Evaluating Costs: Insights into Property Loan Interest Rates - Loan Trivia


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Wednesday 12 June 2024

Evaluating Costs: Insights into Property Loan Interest Rates

Property loans serve as a popular option for borrowers when in need for substantial funds. The main reason for the popularity of this credit type is that there are no end use restrictions of the funds, allowing their use for pretty much everything. 

However, before beginning with the application process, it is imperative for applicants to have a clear idea on the property loan interest rate and other crucial details associated. Potential borrowers can keep reading to know all about interest rates for mortgage loans. 

Factors Affecting Property Loan Interest Rates

Various factors can influence a property buyer's loan interest rates. So, considering the following elements can help one in getting a favourable interest rate:

  • Credit Score 

Every lender reviews the applicant’s credit score and history to evaluate their creditworthiness. Having a low score represents an individual as a risky borrower, whereas a high score displays that they are a responsible borrower. Therefore, maintaining a good credit score is essential for getting property loans at low interest rates. In simple words, a score above 700 is considered as good.

  • LTV ratio

LTV or loan to value is the ratio between the total loan amount and the total property value. For example, if someone wants to take a LAP of Rs.45 lakh against a property valued at Rs.50 lakh, the loan-to-value ratio is 90%. This is considered as a high ratio, because of which the interest is also going to be higher. Therefore, it is suggested to take LAP with a maximum of 80% of LTV ratio to avoid higher interest rates.

  • Loan Tenor

Tenor plays a crucial role in determining the interest rates. Property loan interest rates in India are lower if the repayment tenor is shorter. However, this can significantly increase the EMIs, so one should assess their financial condition before opting for a shorter tenor. In case of a wrong tenor selection, the chances of defaulting go up which can have a significant impact on any individual.

  • Type of interest

Lenders can offer credit-seekers loans with different types of interest rates. Borrowers can choose between fixed, mixed and floating rates of interest, depending on the one that suits them the most. 

The term fixed rate explains itself, this form of interest rate remains the same throughout the tenor, whereas floating interest rates change after the RBI releases the repo rate. Lastly, the mixed rate of interest remains the same for a fixed period and later converts into a floating rate.

  • Property Location

Lenders also evaluate a property's location before determining the interest rates. Usually, a property loan for an urban location has lower interest rates when compared to properties located in isolated or rural areas. This is because property prices can increase significantly in urban areas, which is not the same as in rural areas.

Most financial institutions extend pre-approved offers to their existing customers. These offers are mainly applicable to financial products like a home loan and or loan against property. Pre-approved loans make the loan application process simpler and faster. Existing customers can easily determine if they are eligible or not for such offers by submitting their data on the lender's official website. This will not only reduce the time but also make it straightforward for loan-seekers to obtain credit.

The determination of property loan interest rates is subject to various factors. Understanding them can help people prepare themselves to avail a loan at lower interest rates and favourable terms.  

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