How Does Lenders Decide Home Loan Interest Rate?

Are you planning to buy your dream home but concerned about the high interest rates on home loans? Have you been wondering how lenders arrive at your home loan interest rate, and if there's a way to negotiate for a lower rate? Well, you are not alone! Securing a home loan is a significant milestone for many Indians, but the interest rate offered on the loan can significantly impact your monthly payments and the overall cost of the loan. 

In this guide, we will explore the various factors that influence home loan interest rates in India and offer you practical tips to help you get the lowest possible rate for your home loan. So, let's dive in!

6 Key Factors Affecting Home Loan Interest Rates in India

1. Credit Score

Your credit score acts as a vital indicator of your creditworthiness for lenders. A high credit score (typically above 750) signifies a good credit history and responsible borrowing behavior. This translates to a lower risk for lenders, allowing them to offer you a competitive interest rate on your home loan. Conversely, a low credit score indicates a higher risk of defaults, leading to lenders charging a higher interest rate to compensate for this risk.

2. Loan Amount and Loan-to-Value Ratio (LTV)

The loan amount you borrow and the Loan-to-Value Ratio (LTV) are interlinked. LTV is the percentage of the property's value that the loan covers. For instance, if the property value is ₹1 crore and you borrow ₹80 lakh, your LTV is 80%. Generally, lenders offer lower interest rates for lower loan amounts and lower LTV ratios. This is because a smaller loan amount and a smaller LTV signify a lower risk for the lender.

3. Property Type and Location

The type and location of the property you are financing can also influence the interest rate. Lenders may offer slightly lower rates for residential properties in prime locations or specific types of properties like affordable housing units.

4. Employment Type and Income Stability

Your employment type and income stability are crucial factors for lenders. Individuals with salaried jobs in reputed companies or with a demonstrably stable income stream are generally considered lower-risk borrowers and may be offered lower interest rates.

5. Interest Rate Type (Fixed vs. Floating)

Home loans can be fixed-rate or floating-rate. Fixed-rate loans offer a stable interest rate throughout the loan tenure, while floating-rate loans have interest rates that fluctuate based on market conditions. Generally, fixed-rate loans come with a slightly higher interest rate than floating-rate loans.

6. Bank/NBFC and their Offerings

Different banks and NBFCs (Non-Banking Financial Companies) have varying interest rate policies and schemes. It's advisable to compare rates offered by multiple lenders to find the one that best suits your needs and offers the lowest interest rate.

5 Helpful Tips to Get the Lowest Home Loan Interest Rate

1. Maintain a High Credit Score

Building and maintaining a high credit score is essential for securing a lowest home loan interest rate. Regularly review your credit report for errors and take corrective actions to improve your credit score if necessary.

2. Make a Larger Down Payment

A larger down payment reduces the loan amount you need to borrow, lowering the LTV ratio and potentially fetching you a better interest rate.

3. Negotiate the Interest Rate

Don't hesitate to negotiate the interest rate with your chosen lender. Having a strong credit score, stable income, and a good comparison of rates from other lenders can strengthen your bargaining position.

4. Opt for a Shorter Loan Tenure

While shorter loan tenures lead to higher monthly EMIs (Equated Monthly Installments), they can also significantly reduce the total interest paid over the loan period. If your budget allows, consider a shorter tenure to benefit from a potentially lower interest rate.

5. Explore Balance Transfer Options

If you have an existing home loan with a high-interest rate, consider transferring your loan to a different lender offering a lower rate. This process is known as a balance transfer and can help you save a substantial amount of money on interest payments.

Taking Advantage of Online Tools and Resources

The Indian digital landscape offers several online tools and resources that can simplify the home loan process and help you get the best possible interest rate. Platforms like Test My Loan (TML) can analyze your current home loan and provide insights into potential savings through a balance transfer. These resources can also connect you with lenders offering competitive interest rates and guide you through the application process.

Understanding how home loan interest rates are determined empowers you to make informed decisions and potentially save a significant amount of money over the loan tenure. By maintaining a good credit score, comparing rates from multiple lenders, and exploring options like balance transfers, you can increase your chances of securing the lowest possible interest rate for your home loan in India.

Are you considering a home loan or looking to reduce your existing home loan interest rate? Test My Loan (TML) can help you compare home loan rates and find the best deal for you. Our easy-to-use platform allows you to compare rates from multiple lenders and customize your search based on your individual needs. 

Whether you're a first-time home buyer or looking to refinance, TML can help you save time and money on your home loan. Start comparing rates today and take the first step towards homeownership!

Also, Read this: How to Reduce Home Loan Interest Rates in India?