Buying a property requires a considerable outlay of funds. Many buyers take a property mortgage loan to finance their property. You have to repay the borrowed amount and the interest on the loan in equal monthly instalments.
The interest rates determine your EMI and also your overall interest burden. Most borrowers focus on getting the best rate for a mortgage, but do you know what factors determine mortgage loan interest rates? Read on to find out more.
7 Factors That Determine Your Mortgage Loan Interest Rate
There are many aspects to a loan, and interest is one of the crucial ones. The below-mentioned factors determine your mortgage rates:
1. Current MCLR
The marginal Cost of Funds based Lending Rate (MCLR) is the minimum rate at which the lender can offer you a loan. The MCLR further depends on factors like the operating cost, cost of funds, Cash Reserve Ratio (CRR), and tenor premium.
The MCLR is reset annually, and banks review the rates they charge borrowers annually based on the change in the MCLR. So whether it is an existing loan or a new loan, it is linked to MCLR and may increase or decrease as per changes in it.
2. Fixed Or Floating Rate
Your property mortgage rate also depends on whether it is a fixed, floating, or a combination of both.
Floating rates change as per changes made by the Reserve Bank of India. Your EMIs may go up or down depending on the changes announced by the RBI. Fixed-rate loans do not change throughout the loan tenure.
You can also choose a combination of fixed and floating rates, where the rates remain constant for some time and may change after that.
3. Loan-to-Value (LTV) Ratio
LTV ratio is the proportion of the property value you can take out for a loan. Most lenders have an upper limit fixed for the LTV ratio; you can choose to borrow a lower amount by making a larger down payment.
If your LTV ratio is high, you tend to get a higher interest rate on your loan as the lender is undertaking a bigger credit risk.
4. Credit Score
Your credit score is another factor that influences the mortgage rate. If you have a good credit rating, it shows you are a responsible borrower who is less likely to default, and this reduces the credit risk for the lender.
Lenders prefer applicants with a healthy credit history and are willing to offer them loans at lower rates. If you want the best mortgage loans, you should focus on improving your credit rating before applying for a loan.
5. Employment Details
When lenders assess the loan application, they consider the applicant’s employment records before they sanction a loan.
If you have a stable job and are employed with the same organization for a considerable period, you are considered a low-risk applicant. The lenders are willing to sanction loans to such candidates at lower rates.
Chartered accountants and doctors are considered low-risk in the self-employed category.
6. Loan Tenure
Interest rates also depend on the loan tenure. Property mortgage loan interest rate is lower for loans with a shorter term.
Though the EMI burden may be higher compared to the longer-term loan, the interest rate charged by the lender is lower.
7. Property Location
As the loan is for the property you intend to buy, its location also impacts the mortgage rates.
Properties in localities with good amenities are well-connected and have higher resale values. These properties would be expensive, but lenders would offer loans for them at lower rates.
The converse is also true. Properties in not-so-sought-after localities are less expensive, but lenders would give loans to them at higher interest. Lenders find properties with a higher resale value less risky than properties that may be difficult to sell or might not appreciate much. So they will charge higher rates for them.
If you want the best home mortgage loans, you should research well and choose a lender after careful comparison. Loans run for a long duration; the decision to take a loan today will have long-term consequences for you, so choose a reputed and reliable lender.
The above factors are the most crucial when it comes to mortgage rates. Some of these factors are beyond your control, but others you can control.