What factors determine the interest on my home loan?

Buying a new home makes you proud as for many; it is a life’s biggest achievement. When it comes to the buying process, applying for a home loan is one of the biggest financial commitments you will ever make in your life. Do you know home loan interest rates dramatically impact the overall cost of your home? Let’s see what factors will determine the interest on your home loan.

Home loan interest rate directly affects your affordability of the loan and how conveniently you can repay it. Equated monthly instalment or EMI determine the amount of repayment of the loan, and it is inclusive of principal and interest amount. Low-interest rates mean low EMIs. Below are the factors that determine the home loan interest rate.

1. Marginal Cost of funds based on Lending rates (MCLR)

MCLR is the minimum lending rate at which banks are not allowed to lend. This applies to banks, wherein they need to change the interest rates as soon as the repo rate fluctuates. The Reserve Bank of India (RBI) introduced MCLR to ensure openness, so as banks can calculate interest rates in advance, and it is true to customers.

MCLR comprises of four elements:

a. Tenor premium

b. The marginal cost of funds

c. Operating cost

d. Negative carry on Cash Reserve Ratio (CRR)

2. Credit Score:

Your credit history impacts your interest rates. Before approving your home loan, the bank will examine your repayment history of your past loans. It will then set the rate based on your credit score. Usually, if the credit score is high, you can negotiate with your bank to impose the lowest home loan interest rate.

3. Type of Interest Rate:

Interest rates comprise of two types: Floating and Fixed. Floating interest gets revised every quarter based on the market scenario. It is cheap as compared to the fixed interest rate. Fixed interest rate implies that you will have to pay fixed equal instalments every month based on the constant rate as it is unaffected by any market fluctuations.

4. Tenure of Home Loan:

Loan tenure also determines your home loan interest rate. If you opt for low home loan tenure, then the bank will impose low-interest rates, but your EMIs will be high. In either case, if you choose for a long tenure cycle, then the interest rates will be high, but your EMIs will be low.

5. Employment Type:

Banks prefer quick home loan disbursement if you’re a salaried individual, government professional or having a private business such as a doctor or chartered accountant. If you’re working in any of these sectors, banks consider you as low-risk and hence charge a low interest rate on the home loan. Banks maintain separate interest rate slabs for salaried and self-employed individuals.

6. Location of your New Home:

If the new property is located in a prime location or you’re planning to buy from a leading real estate agency, then lenders will charge low-interest rates. In case you’re planning to invest in old property, it will have a lower resale value which will ultimately bring down the interest rate.

Now you can estimate interest rate with home loan interest calculator without any hassle. You will get to know the exact principal and interest amount on your home loan.