How to Financially Prepare for a Home Loan Interest Rate Hike in the Future?

How to Financially Prepare for a Home Loan Interest Rate Hike in the Future?

Most financial institutions offer reasonable home loan interest rates due to the truncated policy rates fixed by the Reserve Bank of India. Currently, the Repo Rate stands at 4.00%, whereas the Reverse Repo Rate stands at 3.35%, which is among the lowest in the country’s history. 

But, fluctuations in these rates can significantly impact the housing loan interest rate, so prospective borrowers should not neglect the chances of soaring policy rates.   

Factors that affect the home loan interest rate

It is essential to know that apart from policy rates, an interest rate on a home loan depends on multiple factors. And knowing these factors can help individuals prepare for the possible interest rate hike in the future.

To prepare for the future rise in interest rate, most experts advise opting for a fixed-rate loan. With a fixed rate, the interest rate isn’t affected by future market volatility, and regardless of rises or falls, an individual will always pay the same rate. But, apart from this, other factors to consider are – 

1. Credit score 

A credit score is by far the most important thing to consider before opting for a home loan. Most lenders decide the home loan interest rate by keeping an eye on the credit score and prefer it above 750. A high CIBIL score portrays a borrower’s creditworthiness and increases reliability. 

But, individuals with low a CIBIL score, specifically lower than 700, display irregularity in their loan repayment history, making them risky borrowers. 

Hence, to avail home loan at a lower interest rate, it is vital to have a high CIBIL score. But, if they have a weak credit report, it is possible to boost it by paying all pre-existing loans and due EMIs.  

2. Loan to value (LTV) ratio   

An LTV ratio is the assessment performed by the lenders before approving credit. Most lenders often disburse a housing loan with an LTV ratio of around 75%. A high LTV ratio means that the financial institution will disburse a higher loan amount, and for compensating it, they might charge a high-interest rate. While a property with a lower LTV ratio will let a lender disburse less sum, thus charging less interest rate. 

3. Loan amount 

It is no secret that a higher loan amount will fetch a higher interest rate while a lower loan amount will fetch a lower rate. As a result, lenders are taking a higher risk and thus increasing the interest rate.  By paying a higher down payment, you can reduce the loan amount, and your interest rate will also be lower.

4. Location of the property

A property’s location also significantly impacts the interest rate. Having a property in a prime location may reduce the risk for lenders, as they can get the cost of the property without any significant hassle in case of default. The disadvantage of a rural property is that a lending institution will face obstacles to collect the loan amount from a rural property. Thus, properties in prime locations fetch a lower interest rate than other properties.

5. Meeting home loan eligibility criteria   

Every lender has specific eligibilities for disbursing a home loan. Thus, meeting the lender-specific home loan eligibility criteria beforehand can significantly decrease the interest rate for a prospective borrower. 

Also, before availing of a home loan, financial experts advise opting for a home loan calculator as this tool provides insight on probable EMIs with a detailed amortisation schedule. As a result, it eases the financial calculations for a prospective borrower.  

Several financial institutions extend pre-approved offers to ease the loan application process in India. These offers are available for several financial products, such as home loans, loans against property, and others. Applicants need to enter their name and contact number to check their pre-approved offers. 

Thus, it is beneficial to consider all the above pointers to be future-ready for a home loan interest rate hike. Also, opting for a fixed interest type over a floating or mixed type can benefit.  

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