22 MARCH, 2022

If you have ever thought about availing a home loan, you might know that its interest rate is a crucial aspect. The home loan interest rate can have a significant impact on the overall cost of borrowing and your EMI. While the interest rates depend on the overall market rates, every lender offers different interest rates based on the borrower’s financial profile and loan parameters. But have you ever thought about how lenders decide who should get what interest rate? If not, this blog will help you.


Before you apply for a home loan, you must know the factors that lenders consider while setting your home loan interest rates. Take a look.


  • Credit score

Your credit score reflects your credibility and creditworthiness. If you have a high credit score, it means you are a reliable borrower and would not default on the repayment. On the other hand, a low credit score could question your repayment credibility and thus be a red flag for the lenders. Typically, lenders charge higher interest rates for borrowers with a low credit score. You must have a credit score of at least 750 and above to get a home loan at lower interest rates and best deals.


  • Employment profile

Where you work and how often you switch your job also affect your interest rates. Lenders consider you a credible borrower if you do not change your jobs too frequently and have a stable job profile. Typically, lenders charge lower interest rates to applicants who have a stable and regular source of income. You must avoid changing too many jobs or professions if you plan to avail a home loan. Lenders also consider your income source. They could charge lower interest rates to a salaried applicant as they have higher income certainty compared to self-employed individuals.


  • Loan amount

If you apply for a high loan amount, the risk for the lender increases. Therefore, lenders charge a higher interest rate for high loan amount applications. Paying a higher down payment can thus help you get lower home loan interest rates. Similarly, if you opt for a shorter tenure, lenders can consider it as risky as you have less time for repayment and so can default. You can instead opt for a longer tenure and then prepay the loan to avoid high-interest rates.


  • Interest type

Floating interest types have slightly higher rates than fixed interest types. Therefore, if you opt for floating interest rates, you could have to pay a higher interest amount. Lenders charge higher interest on fixed interest types to cover the risk of change in interest rates.


  • Loan to value ratio (LTV)

LTV is the percentage of property value that you would finance with a home loan. Having a high LTV increases the risk for the lender. Therefore, they charge higher interest rates for applicants with high LTV.


Your interest rates are significantly dependent on your repayment capacity and lender's risk. Therefore, while applying for a home loan, take note of these factors to get the best home loan interest rates. To ensure that you can afford the loan, use a home loan EMI calculator.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.