When you manage to buy a home, you achieve a major milestone in life. This achievement opens a new chapter and gives you access to an asset that can be added to your financial portfolio. It can help you with investments in the future. The greatest issue people face when buying a new home is financing. You may have to find the best bank for a home loan to facilitate it. Home loans attract an interest obligation making finding the best rates paramount.
Factors affecting home loan interest rates
The current home loan interest rates affect how affordable a loan is and affect the monthly installments expected. It also determines the total amount you end up paying in the end. Various factors affect the interest rate and may vary between different lenders. Here are some of them:
Credit score
Financial institution utilizes the credit score to see how credit-worth a client is. This is a way of ensuring that the borrower will honor their repayment obligation. When you have a good credit score, it becomes easier to get a lower rate offer or the basis to negotiate with the lender. A lower credit score means a higher rate. For a home loan, a good score is considered 700 andabove. To maintain or acquire such a score, you need to clear your debts, use your credit cards wisely, and pay up loan installments as expected.
MCLR rate (Marginal Cost of Funds based Lending Rate)
MCLR is the minimum interest rate that a bank can offer. Banks use this benchmark when giving out loans. This lending rate is based on various financial principles namely:
- Marginal funds cost
- The operating costs
- Premium
- Cash Reserve Ratio effect on the account
The factors are not uniform in all financial institutions meaning different banksmay have different MCLRs. As a result, there are different lending rates as well. If the MCLR is low, then the current home loan interest rates will also be low.
Value and location of the home
The location and the value of the house you want to finance can affect the interest rate offered by the lender. If a house is poorlyconstructed, is located in a low-profile area, and has meager amenities, the resale value is greatly reduced. As a result, you may have to pay a higher interest rate. The LTV ratio (Loan-to-Value) which is the property value proportion that may be financed through the loan amount you’ve taken can affect the interest charged. With a higher LTV ratio, you can access a higher loan.
Loan amount
This is another factor that affects the interest charged on a home loan. The best bank for home loans normally expects a higher interest whenthe disbursed amount rises. If you want to lower the interest rate even when asking for a higher amount, consider increasing your loan down payment.
Applicant’s job profile
If you have a stable income inflow and job, then lenders may be more willing toaccommodateyou and offer you a better interest rate. Anyone without a stable source of income is viewed with a level of uncertainty since there is no telling whether they will be able to pay or not. As such, employees in the private sector, in government, and other salaried professionals may end up getting a better interest rate than others get.
The type of interest rate applied
The best bank for home loans offers three interest rate categories. These are fixed, mixed, and floating interest rates. For a fixedoption, the rate remains constantthrough the loan tenure. Floatingrates, on the other hand, fluctuate according to market changes. Mixed rates are a combination of fixed and floating options. They remain fixed for a specified period and then convert to the floating interest rate. The mixed and fixed rates come withhigh risks. As such, lenders tend to chargemuch higher interest to protect themselves against interest income losses.
Loan tenure
The loan duration can affect the interest rate charged. Typically, a shorter tenure means lower interest rates even if you are dealing with a higher EMI.Longer tenure, on the other hand, attractshigher interest rates.
Debt-income ratio
Lenders will normally look at how your monthly incomecompares to the required monthly debt payments. This ratio can help determine the interest rate offered. Typically, the lendersrationalize that a higher debt-to-income ratio translates to a higher chance of defaulting and vice versa.
Conclusion
Many factors influence the interest charges you get from a financial institution whenapplying for a home loan. The differences between the factors may make some of the plans better and more attractive compared to others. To find the best option, you should make sure the external and internal factors favor you best.
Before making a decision, it is important to find out more about the current home loan interest rates. Learn more about your credit history and how different elementsshape the rate you are offered. By evaluating the various factors thoroughly, it becomes easier to take strategic action and achieve the best terms.