A Home Loan interest rate is set after considering several factors. These include costs borne by the lender, the marginal cost of lending, and other expenses, fees and charges stemming from the borrower. The interest rate you receive also depends on various elements of your financial history. These factors are your credit history, income bracket and employment status. In order to reduce your Housing Loan interest rate, it is important to identify and control the factors that you have influence over.
Here are some external factors that influence your interest rate:
1. Marginal cost based lending rate (MCLR):
a. The MCLR is set by the Reserve Bank of India (RBI) and Home Loan interest rates are set in accordance with it.
b. The MCLR is calculated keeping in mind the financial institute’s cost of borrowing funds from the RBI.
2. Repo rate:
a. The repo rate is the rate at which financial institutions borrow money from the RBI. When this rate is high, the cost of borrowing funds shoots up for financial institutions and they are able to borrow less. As a result, they have lesser funds to lend to you.
b. So, this rate is passed down to every borrower when applying for a Home Loan.
3. Reverse repo rate:
a. The reverse repo rate is the rate at which lenders lend to state and central banks. It works in a similar fashion as the repo rate. If the central bank borrows a high amount from the financial institution, it has lesser funds to loan to you. Therefore, it charges you a high rate of interest.
b. When the reverse repo rate is low, the opposite happens.
4. Market scenario:
a. In some cases, even the market influences the interest rate for Home Loans.
b. If the demand for Home Loans increases, it is likely that the interest rates will also rise over time.
Apart from these market conditions, there are factors within your control that influence interest rates too. Take a look at what they are.
- Credit score:
> A good credit score is a sign of creditworthiness. Lenders are likely to have more confidence in applicants with a good credit score and so, they charge them lower interest.
> If you seek to gain from a low rate of interest, ensure that you maintain a good credit history by not borrowing excessively. You can also pay off old debt to improve your credit score.
- Employment status:
> Employed applicants have a stable income that guarantees the lender repayment of the loan.
> This is why lenders are likely to provide such borrowers a low rate of interest.
> Unemployed applicants are at a risk of being charged high interest and can even have their loan rejected.
- Income bracket:
> Your income plays an important role in influencing the interest rate that you are charged.
> Applicants who fall in high-income brackets are viewed as low-risk applicants as they possess the financial ability to repay the loan. As a result, they are usually charged a lower rate of interest.
> On the other hand, applicants belonging to a low-income brackets are usually charged a high interest rate because there is greater risk attached to their application.
- Home value:
> When borrowing a Home Loan it is important to select a property with good financial value. This is because applicants with high-value homes are charged a lower rate of interest.
> Conversely, applicants with low-value homes will be charged a higher rate of interest.
I am a Financial Advisor with an experience of more than 7 years.I had worked for top Financial Firms in India and has been a visiting faculty at many reputed institutes. I have done my post-graduate in Business Economics, from Princeton University, USA. During my free time, I teaches children from marginalised sections of society and also work on my Blog.