Top Factors that Impact Home Loan Interest Rates

Acquiring a home is a crucial milestone in most people’s lives, but achieving it can be challenging. A home requires a hefty investment, patience, and months of planning. While people can manage the latter two, the former can cause the most trouble.

At least it used to until loan providers started offering affordable home loans. Nowadays, numerous financial institutions offer home loans with low interest rates. Unfortunately, while this provides an abundance of choice to users, it also creates confusion.

Choosing the ideal home loan with low interest rates can be tricky, given the number of factors affecting its effectiveness. But what are these factors, and how do they impact your home loan interest rates? Let’s find out.

Top Factors Affecting a Home Loan Interest Rate

Loan Amount

The first aspect that affects your interest rate is the loan amount. Even if lenders offer a high loan amount, it comes with expensive interest rates. The higher the home loan amount, the higher the rate gets. That is why you should restrict your loan amount to the point that it does not ruin the budget.

Credit Score

The CIBIL score is among the primary factors that every financial institution assesses. Lenders ask for consumers with higher CIBIL scores due to their credibility. In addition, institutions use the score to calculate the interest rate. Thus, go through your credit report and ensure that there are no errors before you apply for a home loan. Several tools on the market let you assess your credit score and all the related information. 

Home Location and Value

The home’s location plays a pivotal role in determining the home loan interest rateA home with good amenities and good facilities like bus stops, banks, hospitals, or shopping centres make for a higher resale value. Similarly, the property’s age also affects the interest rate. A newer home is considered a stable investment, incurring a lower interest rate and vice-versa.

Loan Tenure

Nowadays, you can avail yourself of multiple repayment options. However, you should still opt for the option with the shortest loan tenure. This is because a short loan tenure can increase the EMI amount, but it will significantly lower the interest rate. On the contrary, a longer tenure may offer comfortable EMIs, but it will incur heavy charges in the long run.


Marginal Cost Lending Rate or MCLR is the benchmark that decides lenders’ lending rates. Hence, it directly affects the interest rates the bank will charge you. Starting from 2016, every financial institution must use the MCLR to base its lending rate. In addition, it facilitates transparency as lenders cannot charge rates lower than the MCLR.

Down Payment

Generally, higher down payments mean you can enjoy lower interest rates as it reduces the lenders’ risk. Since you have more stake in the home, lenders are assured of timely repayments. If possible, try to gather at least 20% or more down payment to benefit from a lower interest rate.

If your down payment does not amount to 20% of the home value, institutes will ask you to buy mortgage insurance., as it protects lenders even if you stop repaying the loan. However, while it provides lenders with security, it increases your overall cost and monthly payments.

Income and Employment

You can get a low interest rate as a salaried employee and a self-employed individual. The bottom line is that you must have a stable source of income. It reduces any risk for lenders, allowing them to offer you a low interest rate. Generally, lenders prefer PSUs and government employees and applicants working in leading firms.

In Conclusion

Home loans can be tricky, especially with the number of factors that can affect their affordability. The above-mentioned factors play a crucial role in determining your interest rate. You can moderate some of them with healthy financial habits, while some can fluctuate as per the economy’s performance. So go through the factors mentioned above before going mortgage hunting. Then, keep them in check and find the most affordable home loan alternatives.

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