Home Loan Interest Rate Influenced by Five Major Factors

Home Loan Interest Rate Influenced by Five Major Factors

The home loan segment is about to witness a surge of 26% CAGR between 2021 and 2026, owing to the effort of making them accessible to individuals at a competitive interest rate. However, how comfortable a borrower will be financially throughout the repayment tenor depends on the lending rates associated with the borrowing option. 

Lenders factor in numerous parameters before deciding on a housing loan interest rate. Hence, a deep understanding of these factors will help get a home loan at a nominal lending rate, helping secure an individual’s financial health in the long run.

5 factors that influence home loan interest rate

The lending rate has a significant impact on the cost of borrowing. Hence an idea regarding the factors that affect housing loan interest will help one decide before availing it. 

These include-

  • CIBIL score: CIBIL score reflects borrowers’ creditworthiness, financial habit and repayment history. It affects a lender’s faith in borrowers’ repayment capability. Individuals with a credit score of 750 and above are considered low-risk borrowers and charged a lower interest rate. On the other hand, applicants with substandard CIBIL scores are offered a higher interest rate on the approved loan amount. 

Hence, willing borrowers must check their credit scores every six month before making a home loan application.

  • Home loan interest type: The affordability of borrowing also depends on the type of interest rate one opts for. Most lending institutions offer two types of interest rates: fixed and floating. Fixed interest remains constant throughout the loan tenor, whereas floating interest rate fluctuates per the changing base rate. 

Generally, individuals opting for floating interest rates pay 1%-2% less interest than ones opting for fixed interest. Fixed interest rates are availed by those who want certainty throughout the loan tenor. A floating interest rate lets one benefit from the change in the base rate. In this regard, one can use a housing loan interest calculator to help reckon the reasonable interest rate.

  • Income stability: Another vital factor that affects the home loan interest rate is borrowers’ income status. Lenders are more likely to offer lower interest rates to individuals with stable income sources employed in the public or private sector as they are considered low-risk borrowers and believed to repay the loan amount on time. Borrowers with unstable income are offered higher interest rates.
  • Location and value of a property: Property’s location plays a vital role in determining home loan interest rates. A property in a prime location with adequate amenities and accessible transportation will invite a lower interest rate. On the other hand, property situated in an area with poor connectivity and inadequate amenities will have a less resale value, and hence, lenders will charge higher interest rates. Many lenders pre-sanction a property located in a premium location.
  • Home loan tenor: Individuals should also be prudent in choosing the repayment tenor as it impacts the interest. Most lending institutions offer flexible loan tenors. Individuals opting for a shorter loan tenor have to pay a lower interest rate; however, the EMI burden will increase. On the other hand, a longer loan tenor attracts a higher interest rate. In this regard, knowing how to reduce home loan tenor and EMI will prove beneficial for a borrower.                

Furthermore, one can claim home loan tax benefit and avail reduced interest on home loan deduction. Under section 24 of the Income Tax Act, borrowers can claim a tax rebate on the interest paid towards a home loan.

In this respect, there are specific home loan tax benefits every new and existing borrower should know to reap the maximum benefit of it and lower the cost of borrowing.

Moreover, eligible individuals can check the pre-approved offers extended by leading financial institutions on financial products like home loans, loans against property, etc. These offers expedite the lending process and provide relaxation on the interest rate. One can easily check the pre-approved offer by entering his/her name and contact details.

To sum up, a home loan is a significant financial liability, the affordability of the borrowing option and financial health of a borrower hinges primarily on the home loan interest rate. Hence, borrowers must keep the above mentioned factors in mind and invest time searching for a lender offering a nominal interest rate.


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