Applying for home loans is the most common way of affording a property purchase. Real estate prices are very expensive, which makes it difficult for homebuyers to solely rely on their savings. There are many lenders out there offering home loans, which makes borrowers’ lives easier when it comes to receiving financial support.
However, many people are worried about going for such loans. This is because they are worried about not being able to afford the home loan rate. While it is true that some struggle with the repayment of their loans due to heavy interest, this should not be the reason for not going for that house you have always dreamt of. To avoid such problems, it is important to learn how lenders set home loan interest rates.
6 factors that lenders take into consideration while setting the home loan interest rate:
- Credit score
Any lender is always going to check the credit score of an applicant before offering them a home loan. The credit record actually plays an important role in the lender’s decision of setting the home loan interest rate. Credit records give the lender an understanding of borrowers’ creditworthiness, previous repayment schedules, and financial responsibility. A low credit score can result in a high interest rate and vice versa.
- LTV ratio
LTV (Loan to Value) ratio refers to the value of the property that can be covered by the home loan. The remaining amount will have to be covered from personal savings. A higher LTV would mean a lower down payment, which is ideal for most borrowers. However, in this case, the interest rate could be higher too considering the lender’s disbursal of a higher loan amount is riskier than approving a lower amount.
- Repayment tenure
The repayment tenure that you choose can also affect the monthly instalments as well as the interest rate of the home loan. Choosing a shorter tenure can help you get lowest home loan interest rate as compared to a longer tenure. In this case, your monthly instalments will be bigger, however, the overall cost of the loan will be lesser since you are reducing the total number of EMIs.
- Homebuyer’s employment profile
Any lender would prefer their applicants to be under steady employment. This is because a good employment record indicates a stable monthly income and good repayment capacity. Lenders are more likely to offer lower home loan interest rates to someone working with a stable income rather than someone working in a profession with an unstable income.
- Type of interest rate
While applying for a housing loan, you can either opt for a floating or fixed interest rate. A floating interest rate is subject to market conditions and will fluctuate accordingly. On the other hand, a fixed interest rate will remain constant irrespective of market fluctuations. A floating interest rate is generally slightly lower than a fixed interest rate.
These are some of the basic factors that lenders consider while setting the housing loan interest rate. However, do note that each lender’s terms differ from one another, which is why it is important to do your research before picking one for a home loan plan.
