Importance of Rate of Interest when Availing a Home Loan - Loan Trivia


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Friday 11 May 2018

Importance of Rate of Interest when Availing a Home Loan

A prospective applicant looking for a Home Loan always considers the cost of borrowing first and foremost when deciding which lending institution to apply to. This Home Loan rates decide the Equated Monthly Installment (EMI) to be paid each month as well as the affordability of the loan.

Ideally, an applicant should begin by considering the cumulative income from all sources and tally the same against the regular expenses and liabilities. These include lifestyle related spendings, existing loans and credit card dues. The difference between the income and the cash outflow gives an idea of the amount the applicant can set aside each month to service the Home Loan. As these debt instruments are usually for the long haul, one needs to think of the long term when opting for one. The applicants should have a margin of at least 40% left from their income after deducting all liabilities each month in order to be eligible for a Home Loan and to pay its EMI. This EMI should be within the affordability of the loan applicant so that he/she can set aside this amount each month and still lead a comfortable life for the repayment tenure decided.

A key factor here is the credit score of the applicant which should be in the creditworthy category of 700 and above.

Banks and Non-Banking Financial Companies (NBFCs) provide Home Loans and their rates are individual as per their internal policies. For banks, the MCLR forms the basis of determining the rate whereas NBFCs follow a different method to determine theirs (base rate system).

These two methods often lead to quite a difference in the cost of borrowing for applicants who avail a Home Loan from a bank and for those who choose to opt for an NBFC instead. In most cases, NBFCs provide a lower rate of interest to their customers than banks.

If you want to know how and why NBFCs are capable to lend Home Loans at interest rates lower than those of banks, check out the resource given below:

Role of Interest Rates to Taking a Housing Loan

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