With a home loan, it is possible to own a dream home early in life. The affordability of a home loan is dependent upon the EMI you agree to repay. EMIs assist you to repay the principal as well as interest component in a manner without having to stress much on your monthly budget. But note that this ease is dependent upon the deal you get on the rate of interest from lenders like Citibank Home Loan, RBL Bank Home Loan or others. With the loan repayment tenure of a home loan going up to 30 years, a minor difference in the rate of interest can result in a substantial difference in the entire home loan’s interest cost. As lenders like RBL Bank Home Loan, Citibank Home Loan and other lenders factor in various parameters when setting the interest rates of home loans, a thorough understanding of such factors can help at getting you a great deal with the lowest interest rate.
Here, we will discuss some of the crucial factors that determine home loan interest rates.
External benchmark rate of bank
External benchmark of the bank like RBL Home Loan, Citibank Home Loan and other lenders is one of the most essential factors that determine your home loan’s interest rate. According to RBI, from 1st October 2019 onwards, all the new floating home loan rates extended by banks are linked to four external benchmarks – repo rate, 6 months and 3 months Treasury bill rates and any other benchmark market interest rate listed by FBIL(Financial Benchmarks India Private Ltd.). As all such benchmarks come with different figures, one’s home loans interest rate basically depends on the bank’s chosen external benchmark.
While RBI has permitted banks to determine their spread over the external benchmark interest rate, credit risk premiums might go through a change only when the credit risk profile of borrowers undergo substantial change. Thus, any major dip in the borrower’s credit profile can lead to a considerable rise in his home loan’s rate.
Lenders like RBL Home Loan, Citibank Home Loan etc., consider the credit score of the applicant as one of the crucial factors when assessing his application for a home loan. Applicants with a high credit score of 750 and above are viewed as creditworthy and have higher chances of home loan approval at a lower rate of interest. However, those with a credit score of below 750 are usually considered to be lacking in credit discipline and may be charged a higher interest rate to make up for their higher risk of credit default.
Thus, ensure to fetch your credit report at least 6 months before submitting your home loan application. Doing so would render you sufficient time to take the required measures to improve your credit score. It would also help you detect clerical error or wrong information, if any, which, once rectified, may enhance your credit score and also your home loan eligibility prospect.
For higher loan amounts, most lenders charge higher interest rates. For example, home loan’s interest rate for State Bank of India for amounts up to 30 lakh starts from 6.95% p.a. onwards while their interest rates for amounts above 30 lakh and 75 lakh start from 7.20% p.a. and 7.30% p.a., respectively. Hence, borrowers should try to pay a higher down payment amount if doing so helps them to avail of home loans at a reasonsable or lower rate of interest.
Interest rate type
Home loan’s interest rate for RBL Bank Home Loan, Citibank Home Loan and various other lenders can be categorised into 3 – mixed, fixed and floating interest rates. Interest rates of floating home loans fluctuate based on the market, while fixed home loan rates stay constant for the entire home loan duration. For the mixed home loan interest rate, the rate stays fixed for a fixed period, and afterwards, it transitions towards floating rates. As fixed and mixed home loan rates have higher risk involved in interest rates, banks as well as HFCs usually charge a higher home loan rate on them for hedging against the interest income loss because of the interest rate volatility.
LTV (Loan to value) ratio refers to the proportion of property value sanctioned as loan by the banks like RBL Bank Home Loan, Citibank Home Loan or HFCs. The rest of the amount requires being financed through the home loan applicant’s own funds in the form of a down payment. For loans up to 30 lakh, 90% LTV is allowed, for loans from 30 lakh to 75 lakh, LTV is 80%, and for loans over 75 lakh, LTV is 75%. Most lenders encourage borrowers to opt for a lower LTV ratio by charging lower interest rates because it reduces their credit risk.
Many banks like RBL Bank Home Loan, Citibank Home Loan and HFCs also consider income sources of their home loan applicants at the time of fixing their rate of interest. Generally, salaried individuals are charged a reasonable or lower interest rate as compared to self-employed professionals. Among self-employed, chartered accountants and doctors generally have higher chances to get Lowest home loans interest rates. Among salaried applicants, government and PSUs are most favoured owing to their higher job & income certainty. These salaried applicants are followed by those working in reputed & large private sector organisations as such companies are usually viewed as more stable with increased potential to withstand economic downturns as compared to other private sector companies. This lowers the credit risk perception of lenders, leading them to attract such employees via lower home loan rates.
As every bank and HFC have their own process to calculate differential rates for their home loan applicants, make sure to compare all the various home loan options before submitting the final application. One of the best possible ways to do so is to visit online financial marketplaces, which will fetch you different home loan options available on your credit score, income and other eligibility criteria.