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Analyzing the Factors that Determine Mortgage Rates

mortgage loan interest rate

Since last year, sluggish economic growth has severely impacted the household income of Indians, especially those who belong to the middle and lower classes. In such a situation, tiding over a substantial financial requirement is challenging. To that end, a mortgage loan like a loan against property can be ideal. The affordable mortgage loan interest rate is one of the reasons individuals choose this credit to address any high-value fund requirement. 

Per a TransUnion CIBIL report, private financiers witnessed a surge of 5.7% y-o-y in inquiry volume for loan against property in November 2020. However, to facilitate a smooth repayment, individuals should know the factors that determine mortgage loan rates. 

Factors affecting property loan interest rates

Typically, the mortgage loan interest rate is competitive, and therefore the borrowing cost is also economical. However, a few factors that influence this rate are: 

  • Borrower’s profile

Like other financial products, lenders decide the loan against property interest rates after assessing an applicant’s credit profile. In this regard, they consider the repayment history, existing debts, and income, among other factors. Lenders also consider the Fixed Obligations to Income Ratio or FOIR while determining the rate. Typically, a FOIR below 50% is deemed ideal to receive the most competitive LAP interest rates. 

Let’s understand better with an example. 

Suppose the monthly income of a salaried individual is Rs.70,000, and liabilities are Rs.25,000. Hence, the FOIR of that individual would be (25,000/70,000)*100 = 35.71% 

Since it comes to below 50%, lenders will most likely approve a mortgage loan at affordable interest rates. 

  • Credit score

The credit score of an individual depends on the factors above. Additionally, lenders decide a mortgage loan interest rate only if an applicant’s credit score ranges from 650 to 750 and above. Since the credit score is a reliable indicator of an individual’s creditworthiness, it plays a vital role in determining the rates. Moreover, due to the presence of collateral, you can negotiate for more competitive rates. 

Nonetheless, you should know in detail how your credit score affects loan against property eligibility to stand a better chance at interest rate negotiation. 

  • Property type and location

The type of property to be mortgaged and its location, age, and occupancy status are critical in getting the best interest rate on loan against property. For instance, a residential property with all modern amenities at a sound location helps get the most competitive mortgage loan interest rate. 

Besides, the property age also influences this rate. Usually, the interest rates are higher, and LTV is lower for a property of more than 10 years. 

  • Loan tenor 

The loan against property tenor and interest rates are also related closely. Typically, lenders charge higher interest rates on a longer tenor and vice versa. Since with a longer tenor, the chances of defaulting on repayment is higher. To cover this risk, lenders decide on a higher LAP loan interest rate. 

Note that a loan against property comes with a tenor of up to 20 years. Although with a longer tenor, the EMI payable is lesser, the total interest payable is higher. Hence, it is essential to determine the ideal tenor of your loan against property to settle for a reasonable interest rate.  

  • Interest type 

The mortgage loan interest rate generally comes in two types: fixed and floating. The former remains constant throughout the repayment tenure, whereas the latter changes per base rate variations. 

To decide better, you should also compare floating interest rates vs fixed interest rates. What is a better option when you opt for a LAP.  However, the interest rates are slightly higher for a fixed-rate loan than its floating counterpart. 

  • Loan type 

Besides the interest type, the loan type also figures in deciding the interest rate. For example, select financial institutions offer a LAP with a flexi loan facility different from a term loan. With a Flexi loan against property, you can reduce the interest outgo and EMI payment to a great extent as you have to pay interest only on the fund utilised. 

Almost all reputed NBFCs offer a mortgage loan with this facility. They also bring pre-approved offers for their existing customers. Such offers expedite loan processing by minimizing paperwork. These are available on a gamut of financial products, including loans against property and home loans. All you have to do is enter your name and contact number to check your pre-approved offer within seconds. These are some of the most crucial factors that influence the mortgage loan interest rate. However, intending borrowers should always compare different lenders to get the best rates on a mortgage loan. 

Mortgage loans have long served as a critical source of high-value financing for many individuals. Mortgage loans are long-term credits with repayment tenor extending up to 20 years or more. Various financial institutions bring mortgage loan calculators which help borrowers to make such decisions efficiently.

Must Read: Dos and Don’ts of Applying for a Loan against Property (LAP)

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