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Home loan interest rates vary based on the loan amount, the creditworthiness of the borrower, and the relationship between the lender and you. Sometimes it also depends on the lender’s internal regulations. Earlier, home loan interest rates were dependent on the base rate prescribed by RBI. Now, lenders consider the MCLR method to calculate interest rates.

There are two types of housing loan interest rates:

• Fixed interest rates remain unaffected by market conditions. They are unchanged throughout the tenure
• Floating or variable interest rates keep changing along with changes in the bank’s MCLR

What are the interest rate determinants?

There are certain factors that determine the interest rates of housing finance:

• Lenders determine the lending interest rates by the fund’s cost and the net interest margin they must earn to handle operating costs
• Lenders usually offer lower interest rates on home loans as compared to a personal loan. Such loans are granted against the security of your house. This lowers the lenders’ risk
• Home loan rates are higher for people who work in the unorganised sector. Meanwhile, self-employed or salaried professionals preferably receive lower rates

What is the connection between the interest rate and eligibility criteria?

Lenders generally have three crucial aspects in place before approving of the loan – employment, income, and credit score. This helps the lenders determine if the borrower can repay the credit on time.

Housing loan EMIs are dependent on two factors – principal amount and interest rates. When the interest rates are high, the interest component towards the EMI is also high. However, the principal amount lowers. Therefore, home loan rates are critical to calculating eligibility.

Understanding house loan interest rate fluctuations:

• Fixed rates: Most house loans are offered for a fixed price for the first 15 years. Nevertheless, check for the tenure through which the rates would be fixed on the agreement. Fixed rates also change periodically. However, they are less frequent than floating rates. The credit agreement also explains the formula if the loan gets converted to a floating interest rate. Lenders use the MCLR method to determine the final interest rate.

• Floating rates: When you take the loan for a specific interest rate, it later gets converted to a floating rate. The conversion formula is mentioned in the agreement. As per the RBI directives, lenders need to revise the floating rates at least once in six months or once every year.

Some additional points to remember:

• Banks usually provide 80 per cent of the property value. You have to arrange for the remaining 20 per cent
• Lenders charge 2 to 3 per cent as pre-payment penalty on the outstanding loan amount. In some cases, lenders do not charge pre-payment costs until a specified number of EMIs have been paid
• Those who carry a low credit score may not get the housing loan. In such scenarios, you can always opt for joint loans (either a spouse or parent), as they carry strong credit score and sufficient for a co-borrower

Some lenders also offer lower interest rates to women. This benefit is applicable if the woman is the primary applicant of the credit