Home Loan Interest

Home loans are low-interest-rate and long-tenor loans that help make the dream of homeownership affordable. Borrowers repay home loans in the form of EMIs. Home loan EMIs are calculated using this formula: 

Home Loan EMI = P x R x (1+R)^N / [(1+R)^N-1] 

Here, 

P is the principal or loan amount,

N is the loan tenor in months,

and R is the rate of interest.

The essence here is that the EMI that one must pay depends on three factors: principal value, loan tenor and the rate of interest. Of these three, two are variables. Borrowers have the flexibility to choose the principal or loan amount and loan tenor based on their affordability and repayment capacity. The rate of interest, however, is decided by the lenders. 

The home loan interest rate that one gets is important in ascertaining the viability of the loan. High home loan interest rates translate into high home loan EMIs and paying high EMIs for an extended period may not be feasible, especially when met with a contingency or a financial crunch. This article contains advice for home loan applicants regarding what they can do to avail of housing finance at low home loan interest rates

Home Loan Interest Rates: Factors that Impact Your Lender’s Decision

Lenders decide the rate of interest to be offered to a loan borrower after taking into consideration several different factors. Let us take a look at these factors and how they affect the home loan interest rate one gets. 

Credit Score

An individual’s credit score is a statistical representation of their creditworthiness. It indicates their repayment capacity and the risk for lenders. Credit scores can range from 300 to 900 and a credit score above 750 indicates excellent creditworthiness. Such a credit score guarantees instant loan approval, also blessing the loan applicant with strong negotiating power concerning loan terms and conditions.  

Applicants should proceed with their loan application if their credit score is at least 750. Paying one’s loan EMIs and credit card bills on time, maintaining a low credit utilization ratio, a healthy mix of secured and unsecured loans, and not being excessively dependent on credit will help you build such a credit score. 

Debt-to-Income Ratio

The debt-to-income ratio is important as it helps lenders know what percentage of a person’s total income is already going towards loan repayment. The debt-to-income ratio can be calculated by dividing all of an individual’s monthly debt payments by their gross monthly income. A high debt-to-income ratio indicates that a significant portion of one’s net income is already going towards debt repayment. Such individuals may default on loan repayment when met with a financial crunch or emergency. Most lenders, thus, offer the lowest home loan interest rates to individuals who have maintained their debt-to-income ratio below 36%. If your debt-to-income ratio already exceeds 50%, availing of a home loan on low home loan interest rates may be difficult for you.  

Income and Job Stability 

Individuals who switch jobs often are considered risky borrowers by lenders for such individuals are more likely to default on loan repayment. Similarly, individuals who move from one business to another are also considered high-risk borrowers and are therefore extended loans on high home loan interest rates. Income and job stability are an integral part of a person’s home loan eligibility. Every lender asks for income and employment documents to gauge the risk in doing business with the applicant and people with an unstable income and job or business have low home loan eligibility and are therefore, extended loans on high home loan interest rates.

Loan-to-Value Ratio 

The loan-to-value ratio refers to the percentage of a pledged asset’s net market value that has been sanctioned as a loan. High LTV ratio loans involve high loan amounts and therefore, chances of loan default are also high in the case of high LTV ratio loans. To cover the risk, lenders charge a high rate of interest on high LTV ratio loans. On the contrary, low LTV ratio loans are sanctioned at a low rate of interest. Ideally, loan applicants should not apply for a loan with an LTV ratio exceeding 80%.

Concluding Remarks

Other than the factors mentioned above, other factors, such as external market conditions, location of the property, home loan interest rate type you have selected, etc., also affect home loan interest rates. Having a clear understanding of these factors will allow you to avail yourself of housing finance at the lowest home loan interest rates.

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