Living in a luxurious home is a dream for many people, but only a few can realize it. House purchases can cost millions, if not crores, of rupees. Because of restricted income or family commitments, most people do not own a home but have lived in rented property their entire lives. However, in recent years, there has been a significant increase in the number of home purchasers, thanks to financial institutions willing to provide affordable housing loans.
If you are considering applying for a home loan but are unsure about the parameters that affect the rate of interest on borrowing, you need to read this article.
What Factors Affect the Housing Loan Interest Rate?
The seven key parameters affecting housing loan interest rate are as follows:
1. Age
Lenders approve funding to those between the ages of 21 and 70. However, obtaining affordable rate funding may be impossible for individuals approaching retirement.
Retirees often have no source of income and rely solely on their savings. Even if they receive a pension, the amount will be far less than what they previously earned while working. In such cases, the risk of default is high, and to cover this risk, a high-interest rate is imposed.
You may not be aware that the interest portion of the EMI for a home loan or any other financing product is higher in the first few years. This helps the lender cover any potential future losses caused by loan default.
2. Debt-to-income Ratio
This ratio is another commonly used metric in credit appraisal. It reflects the percentage of your income used to meet monthly obligations. The optimal DTI ratio is 50 or less. Divide your total monthly EMI by your gross monthly revenue to get this ratio.
Suppose you earn Rs 1.8 lakhs every month. However, your current monthly commitments are as follows:
- Car loan: Rs 32,000
- Personal loan: Rs 20,000
- Loan against property: Rs 52,000
- Business loan: Rs 15,000
The total EMI here is Rs 1,19,000. This means that more than half of your income goes towards debt repayment. It suggests that if you are approved for a new loan, EMI skips are highly likely.
3. Credit Score
This three-digit number reflects your credit history. Anything above 750 is considered good for obtaining an affordable loan. But what if the score is average? Is there a way to improve it? Check out the pointers below.
- Start by reducing your dependence on credit cards. If your card limit is Rs 50,000, try not to spend more than Rs 15,000 in a month.
- Avoid being desperate when applying for a home loan. Multiple applications submitted simultaneously to different lenders result in hard inquiries reported in your report, lowering your credit score.
- Automate your EMIs to ensure you do not skip or delay the payments.
- If you tend to meet your requirements through funding, try creating a credit portfolio with a balanced weightage of secured and unsecured loans.
- Always use a housing loan EMI calculator to know your affordability and avoid any EMI skips.
4. Property Location
Not all properties are eligible for housing loans. For example, most lenders do not consider a house built on agricultural land. Furthermore, no financing will be approved if the property is erected illegally on a government plot.
Location is another key consideration. When purchasing a home, consider the distance to the nearest petrol station, grocery shop, school, and hospital. If these amenities are within a three-kilometre radius, obtaining approval at a reasonable rate is possible. The rationale is that in the case of default, auctioning such assets for loss recovery is easier because they are always in high demand in the market.
5. Co-Applicant
A co-applicant could be your spouse, parents, or an earning son/daughter. When you apply with a co-applicant, the repayment liability is evenly distributed or shared in proportion to your part in the property.
However, before you add a co-applicant, ensure they have a decent income and no default or settlement record on their credit report.
6. Occupation
This loan is accessible to self-employed professionals, non-professionals, and salaried employees.
If you work for a salary, ensure your employer has a solid reputation in the market. If they do not credit your salary on schedule or if layoffs are common in your organisation, you may be unable to obtain a house loan.
If you are self-employed, your firm must have been profitable over the past 2-3 years. The lender will also examine to see if you are in a lawful business according to regulatory regulations. Another consideration is turnover. If you are able to generate sales only in a few months of the year and there is hardly any revenue the rest of the month, then no matter how much you earn, forget about the interest rate; even your chances of loan approval are minimal.
7. Documents
Check the list of documents necessary for home loan approval. You will usually require the following set of documents:
- Proof of Identity
- Proof of Age
- Proof of Residence
- Proof of Income
- Property documents: Receipts of payments to the developer, Allotment Letter/Buyer Agreement, Title Deeds, Sale agreement, and Proof of no encumbrances on the property
- Other Documents: Passport size photographs, proof of own contribution, and bank statements showing repayment of ongoing loans
Conclusion
Understanding the aspects that influence your home loan interest rate is critical. It offers you an indication of where you are falling behind and allows you to address any shortcomings before submitting your loan application. Once you know what interest rate range you will be accepted for, don’t forget to use the home loan EMI calculator. This tool will assist you in determining your budget and making changes to the required borrowing amount to match your financial situation.
