How Lenders Determine Interest Rate for Your Home Loan?

The interest rate charged on your home loan contributes significantly in determining the total cost of your loan. Therefore, when availing a home loan, you must consider various lenders and settle for the one that offers the most competitive interest rate along with other favourable loan terms. This will not only help bring down the overall cost of borrowing but also lower your monthly EMIs, consequently reducing your repayment burden.

But, how do lenders usually determine the interest rate for your home loan? Below, we have enlisted some basic parameters based on which lenders determine the home loan interest rate.

1. Credit Score

• The credit score ranges from 300 to 900 with 300 being the lowest and 900 the highest. The score determines the creditworthiness and repayment capacity of the borrower. Lenders evaluate the credit score of borrowers to estimate the credit risk associated
• If your credit score is lower than 700, lenders may consider you a high-risk home loan applicant, and therefore charge a higher interest rate on your home loan
• On the other hand, with a high credit score of 750 or above, lenders may consider you a low-risk applicant, thereby making you eligible for a competitive interest rate.
• Therefore, before applying for a home loan, you must consider improving your credit score by paying off your existing debt, decreasing your credit utilization ratio, and maintaining the right credit mix.

2. Loan-to-Value (LTV) Ratio

• The Loan-to-Value (LTV) ratio is the percentage of property’s value that can be financed through a home loan. With leading lenders, you can avail up to 75% to 80% of the property cost as a home loan.
• However, you should aim at making a larger down payment and availing a lower home loan This is because, the higher the LTV ratio, the higher will be the credit risk, and consequently your home loan interest rate will be higher.

3. Income

Your monthly income will impact your home loan interest rate. A good monthly salary will reflect your high repayment capacity, and hence, lenders may charge a lower interest rate on home loan. Moreover, if you have any additional source of income apart from your salary, you may stand a better chance of availing a competitive home loan interest rate.

4. Employment History

Lenders may also check your employment history and job profile before finalizing your home loan interest rate. If you have a stable employment history of working with reputed organizations for long period of timeyou can get a home loan at an attractive rate.

5. Property’s Location

If the property you are purchasing is in a locality having good connectivity and amenities, it will have a high resale value. Lenders consider properties with high resale value as lucrative properties and may charge a lower interest rate on home loan.

These are some essential parameters that help lenders determine the loan interest rate. Being aware of these factors can help you get the best deal for yourself. Lastly, apart from the interest rate, you must also take into consideration other charges such as processing fee, prepayment penalty, etc. when availing a home loan.