You are here
Home > Home Loan > 10 Factors That Determine Interest Rate of Home Loan

10 Factors That Determine Interest Rate of Home Loan

Interest Rate of Home Loan

Building or purchasing one’s own humble abode is a dream for many, and thanks to the easy availability of Home Loans, this dream can now come true with increased ease. However, before you go ahead to apply for a loan, we recommend you take some time to analyse the interest rate you will be paying for the same.

This is because, while your principal amount will more or less remain the same, it will be the rate of interest which will determine the overall cost of your loan. The higher the rate, the more you will be required to pay from your pocket and vice-versa.

To help you draw a fair analysis of the rates offered by different lending agencies and banks, we have listed down the factors that determine the interest rates on various Types of Home Loans.

  1. Bank Rate

The bank rate is necessarily the rate of interest at which the Reserve Bank of India (RBI) lends money to other banks. This money is usually given out for a longer time duration, ranging between 1 month and 12 months, without any collateral. These banks, in turn, offer loans to customers, often at a higher rate in a bid to make profits. Hence, when the Bank Rate increases, it results in a spike in Home Loan interest rates.

  1. Repo Rate   

The repo rate, also known as repurchase rate, refers to the rate at which commercial banks borrow money from the RBI. This money is usually acquired with the intention of losing the gap between the funds available with the commercial bank, and the demand for loans from customers. The lending period for this money is rather short, and ranges anywhere from two days to three months, against some security such as bonds. Repo rate is an efficient tool that helps the RBI to maintain liquidity in the market.

There are times when the RBI wishes to constrict the flow of money in the market, and thus increases the repo rate. This, in turn, results in a hike in the interest rates for Home Loans.

  1. Cash Reserve Ratio

Cash Reserve Ratio (CRR) is a monetary tool that helps control the supply of money in any economy. By definition, it is nothing but a fraction of the total deposits in a bank that the RBI holds as a reserve. This simple manoeuvre ensures that the banks do not run out of money at any given point in time. Needless to mention, as the CRR increases, the cash at lender’s disposal decreases thus resulting in a hike in interest rates.

  1. Inflation

Inflation is the rise of general prices of goods and services. As can be understood, inflation reduces the purchasing power of money and thereby gives way to higher interest rates.  Moreover, the overall unavailability of liquid funds pushes the interest rates even higher. Hence, availing a Home Loan during inflation may not be a wise decision.

  1. Statutory Liquidity Ratio (SLR)

SLR is the percentage of the Net Demand and Time Liabilities that any commercial bank needs to maintain as liquid assists. The SLR often restricts the banks’ ability to offer money towards loans and other credits, thus resulting in higher lending rates.

  1. Demand and Supply

In case of an unprecedented increase in the demand for credit, the interest rates witness a spike. This surge is sometimes, also caused due to decline in the funds available with the bank (as a result of deferred payments from customers).

On the other hand, an excessive inflow of money to the banks due to the opening of new bank accounts, or a decline in the demand for credit may result in decreased interest rates.

  1. Location of the Property

A loan is only provided if the lenders can rest assured of the fact that in case of default at your end, the property can be quickly sold off to settle the losses incurred by the lender. Hence, if the home that you wish to buy is in a unique geographical location that is either difficult to approach, or doesn’t have convenient access to essential amenities, the lender may charge you a higher interest rate.

On the other hand, if the house enjoys a highly sought after location, you can expect to pay a lower rate.

  1. Down Payment

As mentioned earlier, online lenders look for ways to ensure the security of the loans that they offer. In case, you can readily make a down payment of 20% or higher towards your property; it leads the lenders to believe in your financial stability. As a result, you can expect to get your loan sanctioned at comparatively cheaper interest rates.

  1. Loan Term

Loan term refers to the tenure through which you plan to repay your loan in the form of equated monthly instalments or EMIs. In case you opt for short duration Home Loans, you will be required to pay higher EMIs. However, this will considerably reduce the interest rates, thus helping you save a better part of your hard earned money.

On the contrary, a long-term loan will need you to pay lower EMIs but will increase the interest rate significantly, thus requiring you to shell out a more considerable sum of money eventually. Of course, there will be some other factors, such as the type of Home Loan, the amount and your repaying capacity that will have a direct effect on the rates.

  1. Credit History

If you have a record of repaying your credit card bills and other debts well within time, your credit history will reflect the same. This will result in a high credit score of about 650-700 for you. A good score will ensure lower rates on your home loan and vice versa.