Build A Home With The Cheapest Loan
Home loan, usually, is a big and long-term financial commitment, and one where a slight difference in interest rate is likely to lead to a significant difference in payout over the long run. While traditionally, lenders set the interest rates for home loans primarily on the basis of their own cost of funds, many have now started factoring in the ‘risk’ associated with the applicants. This means lenders are ready to offer lower interest rates for home loans to those who have a strong profile. On the other hand, applicants who are perceived as ‘risky,’ instead of getting outright rejected by lenders, may be able to get the loan, though at a higher rate of interest. Here are the major factors that influence interest rates on a home loan:
1) Bank’s MCLR: The most important factor that determines the home loan rate is a bank’s MCLR (marginal cost of funds based lending rate). MCLR is calculated on the basis of four major components — the marginal cost of funds, tenor premium, operating cost and negative carry on account of cash reserve ratio (CRR). Banks are required to review their MCLR every month on a pre-specified date based on which they review their lending rates too. Hence, the MCLR applicable on the date of the loan sanction will determine the interest rate of the loan. Banks are required to compulsorily review their home loan interest rate at least once a year on a pre-specified reset date. The MCLR on this date will remain applicable on the home loan till the next reset date, irrespective of any changes in the interim months.
2) Credit score: Banks and NBFCs consider the applicant’s credit score to be one of the most important factors while evaluating home loan applications. A person’s credit score is a reflection of how well he/she has behaved with past loans. An applicant with a low credit score (600 and below) is considered ‘risky’ by lenders and would either be rejected or offered the loan at a higher rate of interest. Some lenders have, in fact, started using credit scores for setting interest rates, offering concessions to those with higher scores (over 700). For example, Union Bank of India, for home loans of up to ₹75 lakh sanctioned, charges an interest rate of 8.7% p.a. to applicants having CIBIL score of 700 and above and 8.8% to those with a score less than 700.The same 10 bps (basis points)difference in interest rate is applicable for home loans above ₹75 lakh as well. Similarly, Allahabad Bank offers 10 bps concession in home loan interest rates to borrowers having credit scores of 750 and above from CIBIL and CRIF High Mark. Home loan borrowers should note that most lenders consider the credit score of all co-owners of the property and not just the home loan applicant. So, if your spouse or parent are joint owners of the house you are purchasing, you need to ensure their credit score is high as well. Ideally, fetch your free credit report from the credit bureaus or online financial marketplaces at least six months prior to applying for the loan and work towards having a credit score of 750 and above.
3) Loan amount: Lenders usually charge higher interest rates for bigger loan amounts. For example, while the lowest interest rate for home loans of up to ₹30 lakh from SBI starts at 8.7% p.a., the rate for home loans of ₹30-₹75 lakh and above ₹75 lakh start from 8.9% p.a. and 9% p.a. respectively. Thus, try to pay as much as you can in the down payment of your property if that leads you to get your home loan at lower rates.
4) Interest rate type: Home loans come in three varieties as far as their interest rate types are concerned — fixed, mixed and floating rates. While floating and fixed rate home loans are self-explanatory, interest rates of mixed-rate loans stay fixed for a pre-determined period after which they become floating rates. As banks and HFCs (housing finance companies) have higher interest rate risk in case of fixed and mixed rate home loans, they charge higher interest on such loans to compensate their future loss in interest income, if any, arising out of interest rate volatility. For example, Union Bank of India’s interest rate starts from 8.7% p.a. for floating rate home loans, whereas the interest rate for their mixed-rate (fixed for up to 5 years) home loans start from 11.40% p.a. onwards.
5) LTV ratio: Loan-to-value ratio refers to the proportion of the property value that one can finance through a loan. The rest of the property value has to be financed out of the borrowers’ own resources. Currently, RBI has capped this ratio at 90% for home loans of up to ₹30 lakh; 80% for loans between ₹30 lakh and ₹75 lakh and 75% for loans above ₹75 lakh. As a lower LTV ratio decreases the credit risk for banks and HFCs, they encourage higher margin contribution by charging lower interest rates. For example, Allahabad Bank offers a 5 bps (basis points) concession in interest rates on home loans of up to ₹75 lakh with an LTV ratio of 75% and less. For loans above ₹75 lakh, the 5 bps concession is available on having an LTV ratio of 65% and less.
6) Job profile: Lenders prefer to sanction home loans to those with a stable job or income source. Salaried professionals are often offered home loans at lower interest rates than those who are self-employed. Among the salaried class, government and PSU employees are the most preferred followed by employees of top private sector companies. Among the self-employed, doctors and chartered accounts are usually considered as the least ‘risky’ professions. As a result, some lenders usually try to target these specific customer segments by offering them home loans at concessional rates. For example, UCO Bank offers 10 bps concession in interest rates for home loans availed by government and PSU employees. Similarly, Punjab National Bank charges 5 bps less on home loans sanctioned to central and State government employees.
Concession for women
Additionally, most banks also provide 5 bps concession in the interest rates on home loans where the primary loan applicant is a woman. The concession is usually available across all home loan categories for all loan amounts. Hence, those planning to avail a home loan can apply in their wife’s name to save money. For example, a ₹70-lakh home loan for 20 years lent at 9% p.a. would entail a total interest cost of ₹81.15 lakh whereas the interest cost for the same loan at 8.95% p.a. would reduce the interest cost by ₹53,950. While the above are the standard factors used by most lenders for offering differential interest rates, each bank and HFC has its own mechanism to calculate interest rates. Hence, when applying for any kind of loan, especially home loans, since they usually involve a high amount, ensure you compare all options available to you and choose the best-suited option.
Original Source: The Hindu