With high amounts and long repayment tenures stretching to mostly as big as 30 years for most home loans, even a minor difference in their rate of interest may result in a big enough difference in its overall interest cost. Since lenders tend to put in a wide range of parameters when setting lending rates for LIC home loans, understanding these factors can get you a low LIC home loan interest rate which also lowers the overall interest cost of the home loan is taken.
Here let us understand some vital factors that act as a determinant of your home loan interest rates:
Many lenders, including LIC home loans, have begun adopting risk-based pricing, wherein they think about the credit score of their home loan applicants while setting their interest rates. Since those with good credit scores are considered more creditworthy thanks to their disciplined repayment history, lenders attempt to entice them by charging lower LIC home loan interest rate. Similarly, as those with poor credit, many below 750, are usually considered to be lacking in credit discipline, lenders attempt to compensate for their higher credit risk by charging higher interest rates.
Therefore, it becomes important to fetch your credit report a minimum of 6 months before submitting your application. Doing so would allow you sufficient time required to take the specified measures to enhance your credit score before submitting your application. This also assists in detecting the possible clerical errors or wrong information, if any, in your credit report, which has been wrongly damaging your credit score. Once you report such errors or misinformation to the concerned bureau or lender, the rectified credit report will automatically end in a higher credit score.
The involvement of a bigger loan amount results in higher credit risk for the lenders. Thus, lenders tend to charge higher interest rates for a home loan involving higher loan amounts. Hence, borrowers should try accumulating a better deposit or margin contribution if doing so helps them to avail LIC home loan at a lower rate of interest.
Interest rate type
LIC home loan interest rates, along with those of many other lenders, are categorized into three types- floating, fixed and mixed/hybrid rate of interest. Floating rates keep changing/varying as per the changes in the benchmark followed by the lender, whereas fixed-rate home loans remain constant during the whole loan tenure. As far as mixed/hybrid rate of interest home loans are concerned, these remain fixed for a pre-set period, usually for periods of two or 3 years, after which they undergo a transition into floating rate home loans. Since mixed and fixed rates of interest mostly have higher interest rate risk for the lenders, banks and HFCs charge higher interest rates on them to compensate for their loss in interest income.
Loan to value (LTV) ratio
LTV ratio in the case of home loans is that proportion of property value that is sanctioned as a loan by the lender. The remaining amount for the LIC home loan has to be financed through your own funds. Since banks and HFCs have to make higher provisions due to mire risk for home loans with higher LTV ratios, they compensate this up by fetching higher interest rates for loans with higher LTV ratios, whereas on the other hand, lower LTV ratios can fetch lower LIC home loan interest rate too. Therefore, borrowers should attempt to choose a lower LTV ratio to scale back their interest cost and pull down the LTV ratio too.
Many banks and HFCs also think about the income sources of their home loan applicants when setting their rate of interest. Generally, salaried individuals are charged a lower rate of interest as compared to self-employed professionals, thanks to the upper-income certainty of the salaried individuals. Among salaried applicants, government and PSUs tend to be most favoured due to their higher job and income certainty. They’re followed by those working in reputed and enormous private sector organizations intrinsically companies are usually viewed as more stable with higher potential to face up to economic downturns as compared to other private sector companies.
Since the credit risk appetite of numerous lenders and their respective parameters for setting LIC home loan interest rates tend to vary widely, ensure to check as many home loan options as possible before submitting an application for a LIC home loan. Begin this process by approaching banks or NBFCs/HFCs with whom you’ve got an existing customer relationship, as many lenders tend to give preferential rates to their existing consumers. Then, compare the interest rates offered by other lenders basis your criteria like credit score, income, job profile, loan amount and LTV ratio.
Now that you know there are some factors that impact your interest rate, remember to adopt these smart ways to boost LIC home loan approval chances, strike the right deal and also fetch lower rates on the same:
-Attempt to contribute a bigger down payment amount
-Examine your EMI affordability through EMI to income ratio
-Factor in expected home loan EMIs in your emergency fund
-Compare home loan offers of as many lenders as possible
-Review your credit score before submitting an application
-Loop in a co-applicant to boost overall home loan eligibility
After availing of the home loan, these strategies would assist in managing your financial health, liquidity and smartly repaying the loan:
-Opt for balance transfer whenever feasible to fetch lower LIC home loan interest rate and better service terms
-Request lender to extend the tenure if facing difficulty in paying EMIs
Summing it up
Home loans act as a gateway to fulfil most of ours’ dreams to own a home. From choosing the apt location of the property to selecting the suitable lender, the journey towards availing of home loans requires various crucial decision points. Also, many types of customer-centric EMI repayment options are being offered to suit different loan repayment requirements of home loan borrowers. Amidst all this, knowing the factors that impact home loan interest rate and steps that can assist in fetching the best deal can go a long way in ensuring you remain comfortable in EMI repayments despite the big-ticket size and long tenure occupied by home loans during our work life years.