Only if we lived in a utopian society would everyone have been able to realize and achieve whatever they desired. However, because the reality is rarely of this kind, loans are an important part of modern society and the economy. This is especially true for larger expenses, such as building or buying a home for yourself. Home loans are an essential part of achieving your dream home goals. Therefore, take the time to plan your home loans, as they will impact your long-term finances.
Not everyone can borrow the same amount. Your loan eligibility is determined by several parameters including your monthly income, current age, fixed monthly obligations, retirement age, etc. Your loan eligibility can also be used to predict your loan affordability. When choosing a home loan, make sure the monthly mortgage payment doesn’t deplete your monthly living expenses. It is also essential to keep the term of your home loan as short as possible.
What are the different types of home loan interest rates?
Floating interest rates:
A floating plan loan has mortgage interest rate which fluctuates over the life of the loan. It varies depending on changing market circumstances and underlying external benchmarks such as the Reserve Bank of India’s repo rates. When interest rates increase, your loan repayment amount also increases, and vice versa. The floating interest rate is made up of two parts: the index and the spread. The index measures interest rates relative to the underlying benchmark, such as the repo rate.
On the other hand, spread is the extra amount paid by a financial institution to cover credit risks and profit margins. When the interest rate for housing loans in the market drops, floating interest rates are good. However, if conventional interest rates rise, EMIs will also rise.
Fixed interest rates:
The interest rate on a fixed home loan remains constant throughout the life of the loan. As a result, these loans feature ongoing EMIs, allowing the borrower to plan their repayment in advance. The fixed interest rate on home loans is suitable if you anticipate future increases in market rates. If the market interest rate regime falls, you may have to pay higher interest, resulting in a larger EMI obligation. Interest rates can be fixed for the full term of the loan or for a portion, depending on the lender’s policy.
What are the factors that can affect the interest rate of your home loan?
The credit score allows lenders to examine the applicant’s debt repayment history and general creditworthiness. A good credit score indicates that the borrower is more likely to repay their debt on time. As a result, the lender can charge them a cheaper home loan interest rate. If your credit score is on the low end, you can still raise it by following recommended practices.
Reference lending rate
There are several types of benchmark loan rates available to financial organizations. Most banks use the repo rate as an external benchmark, while all NBFCs use the PLR (Prime Lending Rate) to establish an interest rate for home loans.
Property condition and location
A property’s location, age, condition and accessible amenities influence its resale value and, therefore, the interest rate on a mortgage. A home with a high resale value is more attractive to lending institutions, which often results in lower loan rates.
When borrowers have a substantial and consistent source of income, lenders assume less credit risk. As a result, paid candidates at respected companies often receive better interest rates than the self-employed.
The interest rate on your mortgage can have a significant impact on the overall cost of your property. Since home loans are more valuable and have a longer term, even a slight change in the interest rate on your home loan can have significant financial effects, especially in the long term. Therefore, before applying for a home loan, potential borrowers should assess interest rates from as many lenders as possible.