For financial institutions like Bajaj Finance home loan and Shriram Housing Finance, the major determinants of their rate of interest are their credit risk premium and spread charged over their EBR or external benchmark rates. For the HFCs (housing finance companies), it is generally their funds’ costs and other parameters. Few of the large HFCs like the Bajaj Finance home loan, HDFC, LIC housing finance, etc. may be able to provide you a home loan at lower rate of interest than few of the private banks if you hold a good credit profile. Read on to understand the parameters that determine your home loan interest rates –
Credit score –
As with most loan options, lenders factor your score for assessing your credibility. However, owing to the risk-based pricing many lenders of home loan are now considering your credit score while deciding your rate of interest. Those having a score of over 750 are generally considered as highly credible and hence lenders try to attract such kinds of home loan seekers by levying a lower rate of interest. Likewise, as a score of less than 750 is generally looked upon as a market of financial indiscipline and a higher risk, home loan lenders try to make up for the higher risk involved by levying a higher rate of interest.
Hence, if you are one of those looking to take up a home loan in the upcoming times, then you must fetch your credit reports nearly six months before placing an application for home loan. Doing so would provide you with sufficient time to take up righteous steps for ameliorating your credit score. This would even assist in detecting the incorrect information or clerical issues, if any, in your credit report negatively affecting your credit score. Once the incorrect info or errors are addressed to the concerned authority for correction, the corrected report will automatically show-up a higher credit score.
Also Check: Bajaj Finance Home Loan
Loan amount –
A higher loan proceeds enhances your credit risk as a lender. Hence, many lenders of home loans levy a higher rate of interest for higher loan amounts to make up for the higher involvement of credit risk. Thus, you as a home loan borrower must ensure to pay a higher down payment or margin contribution amount as doing so would allow you to avail a home loan deal at a lower rate of interest.
Interest rate kind –
Lenders tend to offer 3 sub kinds of home loan rates, namely, fixed, floating and mixed rate of interest. Home loan interest rate availed under the floating rate change according to the changes in benchmark rates and repo rate. In the scenario of fixed rate of interest home loan, the rate of interest stays the same across the whole home loan repayment tenure. In the case of mixed interest rate for home loan, the rates stay fixed for a specific period generally for the starting 2-3 years of the home loan repayment tenure, post which the mixed home loan rate converts to floating home loan rate. As fixed and mixed rates enhance interest rate risk for lenders, most lenders generally levy a higher rate of interest or a higher processing charge or other charges to make up for the possible loss in the interest income owing to the rise in broader market rates, in the upcoming times.
LTV ratio –
Loan to value ratio also addressed by the term LTV ratio is the proportion of the home property’s value funded via home loans. The rest of the home/property value must be arranged by you as the home loan borrower from your own pocket in the form of margin contribution or down payment. As reduced LTV ratios lower the involvement of credit risk for lenders, many lenders encourage lower LTV ratios by endowing lower rate of interest for those choosing lower LTV ratios.
Job profile –
Many of the financial institutions like the banks and HFCs factor in your source of income while determining your rate of interest. You as a salaried individual are generally provided a lower rate of interest than the self-employed individuals. Salaried applicants hold a higher income certainty and thus, tend to carry a lower credit risk for lenders. Among the salaried group, PSU and government employees are provided a lower rate of interest owing to the higher job certainty and income certainty. They get followed by the ones employed with reputed private companies.
Tip – Compare the rate of interest of various lenders –
The home loan rates differ among lenders because of your differing credit risk appetite, fund cost, and the factors used for setting the rate of interest. Thus, if you are one of those looking to get a home loan, you must ensure to compare the distinct home loan deals from as many home loan lenders as possible and then make the selection as per your repayment capacity and cash inflow.
You must begin the procedure by initially approaching the lender whether HFC or bank with whom you share a good banking relationship. In this case, many lenders may be willing to offer your preferential rate of interest. This process must be followed by the process of approaching the online lending markets to compare the distinct home loan offers, rates and features based on your credit score, LTV ratio, loan amount, job profile, income and various other crucial eligibility parameters.
Job profile –
You as an individual looking for a home loan must hold a stable source of income to be eligible for the home loan deal. If you hold a good source of income, then you are addressed as a low-risk individual while those having an unstable source of income are looked upon as a high-risk individual. Lower rates are thus provided to those with stable income, which would involve a salaried professional, government and PSU employee and those employed in leading private firms. Chartered and doctors are usually looked upon as low-risk individuals under the self-employed category, and hence they too may be considered as low-risk individuals. They may be offered a lower rate of interest on home loans than other self-employed individuals.