Buying a house is one of the biggest financial decisions one makes in their lifetime, and its resulting benefits make it even more essential. However, a new house is not cheap, and most people opt for housing loans to finance their purchase. When applying, however, the interest rates can be intimidating and confusing. In this article, we’ll take a closer look at the factors influencing housing loan interest rates.
What is a Home Loan interest rate?
A housing loan interest rate is the percentage at which the lender will loan you money for your home purchase. It is double-edged – it is what you have to pay back for your mortgage, and it is also the lender’s profit from granting you the loan. The interest rate can vary according to various factors, including the type of loan, the borrower’s credit score, and market fluctuations.
Types of Housing Loans
The first factor that influences the home loan interest rate is the type of loan. Typically, there are two types of housing loans – fixed rate and floating rate.
- Fixed rate: home loans guarantee a set interest rate, which will remain the same for the loan’s duration. This type of loan is ideal for borrowers looking for financial stability and certainty. It is easier to budget and plan for loan repayments since you know exactly how much you’ll be paying each period. However, fixed interest rates tend to be higher than floating interest rates.
- Floating interest rates: on the other hand, fluctuate depending on market conditions. This means that borrowers’ repayments can be affected by changes in the financial market. If rates increase, then the borrowers’ repayment amounts also increase, and vice versa. Despite the uncertainty, floating rates tend to be lower and, therefore, more advantageous since they allow borrowers to take advantage of market trends.
Your credit score is a significant determinant of whether you receive your loan and the applicable interest rates. A credit score helps the lender evaluate the risk of default on repayment. When you have a high credit score, it generally means that you’re more likely to repay your debt, and the lender is likely to recompense by offering you better terms.
A low credit score, however, translates to a higher perceived loan risk, thereby increasing the interest rates. One way around this would be to improve your credit score before applying for a loan. A good credit score often translates to lower interest rates and better loan terms, making the home purchase more affordable.
Loan to Value Ratio (LTV)
The LTV ratio signifies the amount of the property value that the lender is willing to finance. For instance, a lender willing to finance 90% of the property’s value would require the borrower to produce a 10% deposit. If the LTV ratio is more significant, the borrower may enjoy lower interest rates than the borrower with a lower LTV ratio.
The rationale behind this is simple, if the homeowner fails to make payments, the lender will have to recover the borrowed amount, which will be equivalent to the loaned amount minus the deposit. The loaned amount is greater if the LTV ratio is more extensive, and hence, the lender has a higher risk of loss, hence the higher interest rate.
The loan amount also plays a significant role in determining the interest rate. If you borrow a large sum of money, the lender assumes more risk and mitigates the risk by imposing a higher interest rate than if you opt for a smaller loan amount.
Home Loan Process
The home loan process includes various stages, including application, approval, sanction, disbursement, and repayment. The processes’ efficiency, transparency, and accuracy all contribute to the interest rate offered. A detailed credit report, for instance, helps the lender assess your creditworthiness, thereby giving you better bargaining power and lower interest rates.
Other than these primary factors, there are other secondary factors that can affect interest rates, such as documentation charges, processing fees, and pre-payment penalties. Analyzing all of these factors and making the best decision is vital, and it is here that housing loan emi calculator tools come in handy. These tools give you accurate estimates of your future monthly payments and help you budget effectively.
Several factors play a role in determining the interest rate you’ll receive for your home loan. With so many variables in play, it is crucial to research and compare different banks and lenders’ rates to determine the most suitable one. With innovative and free tools such as housing loan emi calculator by banks, it’s easy to evaluate different offers and determine the most cost-effective option. A step towards responsible financial management is learning the ins and outs of credit and loans, and making informed financial decisions.