With subsequent repo rate cuts by the RBI in 2020, borrowers of long-term advances like property loans are expected to benefit significantly. The latest rate cut came through on May 22nd this year, bringing down the repo rate to 4%.
With this effect, several lending institutions are set to reduce their consumer lending rates by the end of the quarter ended September 2020. Now, since the repayment tenor of property loans can extend over up to 20 years, such rate cuts imply increased affordability of borrowers via property loan interest rate reduction and a subsequent EMI reduction.
Nevertheless, while these rate cuts impact only the loans availed at floating rates, several other factors impact the overall lending rates by improving borrower eligibility.
Applicants can thus negotiate for a reduction in their property loan interest rate and save substantially on their repayment liability.
Top factors that affect interest rates on property loans
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Credit rating
The credit rating or score of individuals is one of the primary influencers of interest rates. This rating is calculated based on the credit history that represents individuals’ debt record, including all past and existing loan accounts, as well as their repayment behaviour. Generally, lenders offer competitive property loan interest rate to applicants who possess a high credit score, preferably above 750.
Hence, before availing a loan against property, individuals should take note to check their credit report and take necessary measures that can help improve the score.
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Location of the house
Financiers also offer different rates based on the location of the property that defied its resale value. Further, the resale value of a property depends on its locality and surrounding amenities like retail shops, transportation and connectivity, etc. Financiers thus tend to offer loans at favourable terms, like competitive interest rates, for properties with a high resale value.
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The amount of down payment made
An individual planning to buy a property or making a high-value purchase may need to make a down payment, typically up to 10-20% of the total purchasing cost. Thus, when financing such a purchase with a property loan, making a high down payment indicates responsible credit behaviour, and makes for a good case of availing affordable interest rates.
However, before finalising, individuals must also utilise a property loan calculator to assess their overall interest accumulation and monthly repayments.
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Type of interest rate applicable
In India, interest rates on property loans are applicable in three types – floating, fixed, and mixed rate. When a borrower opts for a fixed rate, it remains unchanged for the entire duration of the loan. However, a floating property loan interest rate can change as per market trends.
As for the mixed type, lending rates are fixed during the initial years and are converted to floating rates afterwards.
Borrowers must, however, make a comparison between floating and fixed interest rate to find out the better option for their loan against property.
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Joint application
Applying for a loan against property with a co-borrower influences interest rates considerably. A joint application from multiple eligible profiles can cover a lender’s financial risk more efficiently. Due to this, lending institutions can consider negotiating the interest rate on property loans.
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Employment and income
Earnings and employment status are two significant factors that affect interest rates for a loan against property. An applicant profile with high income and stable employment generally seems promising to lenders.
These profiles show a lower risk of default as they come with high repayment capacity. So, applicants who hold a job with reputed private or public corporations or MNCs can negotiate for a property loan at attractive rates and favourable terms.
Nonetheless, if individuals receive rents, investment returns, or any other additional income, they should submit the related documents as well for a high income projection. It can also help avail the advance at reduced rates.
Applicants should also focus on lenders who prefer minimal eligibility requirements and documentation. It helps borrowers avail the advance with minimum hassles.
Furthermore, one can also experience quick and simple loan processing with options like pre-approved offers from select lenders. These offers are applicable to several financial products like home loans and loans against property. Individuals can view their pre-approved offer with their name and phone number.
As for property loan interest rates, applicants should also check the offer document for various other charges alongside these rates for increased affordability. Presence of facilities like balance transfer and top-up financing can also be an added advantage.