When an individual borrows money from a bank, NBFC or any other financial institution, they must pay interest. In very simple words, the interest is the cost of borrowing the loan and the lender's payout for taking the risk involved in lending a substantial sum as well as covering the loss of money. Interest is applicable on the sum borrowed at the beginning of the loan tenor, also known as the principal. When it comes to home loans, availing oneself of the right home loan interest rates is crucial as they determine the affordability of a loan as well as the total cost of borrowing. Borrowers must always try their best to avail themselves of the lowest home loan interest rates possible. Low home loan rates minimize the burden of one's home loan EMIs as well as reduce the total interest outgo on the loan, thereby reducing the effective cost of borrowing the loan. Let us now demystify home loan interest rates and try to know everything there is to know about home loan interest rates.
Types of Interest Rates
Before we discuss what factors affect home loan interest rates and how to avail oneself of the lowest home loan interest rates possible, let us share with our readers that interest rates can be simple and compounding. In the case of simple interest-rate loans, interest is applicable only on the principal. In the case of compound interest rate loans, lenders apply interest not only on the principal but also on the interest that the borrower paid the month before. Lenders charge interest on home loans on a compounding basis. Thus, even a small difference in the interest rate offered can make a huge difference to the cost of borrowing the loan. Further, when it comes to home loans, lenders have three different interest rate regimes to choose from: fixed, floating, and hybrid.
In the case of fixed-interest rate home loans, the interest that a lender charges on the home loan does not change with changing market conditions and remains the same through the tenor of the housing loan. Borrowers must go for fixed-rate home loans when they expect home loan interest rates to go up in the near future. Floating interest rates, on the other hand, are linked to an external benchmark, most likely the Repo Rate, and change with changing market conditions.
When the market interest rates go up, floating interest rates go up and home loan EMIs become expensive. On the other hand, when the rates go down, home loan EMIs go down and home loans become cheaper. In the case of hybrid home loan interest rates, lenders charge interest on a fixed basis during the first few years and then, the interest rate type automatically changes into the floating rate type. Floating interest rate loans tend to be cheaper than fixed interest rate home loans as fixed interest rate loans carry lower risk for lenders. Further, most lenders offer home loans on floating interest rates only.
Let us now look at what home loan applicants can do to avail themselves of the lowest home loan interest rates possible.
5 Helpful Tips for Lower Home Loan Interest Rates
1. Check Your Home Loan Eligibility
If you want a lender to offer you a favourable home loan interest rate, you must meet their home loan eligibility requirements. Lenders put forth home loan eligibility requirements to make sure they are lending money only to those borrowers who can afford home loan EMIs and therefore, won't default on loan repayment. Home loan eligibility moves around factors, such as age, income, job stability, credit score, etc. Borrowers who easily meet their lender's home loan eligibility criteria not only find it easy to get approved for a home loan but are also offered comparatively lower home loan interest rates. Not meeting home loan eligibility requirements can lead to home loan application rejection and also negatively impact a borrower's chances of availing of a loan in the future.
2. Maintain a High Credit Score
The credit score is important as it affects a borrower's chances of getting approved for a loan. The credit score indicates a borrower's creditworthiness and repayment capacity. A high credit score represents high creditworthiness and therefore, reduced chances of loan default. A low credit score, on the other hand, says that the borrower cannot be trusted with timely repayment of loan money. Borrowers with a low credit score find it difficult to get approved for a loan on beneficial terms and conditions. If you have an excellent credit score, i.e., anything between 800 and 900, getting approved for a home loan won't just be a cakewalk for you but you will also find that any lender you apply to might offer you a lower interest rate.
3. Maintain Job Stability and a Stable Income
Home loan borrowers with a stable income and job are less likely to default on loan repayment. Therefore, lenders prefer lending money to such borrowers. If you are planning to apply for a home loan , do not switch jobs for at least a few months. Maintain job and income stability to convince your lender of your repayment capacity. Doing this will help you avail yourself of a home loan at the best interest rates possible.
4. Maintain a Low Debt-to-Income Ratio
The debt-to-income ratio gives one the percentage of one's total income going towards the repayment of debts, such as credit card bills and loan EMIs. Having a high debt-to-income ratio means the borrower is already devoting a considerable component of their income to covering debt. Therefore, borrowers with a high debt-to-income ratio rarely get approved for a home loan. Even if they do, they might now be offered a more competitive home loan interest rate. To be eligible for a high home loan interest rate, borrowers must maintain their debt-to-income ratio below 40%.
5. Opt for a Short Loan Tenor
When borrowers opt for a long tenor, the chances of them defaulting on loan repayment or missing EMIs also go up. Therefore, borrowers who opt for a short tenor usually get offered better or lower home loan interest rates. However, you must think before opting for a short loan tenor if they will have difficulty in affording high EMIs. It is better to opt for a longer tenor, pay more interest than default on loan repayment, and lose ownership of your property.
Final Words
If you are applying for a home loan, spend some time researching lenders and finding the right offer for you. Use a home loan eligibility calculator to calculate the loan amount you are eligible for. Further, use a home loan EMI calculator to calculate your home loan EMIs for the loan amount you plan to borrow. Go ahead with your loan application only if you can afford these home loan EMIs. More importantly, negotiate with each lender you talk to for availing of the best possible home loan interest rate as the interest rate you get will determine the likeliness of you being able to repay your loan on time.
