For most, taking a home loan would probably be the biggest financial commitment of their lives. With loan tenure easily stretching to at least 15 years, even a slight difference in their interest rates can lead to a significant difference in the overall interest cost of the loan. As banks and HFCs consider an array of factors while setting your home loan interest rates, an awareness of those factors can help you to get the best deal with the lowest interest cost.
Here is a list of major factors that can influence your home loan interest rates:
MCLR: This is one of the most important factor that determines your home loan rate. MCLR is calculated after consider four major factors –marginal cost of funds, operating cost, tenor premium and negative carry on account of cash reserve ratio (CRR). As these factors can vary for different banks, their MCLR too vary widely. Banks with lower MCLR usually have lower home loan lending rates for customers having same credit profile.
The MCLR of the banks will continue to influence your interest rate post-sanction as well. Banks compulsorily review home loan interest rate of their existing customers at least once a year on a pre-specified reset date. The MCLR on the reset date will remain applicable on your home loan till the next reset date, irrespective of any changes in their MCLR in the interim months.
Credit Score: Banks and HFCs consider applicant’s credit score while evaluating creditworthiness of home loan applicants. Those with credit scores of 750 and above are considered more creditworthy and hence, have higher probability of loan approval.
However, many lenders have also started factoring in credit score while setting interest rates for their loan applicants, charging lower interest rates for those with higher scores. For example, Union Bank of India charges an interest rate of 8.65 per cent p.a. to applicants having CIBIL score of 700 and above for home loans of up to Rs 75 lakh. For those with scores of less than 700, the bank charges 8.75 per cent p.a. for the same home loan amount. The 10 bps difference in interest rate is also applicable for home loans above Rs 75 lakh for those having credit scores of 700 and above and below it.
Hence, fetch your free credit report from credit bureaus at least six months prior to applying for the home loan and aim at having a credit score of 750 and above. Alternatively, you can also avail free credit report from the online financial marketplaces with regular monthly updates. Doing so might also get pre-approved home loan offers available on your credit score and other eligibility criteria.
Loan Amount: Banks and HFCs charge higher interest rates for bigger loan amounts. For example, HDFC’s interest rates for home loans of up to Rs 30 lakh starts from 8.55 per cent p.a. onwards whereas their interest rate for home loans above Rs 30 lakh to Rs 75 lakh and those above Rs 75 lakh start from 8.80 yearly and 8.85 per cent p.a respectively. Thus, try paying higher down-payment if that helps you to get your home loan at lower interest rates.
Interest rate type: When it comes to the type of interest rates charges, home loan come in three varieties — fixed, floating and mixed interest rate home loans. While fixed rate and floating rate home loans are self-explanatory, mixed-rate loans have fixed interest rates for a pre-determined period after which they charge floating interest rates. As fixed and mixed rate home loans have higher interest rate risk, lenders charge higher interest on such loans to compensate for their future loss in interest income, if any, due to interest rate volatility. For example, the interest rates of Union Bank of India’s floating rate home loans starts from 8.65 per cent p.a onwards whereas their interest rates for mixed-rate (fixed for up to 5 years) home loans start from 11.40 per cent per annum onwards.
Loan-to-Value (LTV) ratio: This ratio refers to the proportion of property value that can be financed through your loan proceeds. The rest has to be financed through your own resources. Currently, this ratio is at 90 per cent for home loans of up to Rs 30 lakh by the RBI; 80 per cent for loans above Rs 30 lakh to Rs 75 lakh; and 75 per cent for home loans above Rs 75 lakh.
Banks and HFCs encourage lower LTV ratio by charging lower interest rates as this decreases their credit risk. For example, in case of home loans of up to Rs 30 lakh, SBI charges 10 bps lower interest rates on LTV ratio lower than 80 per cent than those with LTV ratio of 80-90 per cent.
Job profile: Lenders prefer home loan applicants with a stable job or income source. As a result, many lenders try to target specific customer segments with stable income source by offering them home loans at lower interest rates. Salaried professionals are usually charged lower interest rates than the self-employed ones. Among the salaried, government and PSU employees are the most preferred followed by employees working with top private-sector companies. Among the self-employed, chartered accounts and doctors are usually considered as the least ‘risky’ professions.
As each bank and HFCs have their own mechanism to set differential rates for their home loan applicants, ensure to compare all the various home loan options before making the final application. The best way to do so is to visit online financial marketplaces, which will fetch you various home loan options available on your credit score, monthly income and other eligibility criterion.
By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
