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6 Factors That Influence Your Home Loan Interest Rate

The ease of availing a home loan and the vast availability of lenders offering competitive housing loan interest rates in India, make housing finance a go-to option when buying a property. However, when seeking a home loan or looking to refinance a home purchase, you need to know the factors that could affect your home loan interest rate.

First, let's take a look at:

What is Home Loan Interest Rate?

The home loan Interest rate is the rate at which the home loan amount is offered by the lender to the borrower to purchase a property. In other words, the home loan interest is a percentage fee on the principal amount, paid by the borrower.

Thus, interest can be considered an "opportunity cost’ which is paid by the borrower to avail the money when in need, paying it back over a period. The longer the tenure of the home loan, the higher is the interest payable.

The home loan interest rate may vary between lenders. However, the rate of interest in its self also fluctuates based on several factors. Loan seekers must have a brief overview of the factors affecting the Home Loan Interest Rate.

 

Factors Affecting the Interest rate –

Although, Interest rates vary as per supply and demand for money in the economy. The (RBI), tends to influence the lending rates by various means, such as:

1. Changes in the Monetary Policy: In India, the Reserve Bank of India’s financial strategy seeks economic growth and stability. Thus, the RBI controls the monetary policies such as money supply, liquidity, and interest rates through benchmark rates, such as the repo rate and reverse repo rate, cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

Thus, if the RBI loosens the monetary policy, i.e., adds to the cash supply or liquidity in the economy, interest rates decline. On the other hand, if the RBI constricts the monetary policy, interest rates see a rise. For instance, the critical factor that the RBI uses to add or reduce the liquidity of money in the system is the repo rates, which is the rate at which the banks receive loans from the RBI. Thus, changes in repo rates directly influence the housing loan interest rates.

 

2. Economic Growth: The economic environment of a country is one of the prime factors that influence the movement of interest rates. In a growing economy, people have stable incomes and higher purchasing power, thus increasing the demand for funds. Hence the home loan rate of interest amongst other interest rates moves in an upward direction. On the other hand, in a recessionary economy, the interest rates reduce owing to lack of demand for funds.

 

3. The rate of Inflation: The rise in the cost of goods and services in an economy over time, is termed as Inflation. When inflation rises, the purchasing power of a unit of currency reduces. With the rise in inflation, home loan interest rates tend to increase and vice versa.

 

4. Economic Uncertainty: If the economic growth of an economy is unpredictable, lenders tend to demand higher interest rates from borrowers as a security for the higher default risks associated. Thus, home loan interest rates rise at times of uncertainty.

 

5. International Markets: The global economic conditions mainly influence the flow of foreign investments into a market. Thus, influencing the value of the currency and lending in a country.

 

6. Fiscal deficit: A rising budgetary deficit that is indicative of the fact that a government would have to borrow from the market indirectly escalates the rates of borrowing in an economy.

 

The fluctuations in the rate of interest can impact the borrowing behaviour of individuals or entities. Thus, when the home loan interest rates rise, some individuals may avoid home loans, owing to the higher cost of servicing the loan. Since home loans are substantial obligations, and the home loan interest rate has a significant impact on the amount payable, you must always ensure lower interest rates when availing a home loan for the most benefit.