Top Factors to be Noted That Affect Your Home Loan Interest Rate


As per a study, India’s housing loan segment is expected to record a 22% CAGR between 2021 and 2026. One of the primary reasons for this surge in growth can be accredited to factors like availability of better terms of borrowing, changes in monetary policies and decreasing property rates.

  • To curb inflation and boost economic growth, the RBI decided to leave the current repo rate at 4%. As a result, financial institutions slashed the home loan interest rate to pass on the benefits of rate cuts to repo-linked housing loan borrowers.
  • Leading financial institutions are now providing housing credit at rates lower than 7%, which is the lowest in the last 15 years.

Though several factors favour borrowers, parameters like the cost of borrowing and limited disposable income make the process of repaying the loan a challenging affair. However, individuals can reduce their overall borrowing cost by identifying the factors that impact loan interest and develop suitable strategies accordingly.

Factors that influence housing loan interest rate

Here’s a list of factors that tend to influence your home loan interest rate –

  • Credit score

It is a 3-digit expression that represents an applicant’s creditworthiness and helps a financier determine his/her repayment capability. Generally, applicants with a high credit score are preferred as they are considered to be more creditworthy and less prone to defaulting.

For example, two individuals with a CIBIL of 790 and 640 apply for a home loan for 10 years. The applicant with higher CIBIL score, i.e. 790, is more likely to receive a higher loan amount at a lower home loan interest rate.

  • Loan value

Generally, a higher loan amount attracts a higher interest rate mainly because of the risk quotient. Usually, intending homebuyers are tempted to make a low down payment. However, borrowers can save significantly on their interest outgo by making more than 20% of the property’s value as a down payment.

  • Interest type

Home loan borrowers can avail credit at either a fixed or floating interest rate. Notably, each interest type tends to impact the accompanying rate differently. For instance, the interest burden for loans availed at a fixed rate remains the same throughout loan tenor; whereas, those availed at floating rate fluctuate with the change in the base rate.

Usually, floating interest rates are lower than fixed interest rates. Regardless, intending borrowers should determine the pros and cons of each interest type to choose between floating and fixed interest types.

  • Employment status

Income stability is a crucial factor that helps to determine an applicant’s home loan interest rate. In most cases, applicants with a stable job and fixed monthly income often secure better repayment terms pertaining to interest rates. In fact, salaried individuals employed at MNCs, private and public companies are more likely to secure loan approval faster than others.

Individuals who meet home loan eligibility criteria also qualify for pre-approved offers that simplify the borrowing process. Generally, such offers are available on financial products like home loans, loans against property, etc. You can check your pre-approved offer online in three seconds with your name and contact number.

While at it, you may consider using a home loan eligibility calculator to gauge the amount you may avail from the financier.

  • Repo rate

Typically, changes in the repo rate impact the interest rates of repo-linked home loans significantly. For example, when RBI decides to slash the repo rate, financial institutions are encouraged to lower their lending rates.

Such a move comes in handy for home loan borrowers and significantly lowers their loan burden. However, when RBI decides to increase repo, it pushes the home loan interest rate upwards and makes borrowing quite expensive.

  • Loan tenor

Loan repayment tenor also influences housing loan interest rates to a great extent. In most cases, financiers associate long-term loans with risks like default or late repayment. Resultantly, to cushion the associated risks, they levy a higher interest rate on loans with longer tenor. Note that though longer tenors make home loan EMI more affordable, they increase the overall interest burden; interest is calculated on the outstanding amount.

  • Property location

The location of the property in question also impacts an applicant’s home loan interest rate. Properties located in selected cities with good connectivity and proper amenities often fetch a high resale value. This works in favour of applicants and helps them secure a high loan value at competitive rates.

Notably, availing facilities like home loan balance transfer also impacts loan interest for existing borrowers. Such a facility allows them to transfer loan burden to a lender who levies a lower home loan interest rate than the existing lender. However, borrowers should consider the charges involved before transferring it.


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