Major Factors That Influence Your Home Loan Interest Rate and EMI

Are you planning to buy your dream house and become a proud homeowner? Well, you can buy a home in India even if you don't have funds right away. A housing loan can help you seal the purchase of a house in India. However, you must have a good credit history and income to secure a housing loan easily. Also, there are a few factors impacting the housing loan interest rate. When the housing loan interest rate is affected, there will be a change in the EMI amount. Read on to understand the factors impacting housing loan interest rates and EMI.

Here are the factors influencing house loan interest rates and EMI.

1. Credit score

The home loan interest is highly contingent on the applicant's credit score. Not every individual will have the same credit score in India. Some individuals might have a good credit score, while others might not have a poor score. When someone's credit score is poor, it suggests they haven't paid attention to past loans and EMIs. Your credit score drops when you miss EMIs or continuously make late payments. Therefore, someone with a poor credit score will likely miss out on house loan EMIs. Lenders know this and prevent offering house loans to individuals with poor credit scores. Even if they give a house loan to someone with a poor credit score, they apply a high-interest rate.

2. The market value of the property

The lender will ask for the location of the property you are purchasing with a house loan. The lender will even send its representatives to analyse the property's market value under consideration. If the property is within a prime location, it will have a high resale value. On the other hand, a property in a remote location will not have a good resale value. Lenders offer low interest on house loans when the property is in a prime location. As the interest rate decreases, the house loan EMI also decreases for the borrower.

3. Income and job stability

Lenders analyse the credit risk associated with each borrower before offering a house loan. You might have applied the minimum rate on a home loan interest calculator, but things can change. The lender can increase the interest rate after analysing your income and occupational stability. Someone with a low income might miss out on home loan EMIs. Similarly, someone who has switched many jobs in the past might not be considered financially stable by home loan providers. There is a credit risk associated with someone who does not have a stable job or a good monthly income. To minimise the credit risks associated with such borrowers, lenders tend to increase the interest rate on housing loans.

4. Housing loan tenure

The tenure of a housing loan has a direct impact on the interest rate. When the loan tenure is long, the lender will collect the housing loan amount over many years. Since it takes time to collect the housing loan amount, lenders suspect a credit risk. It is why housing loan providers increase the interest rate when the repayment tenure is long. On the other hand, borrowers might get affordable interest rates for housing loans with short tenures.

When the repayment tenure increases, the EMIs become small. Some people are satisfied when the EMI amount is decreased, not knowing that the overall interest charges have increased. When the housing loan tenure is short, you end up paying minimum interest charges. Use a home loan interest calculator to know the overall interest charges you will be paying at the end of a housing loan.

5. Current MCLR

RBI is responsible for deciding on the MCLR (Marginal Cost of Funds-based Lending Rate). It is the lowest interest rate in India that can be used by lenders. A lender cannot offer a housing loan at a lower rate than MCLR. Sometimes, RBI might decrease MCLR, and home loan interests also fall.

Type of housing loan interest rate

Some lenders offer fixed and floating interest rates on housing loans. A floating interest rate will change according to the market rates, and EMIs will change accordingly. On the other hand, you will know the EMI amount beforehand for a housing loan with a fixed interest.

Conclusion

It is essential to analyse the interest rate applied to your housing loan. It is the interest rate that makes your housing loan affordable or expensive. Therefore, borrowers must know the factors that directly impact housing loan interest rates and EMI amounts.

​# This is a guest article authored by Fullerton Grihashakti. For any enquiries or details, you can visit the author's website.