On February 8, 2024, the Reserve Bank of India announced that it would keep the Repo Rate unchanged at 6.50%. The status quo on the Repo Rate and the housing loan interest rates means their EMIs won’t increase any time soon.
Here, we talk about home loan interest rates, types of interest rates available to borrowers, and the factors that impact the rate of interest that one gets on their home loan.
What is the Home Loan Interest Rate?
When an individual avails of a loan to buy a home, the lender they have availed of funds from charges interest on the principal amount. This interest is called the home loan interest rate. Current home loan interest rates start from 8.40% per annum. However, lenders decide the rate of interest that an individual gets based on different factors, such as the loan applicant’s age, income, current debt obligation, etc. We will get to these factors in detail later in this article. Let us first understand the types of home loan interest rates.
Home Loan Interest Rate Types
Homebuyers can choose to avail of a home loan on two different types of housing loan interest rates: fixed and floating.
Floating interest rate home loans respond to external market conditions and change with them. So, an increase in the Repo Rate or the SLR rate causes the housing loan interest rates to increase. Fixed interest rates remain unaffected by external market situations. They remain the same through the tenor of one’s loan and therefore, one’s home loan EMIs also remain the same throughout one’s loan in the case of fixed interest rate home loans.
Fixed-interest-rate home loans tend to be more expensive than floating-interest-rate home loans. However, budgeting and repayment planning is far easier in the case of fixed-interest-rate loans.
Factors that Impact Housing Loan Interest Rates
These are the factors that impact the housing loan interest rates that an individual gets and that lenders take into consideration while deciding the rate of interest to be offered to a loan applicant.
- Credit Score: An individual’s credit score gives a lender an accurate idea of their repayment capacity and creditworthiness. A high credit score, i.e. anything between 750 and 900, indicates a high repayment capacity and therefore, low chances of loan default. Thus, individuals with credit scores ranging from 750 to 900 are offered the lowest home loan interest rates.
- Debt-to-Income Ratio: The debt-to-income ratio is given important consideration as well. If more than 40% of your total income is already going towards covering debt, it is unlikely that lenders will sanction you a loan. If they do, they will charge a high rate of interest to cover the high risk.
- LTV Ratio: The LTV ratio gives one the percentage of a property’s net current market value that is being sanctioned as a loan. High LTV ratio loans carry higher risk for lenders and therefore, lenders may charge higher rates of interest on such loans. Ideally, in the case of home loans, the LTV ratio must not exceed 90%.
- Age: Lenders believe that young borrowers have more working years ahead of them and thus, they are less likely to default on loan repayment than someone nearing retirement. Thus, young people are offered better home loan deals.
- Income and Job Stability: Individuals with a stable income and job or business are offered lower housing loan interest rates than individuals with an unstable income or involved in an unstable profession.
- External Market Factors: All home loans are linked to an external benchmark. Thus, external market conditions have a direct impact on home loans availed of at floating interest rates.
Concluding Remarks
Home loan interest rates are important as they determine how comfortably you will be able to repay a loan. High housing loan interest rates transcribe into high EMIs and high costs of borrowing, both of which affect one’s repayment capacity and return on investment negatively. Therefore, home loan applicants must always strive for a low-interest-rate housing loan. They must also check their home loan eligibility and apply for a loan amount they qualify for to enhance their chances of loan approval as well as their negotiating power concerning the housing loan interest rates and other loan terms and conditions.
