Due to the ongoing recession in the economy, home loan interest rates have been slashed by up to 90 basis points across various lenders since February 2020. It is a direct impact of changes in the repo rate, as enforced by the Reserve Bank of India.
- Presently, the repo rate in India is 4%.
- The simultaneous rate cuts have led to the lowest home loan interest rates within the last 15 years.
This, along with many other factors, can affect your overall home loan interest rate. Borrowers should be aware of all such factors, which can increase or decrease the overall interest rates linked to their housing credit.
Listed below are some aspects that play a significant role in this matter.
- Borrower’s credit score
A credit score is indicative of one’s creditworthiness. An individual’s credit repayment history and general handling of debts are considered when calculating his/her score.
Credit scores can even determine your home loan EMIs since the interest factor in housing finance is lower for individuals with an impressive credit rating and vice versa. Thus, a potential borrower should check this score periodically and work on improving it if it is lower than 750.
- Self-monitoring millennial demography checks the credit rating almost 6 times in a year, as per a report.
- 64% of these individuals tend to apply for new loans within 3 months of checking their CIBIL report.
Taking steps that help improve one’s credit score is easy.
Opting for small loans and repaying them in time can help build a positive impression. Alternatively, responsible use of a credit card or any other credit instrument can also help boost the score, among other means.
- Lender’s external benchmark
Not every financial institution follows the repo rate as an external benchmark in deciding its home loan interest rates. In case of such lenders, repo rate cuts do not immediately result in any interest rate reductions due to a lack of transparency. Therefore, it is imperative for a borrower to know the external benchmark that his/her chosen lender follows.
- Loan principal
First-time home buyers often plan to buy a home with low down payment since doing so averts immediate financial burden. Nevertheless, availing substantial loans can result in increased interest payments due to high loan value.
For instance, one can avail up to Rs.18 lakh as a home loan when buying a property worth Rs.20 lakh. RBI guidelines strictly limit housing loans to 80%-90% of a property’s actual price.
Still, down payment of more than Rs.2 lakh can lower the principal outstanding; subsequently the total interest charged will also come down.
Both these factors will ensure limited financial burden during home loan repayment. A home loan EMI calculator reveals how lowering the principal amount affects a borrower’s monthly liability.
- Borrower’s source of income
Lenders tend to prefer applicants who hold a steady job at government institutions, reputed MNCs or other renowned companies. According to financial institutions, such job profiles are comparatively risk-averse, which increases the likelihood of repayment of the credit, regardless of the home loan interest rates. Therefore, these borrowers stand a better chance in acquiring the most favourable terms on this housing credit.
- A recent survey found that a majority of home loan borrowers are salaried individuals.
- Almost 88% of existing home loan customers held a salaried post at various firms and companies.
Nevertheless, self-employed individuals are just as likely to avail home loans at attractive rates of interest. They need to possess a strong financial background, with stable monthly earnings to negotiate for such rates.
- The resale value of the purchased property
One should consider the condition and location of a property before availing a housing loan for it. If the chosen property lies in a remote area with poor connectivity, its resale value would be considered poor as well.
Similarly, any lurking damage to houses or properties may push your home loan interest rates up. Applying for a high-value home loan for such house purchase is among the common mistakes which one should avoid when choosing a property.
Keep in mind that lenders consider the resale value of the property one purchases via a home loan before sanctioning this credit. If the concerned borrower fails to repay this debt in time, financial institutions gain a right to repossess such property and auction it for loan recovery.
Saving taxes on home loan interest payments
Thankfully, paying home loan interest also makes one eligible to avail attractive income tax benefits.
Under Section 80EEA of the Income Tax Act, eligible borrowers can save up to Rs.3.5 lakh on interest payments as home loan interest tax benefit.
Thus, with the above pointers and the tax benefits included, individuals can easily save significant amounts on their home loan interest liabilities.
Additionally, several lenders also provide PMAY subsidies on home loans, further facilitating a reduction in interest outgo on the advance.
PMAY eligible applicants can avail discounts of more than Rs.2 lakh on the housing credits.
Lenders also provide pre-approved offers to simplify the loan availing procedure, while also making it more time-efficient. These offers are available on secured financial products like home loans and loans against property, among other loans. One can check the pre-approved offer by providing his/her full name and contact details.
A range of factors affect your home loan interest rates. An informed borrower can easily utilise his/her knowledge to avail housing credit at the most favourable rates and enhance the management of finances in the long run.