What are the factors affecting interest rates on home loans

5 Factors Affecting Home Loan Interest Rates

Achieving homeownership is a significant financial milestone. However, securing a home loan often comes with navigating the complexities of home loan interest rates. This crucial factor significantly impacts your monthly payments and the overall cost of your home. Understanding the various elements that influence home loan interest rates empowers you to make informed decisions. This blog delves into the key factors affecting the home loan interest rate, equipping you with the knowledge to secure the most favourable terms for your dream home.

5 Factors that Affect the Interest Rate on Your Home Loan

1. Credit Score

The credit score is one of the most important factors that determine the housing loan interest rate as it is a measurement of your repayment capacity. A healthy credit score will get you better interest rates and terms on home loans. Your payment history, current debts, and other financial commitments are considered when calculating your credit score.

2. Stable Income

A person with a stable income is considered to be low risk as compared to those with an unstable income source. Those considered to be low risk may get the lowest home loan interest rate. While applying for a home loan with a high-risk profile is possible, it is preferable to apply with a stable income to ensure good interest rates.

3. Loan Tenure and Amount

A shorter loan tenure usually has a lower interest cost, but a longer loan tenure usually has a higher interest cost. Similarly, the amount of the home loan required may impact the housing loan rates. Visit the Truhome Finance website to use our free online Home Loan EMI Calculator to check the potential interest rate you will get for your loan.

4. Location of the Property

Homes in good locations with great amenities and easy accessibility have higher resale value. This is why the home loan interest rate on such a property can be lower than a house in a less desired location. The same concept can be applied to new and old homes where a new house will have a lower interest rate than an old home due to the resale value.

5. Loan-to-Value Ratio

Your property value plays an important role in determining the interest rate you might get from the lender. The Loan-to-Value ratio (LTV) refers to the percentage of property value that can be financed through the loan. This means - the higher the percentage, the higher the interest rate. A larger down payment on the loan can help reduce the interest rates as it reduces the percentage of property value for the loan.

6. MCLR & PLR

Home loan interest rates usually consist of a set percentage above the MCLR, known as the "spread." As MCLR changes, linked loan rates adjust, affecting EMIs. PLR, a benchmark rate, also influences home loan rates, impacting repayment costs.

How is Home Loan Interest Calculated?

The interest on a home loan is calculated based on several factors. To help you understand, here is a rough breakdown of the calculation to get a rough estimate.

1. Loan Amount: Rs. 30,00,000 

2. Interest Rate: 8% per year

3. Loan Tenure: 20 years, which is 240 months

Now, let's calculate the interest amount: 

Step 1: Calculate the annual interest amount:

Formula: Annual Interest = Loan Amount x Interest Rate/100

Example: Annual Interest = Rs. 30,00,000 x 8/100 = Rs. 2,40,000 

Step 2: Calculate the total interest amount over 20 years (240 months)

Formula: Total Interest = Annual Interest x Loan Tenure (in years)

Total Interest = Rs. 2,40,000 x 20 = Rs. 4,800,000

So, over the 20-year loan period, you will pay Rs. 4,80,000 in interest. This is the extra money you pay to the bank for borrowing Rs. 30,00,000 to buy your house.

How to Reduce Your Home Loan Interest Rate

Here are some tips to help you get better interest rates on a home loan:

• Enhance your credit score: As mentioned earlier, your credit score plays a big role in getting better interest rates. Paying your loans and other credit bills on time can help you increase this credit score.

• Borrow a loan amount you can repay comfortably: Applying for a loan that can be easily repaid will give you better chances to complete the payments on time. This will be beneficial in getting better interest rates for loans in the future as well.

• Choose a co-applicant to make the process simple: Having a co-applicant on the loan application not only has great tax benefits but also increases your chances of getting the loan approval.

Why You Should Get a Home Loan

Everyone loves having their own space to which they can return to at the end of a long day. You can make these dreams come true by applying for a Truhome Finance Home Loan.

With the information from this article, you can also easily calculate the approximate interest amount you will have to pay on the loan. The Truhome Finance website also has an EMI and eligibility calculator that you can use to get more information.

Truhome Finance offers home loans with interest rates starting from 9.5% per annum. Owning a home is a dream that can be transformed into reality with our home loan. If you require additional finances for the renovation or expansion of your home, you can avail one of the Truhome Finance loan products like the Home Improvement Loan or the Home Extension Loan. You can also visit the Truhome Finance website for more information and to apply for the loan.

FAQs

Here are the most frequently asked questions about home loans in India:

1. What is home loan interest rate?

A home loan interest rate is the percentage of the home loan amount that the bank or financial institution charges you as interest for borrowing the money.

2. Are there different types of home loan interest rates available in India?

Yes, common types include fixed-rate, floating-rate (also known as adjustable-rate), and hybrid-rate (a mix of fixed and floating).

3. How often do home loan interest rates change?

Home loan interest rates are subject to change according to market conditions. A fixed interest home loan will have no changes during the tenure of the loan. A floating interest home loan will be subject to change according to market trends.

4. Is the down payment amount connected to interest rates?

The down payment is an important factor that decides the interest rates. A higher down payment may secure a better interest rate, subject to terms and conditions.

5. What is the tenure of home loans with Truhome Finance?

You can get a home loanv of up to 25 years with Truhome Finance. The tenure will also be subject to your retirement age.