Does the rate of interest at which you take the home loan really matter? It does because a home loan is a long-term commitment and hence you should get the best possible rates. If you look at a 20-year home loan of Rs 90 lakhs at an interest rate of 7.9%, then the EMI over the 20 year period works out to Rs 74,720 a month. Your interest outgo during the tenure of the loan is Rs 89.33 lakhs.
However, if you negotiate a rate of 7.1%, then your monthly EMI for the same loan works out to Rs 70,861 per month. More importantly, interest outgo over 20 years is down to Rs 80.07 lakhs. You save on EMI, and on total interest outflow. That is why the home loan interest rate matters when you finalize the home loan and also why you must negotiate for the best home loan interest rates in India. Here are the driving factors to negotiate the best home loan rates.
How much loan to value (LTV) ratio can you get?
Loan to value ratio or LTV ratio has two components to it.
Firstly, there is the regulatory component and secondly, there is risk assessment. On the regulatory front, RBI allows LTV of 90% for loans up to Rs30 lakhs, 80% LTV for loans between Rs30 lakhs and Rs75 lakhs and only 75% LTV for home loans above Rs75 lakhs.
However, it is not just statutory regulations but also risk assessment by the bank. For example, properties with lower resale value will be allowed less LTV; even lower than statutorily permitted. If your income is not regular or stable, then the bank may reduce the LTV ratio. How does it impact rates? Normally, lower the LTV you opt for, better the rate of interest you get. Rates go up with higher LTV.
Good and consistent CIBIL score?
While most bankers still use CIBIL score as the benchmark, other credit evaluation agencies like Equifax, CRIF and Experian are also accepted. CIBIL score normally ranges between 300 and 900, but loan sanctions and approvals become easier only if your CIBIL score is above 750. Higher the CIBIL score, you can also bargain for lower rates. The bank checks current CIBIL score and CIBIL consistency. If CIBIL score is well above 750, you have an upper hand in negotiating with the bank for a lower rate of interest. Having said that, the golden rule in home loan borrowing is to bargain on rates; but don’t take higher LTV just because it is being offered. Pay as much as you can as upfront equity.
Your income source and growth
Banks giving a loan not only look at the size of the income but also the consistency of the income, pedigree of the company you are working for, the nature of your job, hazards in your job etc. There is a question mark if your income growth has been tepid or erratic in last five years. The assumption is that the borrowers with a stable job and stable income are more likely to repay their EMIs on time. The home loan interest rate is lower in such cases. Banks are also wary of borrowers who change jobs too often or those without a permanent source of income. If you check all boxes, try and get the best home loan interest rates.
Resale value of the property
Are interest rates influenced by the quality and resale value of the property? They definitely are. Home Loans are secured by home as collateral. If borrower defaults, the lender can repossess the property and sell it to recovery dues. One thing you would have observed is that properties with advance tie-ups with the builder offers loans at lower rates. Also, if the property developer has a good track record, loans at lower rates are easier to come by. If projects are floated by big business houses with a reputation to defend, banks are willing to lend at lower rates.
Fixed rate versus floating rate
The rate of interest also depends on whether you opted for fixed rate or floating rates. In a floating rate regime, the rate is pegged to a benchmark. Normally, risk is higher for a bank in a floating rate loan, so the base rate tends to be higher, especially if interest rates are already above the median. The rates tend to be relatively lower in a fixed rate regime, but this is only when rates are above the median. In case the rates of interest rates are below the median, fixed rate loans may actually cost you more.
At the end of the day, it is all about the home loan interest rate, as it has a deep influence on your cost of servicing. Put in that extra effort to get the best home loan interest rates.