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Home Loan Interest Rate-Factors Affecting & Tips to Reduce

A home loan is perhaps the biggest liability one takes on in their lifetime. It also has the longest repayment period. As a result, the majority of house loan borrowers are constantly looking for ways to lower their equivalent monthly installment (EMI) payments.

Factors That Affect Home Loan Interest Rate

According to a recent analysis, between 2021 and 2026, the housing loan market is predicted to grow at a 22 percent compound annual growth rate (CAGR). This estimate comes as financial institutions increase their efforts to make home loan in India more accessible to individuals. It is done by offering low interest rates and increasing their efforts to make housing loans more accessible to individuals.

As a result, prospective borrowers should be aware of the elements that can affect the home loan interest rate that they are currently eligible for. Recognizing these factors and taking steps to improve them will assist you in obtaining a more affordable rate.

Location of the property

Home loan rates are heavily influenced by the location of the property you want to buy. A house or flat in a desirable neighborhood with a variety of amenities and easy access to public transit is likely to attract reduced rates.

Lenders, on the other hand, are more inclined to demand a higher interest rate for a home in a region with poor connectivity and fewer amenities. Because the latter will have a lower resale value than the former.

Loan Quantum

One of the strategies to get a better home loan interest rate is to choose the loan amount wisely. As a general guideline, you should put down at least 20% of the property’s value as a down payment. The amount of the loan has an impact on the interest rate you pay. A larger loan entails a greater risk for the lending institution, and vice versa.


Your credit score impacts whether you are eligible for a home loan and what interest rate you will pay on it. It represents your creditworthiness. It is a measure of the risk that the financial institution assumes by disbursing the funds. A person with a credit score of 750 may be eligible for financing at a rate of 7.5 percent to 8%. If their credit score is between 800 and 900, they may be able to get a loan with the lowest interest rates.

Type of Interest Rate

Interest rates are offered by financial institutions in two forms: floating and fixed. The former varies in response to changes in the base rate. Throughout the tenor, the latter remains unaltered. Floating interest rates are typically 1% to 2% lower than fixed interest rates. The installment you pay is unaffected by variable rate changes, but the tenor is.

As a result, if you prefer more certainty about the payback duration, a fixed-rate loan is a good choice. Floating-rate, on the other hand, allows you to profit from reduced interest rates as the base rate falls.

Income Stability

Salaried persons, particularly those employed in the public sector or reputable commercial organizations, are more likely to be offered a lower home loan interest rate by a lending institution.

Individuals who qualify for pre-approved offers from lenders may also benefit from some interest rate leniency. These also speed up the application process. There are accessible on a variety of financing choices, including home loans and loans against property.

However, in addition to guaranteeing low home loan interest rates, you need to be cautious about the payback period. With a longer tenor, you can reduce the installment load. But keep in mind that the interest outgo will be high. As a result, think about your priorities before applying for a home loan.

Existing home loan borrowers can cut their EMIs in different ways.

Choose a Shorter Tenure

One of the most important elements affecting the amount of interest you must pay is the length of time you have had the loan. Though lengthier terms, such as 25 to 30 years, reduce the monthly payment amount, shorter terms, such as 10 to 15 years, assist minimize the overall interest payable. You can evaluate how the interest rates drop dramatically for the shorter term loans. It can be done by using a home loan calculator. So, when you sign up for a loan, carefully consider the term so that you don’t wind up paying a higher interest rate.

Compare the Interest Rate Online

You must conduct thorough research on loan products and compare rates of various lenders, before selecting a certain product or lender. The number of third-party websites available on the internet can help you understand the rates and other fees charged by various lenders. As a result, it’s advisable to examine home loan interest rates across all banks before deciding on a specific bank or home loan package.

Transfer Your Loan to New Lender

Even though many banks and housing finance organizations offer home loans, the interest rates they charge are vastly different. As a result, you may find yourself paying a higher EMI just because your loan is not from a competitive lender. If you haven’t compared your interest rates, now is the time to do so and see if your lender is charging you a higher rate. Only when you’ve begun making prepayments on your loan does a balance transfer become an option. If you believe your current lender’s interest rate is too high, you can transfer the remaining principal amount to a bank or lender that has a lower interest rate. On the other side, balance transfers should only be utilized as a last option. Because of the balance transfer method, any missed payments result in increased penalties.

Pay More as Down Payment

In a home loan, the majority of banks and other financial institutions fund 75 percent to 90 percent of the property’s entire worth. Remaining costs ten percent to twenty-five percent of the property has to be contributed by you. However, rather than paying the smallest amount feasible, it is best to make a larger down payment from your own cash. The bigger the first payment, the lower the loan amount, which minimizes the amount of interest you must pay.

Prepayment Options

Generally, lenders do not charge prepayment or loan foreclosure fees on floating rate loans. So, if you’ve taken out a loan, try to make prepayments now and then. This is because over the first few years you pay more interest on your loan than you do on the principal. Making frequent prepayments will cut the overall interest owed by drastically reducing the principal amount owed. Prepayments on fixed-rate loans, on the other hand, are subject to a percentage charge from the lender. As a result, it’s a good idea to check with your bank/lender to see what prepayment fees you could have to pay.

Increase Your EMI

Some lenders allow you to revise your monthly payment once a year. So, if you’ve changed jobs and now have a larger salary, you can always choose higher EMIs to reduce the length of your loan. The overall interest you must pay on your loan will be greatly reduced if the term is shortened. You can check with your lender to see whether such possibilities are available.

To reduce your interest costs, think about these factors before or after you take out a home loan. Before you sign up, read the terms and conditions of your lender, as well as any additional fees and taxes.


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