Home loan interest rate: How is it determined?

Summary: Several factors are at play when deciding your home loan interest rate such as loan-to-value ratio, credit score etc. Read on to find out the details of home loan!

27 Mar 2023 by Team FinFIRST

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Home is where the heart is. Thanks to the availability of home loans, it is possible for many people to move into their dream homes! But have you ever considered what factors determine the home loan interest rate charged by your bank? How do banks arrive at it? A clear picture of the same can help you better understand your interest liabilities and buy a home within your budget.

These factors affecting the interest rates of your home loans are:

Loan-to-value ratio

The loan-to-value ratio or LTV ratio tells you the proportion of the property that can be financed via loan proceeds. Your own funds must meet the remaining loan amount. Higher LTV ratios attract higher interest rates due to increased risk born by the bank. Always compare and try to opt for a lower LTV ratio and home loan interest rate.

Location of the property

Another major factor that goes into deciding your home loan interest rate is the exact location of your property. For example, a buzzing neighbourhood with good connectivity and infrastructure will have a great property resale value. Such locations will attract a low interest rate on your home loan. On the contrary, a location that is far off and does not have basic amenities nearby will attract a higher interest rate.

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Credit score

A good credit score is a positive indication of your financial repayment behaviour. Most banks seriously consider this before forwarding loans. A credit score of 750 and above is considered good and can land you a lower home loan interest rate. So, if you have a good credit score, take advantage of the same and negotiate better home loan interest rates.

Tenure of the loan

The life of the loan also has a direct bearing on its interest rate. The longer the loan tenure, the higher will be the interest rate charged and vice versa. Shorter tenures mean bigger EMIs. Look at your overall liabilities and then decide the loan tenure, whether long-term or short-term, as your home loan interest rates will be greatly influenced by the same.

MCLR rates

The Marginal Cost of funds Lending Rate (MCLR) is the minimum rate at which banks can forward loans. Factors such as the bank’s operating costs and Cash Reserve Ratio (CRR) are considered before calculating the MCLR. Banks reset the MCLR annually, which also resets borrowers' home loan interest rates. MCLR is closely linked with the Repo rate, so any changes in the Repo rate will also affect MCLR and, thus, your home loan interest rate as well.

To Sum It Up

IDFC FIRST Bank has published a tenor-linked MCLR available on the official website. With loan tenors and corresponding MCLR rates effective from 8th September 2022, you can clearly see the home loan interest rates at IDFC FIRST Bank. Easily calculate your EMI on a home loan by clicking on the IDFC FIRST Bank Home Loan EMI Calculator.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirst.bank.in for latest updates.