Factors That Affect Your Mortgage Loan Interest Rate

Buying a home is one of the most significant financial decisions you will make in your lifetime. While choosing the right property is crucial, selecting the right mortgage loan is just as important. These mortgage loan options commonly include home loans and loan against property.

Also read: Types of Mortgage Loans

One of the biggest factors that influences your repayment burden is the interest rate on your loan. Even a small difference in your mortgage interest rate can significantly affect the total amount you repay over 15 or 20 years. That is why understanding the factors that affect your mortgage loan interest rate is essential before signing the loan documents.

In this guide, we’ll break down the key variables that determine your mortgage rate and how you can use this knowledge to your advantage.

1. Credit Score and Credit History

Your credit score is one of the first things lenders look at when assessing your loan application. Your creditworthiness is often evaluated using your CIBIL score, which ranges from 300 to 900.

A score of 750 or above is considered ideal. It shows a history of your timely repayments, low credit utilisation and responsible borrowing. In contrast, a lower score may lead to a higher interest rate or even rejection of your loan application.

You can always check your credit score before you begin your application. If your score is low, you can take steps to improve it by paying your bills on time and reducing existing debts.

2. Income and Employment Stability

Lenders prefer borrowers with a stable source of income and consistent employment history. If you are a salaried employee working with a reputable company, you are more likely to get a better interest rate.

For self-employed individuals, financial services like NBFCs may require more documentation such as income tax returns, profit & loss statements and business continuity proofs. A higher income would mean a better loan while frequent job changes or a gap in employment may indicate risk to lenders.

To dodge the risk of loan rejection, it is best to provide salary slips, form 16 and bank statements that prove consistent income for the last 6-12 months.

3. Loan Amount and Tenure

Both the amount you borrow and the duration of your home loan can impact the interest rate. Some NBFCs offer lower interest rates for loans below ₹30 lakhs and higher interest rates for bigger amounts. In addition, longer tenures such as 25-30 years may be approved with slightly higher rates but lower EMIs. However, the total interest paid over the years will be more in long-tenure terms.

To reach your ideal EMI and tenure package, you can always use a home loan EMI calculator to know your interest rate and EMI as well as choose a tenure that offers manageable EMIs without stretching the total interest out too much.

4. Type of Interest Rate: Fixed vs Floating

When taking a home loan, you will be offered two types of interest rates:

• Fixed Rate: Your EMI stays constant throughout the loan term. It is ideal to choose in a rising interest rate scenario but is usually slightly higher than floating interest rates.
• Floating Rate: Your interest rate changes based on the repo rate. This means your EMI amount will fall or rise based on RBI policies, but it offers savings when rates drop.

If interest rates are expected to decline or remain stable, floating rates may save you money over the long term.

Also Read: Understanding Interest Rates: Fixed vs. Semi-fixed vs. Floating

5. Property Type and Location

The kind of property you are purchasing also plays a role. Properties in metro city or prime locations are seen as lower risk by lenders. Furthermore, under-construction properties may attract higher rates or stricter eligibility. Similarly, resale value and legal clearance can also influence the rates offered. It is always best to choose a property that is legally approved, in a well-developed locality and with a good resale value.

6. Down Payment and Loan-to-Value Ratio

The Loan-to-Value (LTV) ratio is the percentage of the property value that the bank is financing. If you make a higher down payment, your loanto-value is lower, which can help you get a better rate. For instance, if you purchase a house worth ₹60 lakhs and make a ₹20 lakh down payment, your loan amount of ₹40 lakhs reflects an LTV of ~67%. Lower LTV reduces lender risk and may lead to better rates.

How to Get the Best Mortgage Loan Interest Rate

Here is a quick checklist to help you secure a better rate:

• Improve your credit score
• Make a higher down payment
• Compare rates across multiple lenders
• Choose the right loan tenure and amount
• Opt for floating rate when appropriate
• Apply when repo rates are low
• Use a home loan EMI calculator to understand your repayment plan

Final thoughts

Understanding what affects your mortgage loan interest rate empowers you to make smarter financial decisions. By improving your credit profile, comparing offers and planning your repayment strategy, you can save lakhs over the loan tenure. Whether you are a first-time homebuyer or refinancing an existing loan, knowing these factors gives you a powerful edge in your homeownership journey.

Apply now for a home loan.

FAQs

Q.1. What is the most important factor in determining my home loan interest rate?

A. Your credit score and income stability are usually the most crucial. Lenders use these to assess your repayment ability and risk.

Q.2. Can I negotiate the home loan interest rate?

A. Yes. If you have a strong profile or an existing relationship with the lender, you may negotiate for a better rate.

Q.3. How does the RBI repo rate affect my home loan?

A. If your loan is on a floating rate, a drop in the repo rate may lead to lower EMIs as banks pass on the benefit.

Q.4. Is it better to choose a fixed or floating interest rate?

A. It depends on the market. Floating is better when rates are falling. Fixed offers stability during rising rate periods.

Q.5. How can I improve my chances of getting a lower mortgage interest rate?

A. You can improve your chances by maintaining a high credit score, choosing a shorter loan tenure, making a higher down payment, and comparing offers from multiple lenders. Being financially disciplined and well-prepared helps you negotiate better rates.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com