The table illustrated below shows the eligibility parameters that a borrower has to meet in order to apply for a home loan in India:

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Documents required for a home loan are as follows:

Personal documents for KYC verification:

Photo ID (Aadhaar Card, PAN Card, Voter ID, Driving Licence, etc.)

Residential proof (utility bills, Ration Card, Passbook, etc.)

Income details:

Salary slips – 3 months (salaried applicants, salaried professional applicants)

Proof of business (self-employed professional, non-professional applicants, etc.)

Qualification documents:

Education certificates – MBBS and above (self-employed professionals – doctors)

Valid COP (self-employed professionals – CAs), etc.

Financial documents:

Bank account statement – 6 months

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P&L statement (self-employed professional, non-professional applicants), etc.

Property-related documents:

 Title deed

Property tax receipts

Allotment letter, etc.

To sum it up, borrowers should take into account the factors mentioned above as they determine the home loan interest rates in India. This will help them enjoy a smooth repayment tenure and avoid long-term financial hardships in the long run.

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