Taking out a home loan is a significant financial decision, and securing the optimal interest rate is crucial to keeping your repayments affordable while maintaining long-term financial health. A major component of home loans, a favourable interest rate can reduce both your monthly EMIs (Equated Monthly Instalments) and the total loan cost.
In this guide, we’ll explore the various types of , the main factors that impact them, and effective strategies to secure home loans with the best possible rates.
Understanding the Various Types of Home Loan Interest Rates
Generally, there are 3 types of interest rates on housing loans:
1. Fixed Interest Rate: A fixed home loan interest rate remains constant throughout the loan tenure, meaning the EMI amount will stay the same regardless of market fluctuations. This option is suitable for borrowers who prefer stability and predictability in repayments. However, fixed rates are typically slightly higher than floating rates, as they don’t decrease even if market rates go down.
2. Floating Interest Rate: Floating interest rates on housing loans vary based on factors like changes in the repo rate or the lender’s internal benchmarks. This option offers potential savings when interest rates drop, as EMIs may decrease. However, floating rates can also increase if market rates rise.
Reputable lenders like SMFG Grihashakti provides floating interest rates on home loans. They offer competitive interest rates based on the applicant’s eligibility and their policies at the time of the loan application.
Which Factors Determine Home Loan Interest Rates?
Several factors can influence the interest rate on a home loan. Understanding these can help you take proactive steps to strengthen your loan application and secure lower rates:
. Credit Score: A borrower’s credit score reflects their creditworthiness. Applicants with higher credit scores, generally 700 and above, are generally favoured for lower interest rates, as lenders view them as less likely to default.
. Employment Status and Income: Borrowers with a reliable income source such as a steady job in a well-known organisation have a better chance of securing lower home loan interest rates.
. Loan Tenure: Longer loan tenures generally lead to higher interest rates, as lenders may seek to compensate for the risk associated with an extended repayment period.
. Location and Market Value of the Property: Properties in prime locations or with high market value may be perceived as lower risk, potentially leading to lower house loan interest rates.
. Loan Amount and Loan-to-Value Ratio (LTV): Higher loan amounts or higher LTV ratios may lead to higher interest rates. A higher LTV means a smaller down payment, which increases the lender’s risk.
. Repo Rate: The central bank’s repo rate directly affects home loan interest rates. When the repo rate is lowered, home loan rates may decrease, and vice versa.
. Inflation Rate: Lenders increase interest rates during inflation to compensate for the decreased purchasing power of money, ensuring they maintain their profit margins.
How to Increase Your Chances of Securing Lower Home Loan Interest Rates?
Here are some strategies that can help you obtain a home loan with lower interest rates:
1. Improve Your Credit Score
To improve your score, focus on paying off existing debts, avoiding late payments on EMIs or utility bills, and keeping your credit utilisation ratio at or below 30%.
2. Ensure Stable Employment and Income
A stable job with a consistent income can significantly improve your loan eligibility, which can lead to lower interest rates. Try to avoid frequent job changes to ensure a consistent employment history. Consider additional income streams like rental income or freelancing to strengthen your financial profile.
3. Consider a Shorter Loan Tenure
While longer loan tenures may offer smaller EMIs, they typically come with higher interest rates. Opting for a shorter loan tenure may result in higher monthly payments but can lower the interest rate and the total cost of the loan over time.
4. Try to Make a Larger Down Payment
A larger down payment can decrease the loan amount you need to apply for, which can lead to a lower interest rate.
5. Time Your Application Correctly
Keep an eye on repo rate changes and market fluctuations. Applying for a loan when the repo rate is lower could help you secure a more competitive interest rate.
6. Shop Around and Compare Lenders
Different lenders offer varying interest rates based on their own policies and market conditions. It’s important to shop around, compare rates, and look for terms that best suit your financial situation.
Additionally, well-respected institutions like SMFG Grihashakti offer a range of calculators to help you make informed decisions. A home loan EMI calculator allows you to explore how different interest rates, loan amounts, and tenures will affect your monthly payments and total interest payable. An eligibility calculator can help you estimate how much loan you may qualify for based on your monthly income, monthly obligations, market value of the property, interest and loan tenure.
Important Note: While interest rates are a major component of the overall home loan cost, other factors like insurance, processing fees, and prepayment charges also contribute to the total cost of the loan.
Final Words
Securing the right home loan interest rate is essential for minimising the overall cost of your loan and contributing to long-term savings. Focus on improving your credit score and consider opting for a shorter tenure and making a larger down payment. Take time to research thoroughly and compare different lenders to avail of a home loan that aligns with your financial goals. Remember that while interest rates are important, other factors like processing fees, prepayment penalties, and customer service should also influence your choice of lender.
T&C apply. Please note that final approval, loan terms, and disbursement process may vary based on lender policies and borrower’s eligibility.
