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A Descriptive Guide on Taking a Home Loan at a Low-interest Rate

A home loan is one of the most sought-after financing solutions available for purchasing one’s dream abode. Although a home loan is cost-effective, it is a long-term financial commitment. Thus, borrowers need to consider certain factors if they want to reduce the interest burden in the long run. It starts with qualifying for low-interest home loans.

But the real question is how to get a more competitive interest rate on a home loan. Well, let’s find out.

Tips to Get the Best Interest Rate on a Housing Loan

Here are some simple ways to bag a low-interest home loan: 

  • Consider the Credit Score

The credit score plays a vital role in determining eligibility for any loan, and home loans are no exception. A credit score is a parameter to assess the credit behaviour of an individual. Based on this score, lenders can predict whether a borrower can repay the loan on time. 

Usually, a credit score of 700 and above is considered ideal for smooth home loan approval. Moreover, lenders also consider this score while offering the interest rate of a home loan to borrowers. For instance, individuals with credit scores closer to 900 are likely to get the best possible interest rate on home loans. 

In case of poor credit scores, individuals should try to improve them to apply for home loans with better terms.

  • Meet Lender-specific Eligibility Criteria 

Besides credit scores, individuals also need to prove their creditworthiness to lenders. Since every financier lays different eligibility criteria, meeting the lender-specific ones is an assured way to get a competitive interest rate on a home loan. 

Following are some common eligibility criteria that individuals need to meet to get competitive home loan interest rates.

  • Age between 21 years to 65 years.
  • Steady monthly income (salaried or self-employed)
  • A resident of the country.
  • Good repayment history
  • Lower debt-to-income ratio 

Usually, individuals having a steady high income can qualify for a home loan with low interest. However, those who fall short of the eligibility criteria can also opt for a joint home loan to ensure approval. Besides, they also need to furnish relevant documents like 

  • Income certificate
  • Tax return documents 
  • ID proof
  • Bank details 
  • Address proof
  • Property documents 

Even so, individuals must check the requisites before applying for a home loan. 

  • Ensure the Right Type of Property 

Since a home loan is a secured loan, the valuation of the property, its type, and purpose of usage play a vital role in determining the interest rate for the fund. For instance, lenders often offer lower interest rates on home loans for personal property than commercial property. Thus, if you borrow for high-value property, you stand a chance to avail yourself of a low-interest home loan. 

Likewise, the LTV ratio also determines when a lender decides on the interest rate of the home loan. Usually, a higher LTV ratio results in higher interest rate and vice-versa.

  • Know the Type of Interest Rate

Home loans in India generally come with two types of interest rates – fixed and floating. As the name suggests, a home loan with a fixed interest rate remains unchanged till the end of the tenure since it provides a sense of certainty; fixed interest rates tend to be higher. 

On the other hand, floating interest rates are subject to market conditions and, therefore, may alter from time to time. Usually, floating interest rates are lower than its counterpart. For instance, if you avail of a home loan with a floating interest rate, you will benefit directly if the market-linked rate drops in the future. 

  • Decide Carefully on the Loan Tenure 

Home loan tenure and the total interest outgo are closely related. For instance, longer tenure may seem like the EMI is affordable, but it actually increases the total interest payable. The reason being, the rate of interest here is high, as longer tenure means higher credit risk.

So, to get a low-interest rate on your housing credit, you need to opt for a shorter tenure. 

  • Compare Different Lenders 

Home loan interest rates vary across financial institutions. Thus, it is a basic thing to compare different lenders to settle for the cheapest home loans. To simplify the process, you can use a home loan calculator available on most lenders’ websites for free. It will help you get a detailed breakdown of the EMI, interest payable, etc. However, in search for the most competitive home loan interest rate, you must not neglect the applicable terms and conditions. It will save you from any discrepancies in the future. 

  • Balance Transfer for Existing Borrowers 

Besides new borrowers, existing ones can also leverage the competitive interest rate on home loans by opting for a balance transfer facility. This provision allows individuals to transfer their outstanding loan balance to another lender who offers a lower interest rate than their existing lender. 

Example of How Home Loan Interest Rate Impact Borrowing Cost

An individual opted for a home loan of Rs.40 lakh for 15 years at an interest rate of 8%. He has to pay a total of Rs.68,80,695 at the end of the tenure, where the interest payable would be Rs.28,80,695. 

If the interest rate were 6% instead of 8%, the total payable amount would have been Rs.60,75,769, and the interest payable would have been Rs.20,75,769. 

It means the individual could have saved Rs.8,04,926 on the borrowing cost in the second instance where the interest rate was lower. 

The example above thus clearly shows that by opting for home loans at an affordable interest rate, individuals can save substantially on interest outgo. Consequently, it frees up the fund that they can utilise to achieve long and short-term financial goals. 

Final Thoughts

Home loans may help you to find the house you are looking for, but it also brings a substantial financial burden. Therefore, to lower your debt and make it more manageable, opting for a more favourable interest is the ideal thing to do. So, keep the pointers in mind and work accordingly to get the best loan deal without any hassle.