Key factors that determine your home loan interest rate

Ravi had always dreamed of owning a home where his family could build memories. After years of saving, he finally found the perfect house. Excited, he approached several banks to get a loan, only to realise that home loan interest rates differ for everyone.

Ravi discovered several factors influence his home loan interest rate, including how choosing the minimum or maximum home loan tenure can affect the cost. With IDFC FIRST Bank's personalised solutions, he secured a competitive interest rate, turning his dream of homeownership into reality without overstretching his budget.

Factors that influence interest rates on home loans
 

When you decide to apply for a home loan, the first question that comes to your mind is – what is the interest rate on the home loan? This interest rate is not arbitrarily set; several factors influence it. Let's understand how these factors shape your home loan interest rate.

• Type of home loan

There are two ways of charging home loan interest: fixed and floating rates. A fixed-rate home loan offers the security of a constant interest rate throughout the loan tenure, which means your equated monthly instalments (EMIs) remain unchanged regardless of market fluctuations. This stability can be beneficial in a rising interest rate environment.

In contrast, a floating-rate home loan varies with market conditions, which can lead to lower interest rates in a declining market but may increase when rates rise. If you want to enjoy the best of both worlds, you can also opt for a hybrid rate. A hybrid interest rate offers a fixed rate for a certain period and switches to a floating rate for the remainder of your loan tenure.

• Credit score

Your credit score and financial history are pivotal in determining the interest rate offered on your home loan. A high credit score, typically above 750, indicates to lenders that you are a low-risk borrower, making them more likely to offer you a lower interest rate.

Conversely, a lower credit score may result in higher interest rates, as lenders perceive a greater risk of default. Alongside your credit score, your financial history, including timely repayments of past loans and credit card dues, also significantly influences the interest rate.

• Marginal Cost of Funds Lending Rate (MCLR)

The Marginal Cost of Funds Lending Rate (MCLR) is the minimum interest rate a bank can lend. This rate is influenced by several factors, including the marginal cost of funds, operating expenses, the Cash Reserve Ratio (CRR), cost of borrowings, and tenor premium.

The MCLR is subject to an annual reset date, where banks review and potentially adjust the rate for existing home loan borrowers. The rate determined on the reset date remains in effect until the next year's reset, regardless of any changes to the MCLR in the interim. Consequently, your interest rate may increase or decrease depending on fluctuations in the MCLR.

• Loan tenure

It refers to the length of time over which a borrower agrees to repay a loan. The home loan tenure can range from a minimum of 5 years to a maximum of 30 years, depending on the lender's policies and the borrower's eligibility.

A shorter loan tenure comes with a lower interest rate, as lenders perceive a reduced risk in quicker repayment. However, this also means higher monthly EMIs. On the other hand, a longer loan tenure might offer slightly higher interest rates but result in lower monthly EMIs and higher overall interest.

Own your dream home with IDFC FIRST Bank Home Loan
 

Home loans are a popular way to build an asset, offering numerous benefits, including tax exemptions. After meeting the eligibility criteria, it's essential to understand factors like credit score and loan tenure, which can help you secure the best interest rate on your home loan.

IDFC FIRST Bank Home Loan offers tailored solutions designed to meet your unique financial needs. If eligible, you can get a maximum tenure of 30 years on your home loan and interest rates starting as low as 8.85%. The process is entirely digital, ensuring quick and hassle-free approval and disbursal. Plus, enjoy the convenience of minimal documentation and zero processing fees when you choose to repay through an IDFC FIRST Bank account, making homeownership more accessible and affordable. Apply today!