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The Top-5 Factors That Affect Home Loan Interest Rate

avail of a home loan

When you avail of a home loan, the interest rate comprises the major part of your EMI. If the interest rate is low, you can save more. However, if the interest rate is high, you have to spend a larger sum over the loan term, which is usually between twenty and thirty years.

If you want to avail of a home loan with the lowest interest rate, you need to know the factors that affect the rates. This article discusses the top-5 factors that affect home or housing loan interest rates.

Your Credit Profile

Your credit profile, of which the credit score is a part, speaks volume about your financial status. If you are a prudent borrower, your credit score will be above 800, and you can conveniently claim the lowest home loan interest rate. However, if your credit score is lower than 800, you need to take debt repayments seriously to get the best rates. As many websites offer you the facility to check your credit score for free, you can check it frequently to take steps to improve the score or point any anomaly.

The Type of Interest

Lenders provide two types of housing loan interest rates – fixed and floating. Both rates depend on the prevailing Marginal Cost of Funds based Lending Rate or MCLR. If you opt for the floating rate, the interest rate will increase or decrease depending on the prevailing interest rate. While your EMI will remain the same under all circumstances, the tenure may change to reflect the interest rate change. However, if you opt for the fixed rate of interest, the EMI, tenure, and interest rate will remain the same throughout the loan term. It is prudent to know that the fixed rate of interest is typically one to two per cent higher than the prevailing floating rate of interest.

The Loan to Value and Downpayment Amount

Most Indian lenders generally approve a housing loan amount of up to 90% of the home value. It is also mandatory to make a downpayment of at least 10% of the loan amount as the processing charge. When the loan amount you apply for is as high as 90%, lenders may consider your loan risky and increase the housing loan interest rate. Hence, if you want to avail of a home loan with the lowest interest rate, consider reducing the loan amount or enhancing the downpayment.

Property Location and Facilities

Lenders usually evaluate the property’s resale value before approving the loan amount and interest rate. You can claim the lowest home loan interest rates if the house is in a location with modern amenities and 24 hours connectivity. On the other hand, if your property does not have a good resale value, the lender will increase the interest rate. Hence, before applying for a housing loan, evaluate the property’s location and facilities to negotiate the interest rates,

Loan Term

Generally, you can select a repayment term of up to thirty (30) years. However, the higher the tenure, the higher the interest rate. Similarly, the lower the loan term, the lesser the interest rate. Hence, you need to choose the loan term properly to get the lowest home loan interest rate.


Besides the factors mentioned above, some other factors that affect housing loan interest rates are the borrower’s age, income, nature of income, and lender. You may check the interest rates offered by different lenders and select the right loan.

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