Step by Step Guide on Home Loan Interest Rate and how to Calculate it

A demand for owning a house leads to a demand for a home loan. However, the differential rates of interest in the market between different individuals for similar properties is often mind-boggling and discouraging. What is worthwhile to remember is that an individual’s eligibility for a home loan and the corresponding home loan interest rate are influenced by factors, such as their job/business, monthly income, debt burdens, life stage, investment decisions, and CIBIL score.

Here are the above factors explained in more detail for your better understanding:

  1. Your credit score: This score is determined by CIBIL which keeps a track of a person’s loan and default history. This is one of the top factors which impacts home loan eligibility and interest rate.
  2. Income figures and type of occupation: This has a direct impact on home loan eligibility and interest rate.
  3. Spread of investments: Past trends in investments undertaken, and savings discipline, affect one’s home loan eligibility.
  4. The age of a loan applicant impacts the disbursal sum and its tenor since home loans are usually long-term loans.
  5. The current market value and its potential for increment of the property in concern also heavily impact a home loan interest rate.

With the help of the above factors, we shall now determine in a step-by-step manner how to calculate interest rate on home loan, and negotiate a better rate with the lender:

  1. First and foremost, it is important to practise financial hygiene and develop a credible reputation around it. This credibility is offered by CIBIL which maintains records of all PAN holders’ credit history and habits. A score of 700 and above is advisable for a better home loan eligibility and interest rate. This indicates that one is less likely to default on repayments of the loan. Such a score is possible if one pays all credit card outstanding dues regularly, and does not default on EMIs payments on existing loans. Even a one-time delay in repayment can impact one’s CIBIL score, which in turn, can adversely impact the home loan interest calculator.
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What is also important to remember is that the CIBIL score of a joint applicant of the home loan has equal weightage in determining the interest rate on it.

  1. Secondly, it is imperative that one has a stable regular flow of income which can be proven with the help of past data. For this, a job in an MNC, or with the government helps. Also, having a business of your own with a substantial history and continuing period of success is also useful. In case any of these factors is not optimally aligned in the current time, it is advisable to first stabilise this before applying for a home loan and trying to negotiate a competitive rate of interest on it.  
  2. An approved home loan application file usually also features diversification of funds across investment lines, primarily towards stable ones not subject greatly to market fluctuations such as PPF, FD, debt funds, and so on. The ratio of risky equity investments is lower.  
  3. Once income levels, credit rating, and investments are optimally stabilised, a home loan should be sought out without much delay. A younger person is likely to get a better interest rate on their loan as opposed to another who is older. Also, the loan tenor is more favourable for a younger person than for an older one.  
  4. The final and perhaps the most important step to a person is choosing a house to buy. It is recommended that the property chosen is from reputed realtors, with a good market value. Lenders are usually not keen to invest in properties which have little to no scope for appreciation in value and might be difficult to sell in the future if the borrower fails to repay the loan on time. NPAs or non-performing assets are a big cause for concern for lenders and they’d like to keep these figures as low as possible.  
  5. Macro factors, such as economic indicators and repo and reverse repo rates, impact trending home loan rates. Even then, it is possible to fetch a favourable rate by keeping the above in mind and aligning these towards a robust home loan application file.
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If you have understood the steps detailed above, you will be able to work out your home loan interest rate calculator. Just remember to practise basic debt hygiene, financial planning, with optimal resource diversification, and keep yourself abreast with economic health indicators to know the best time to opt for a home loan and invest in a house. It is always wise to remember the housing bubble and a collapse of the financial system in the latter part of the decade of 2000 in the Western parts of the world and learn from their mistakes. We can avoid the same by being meticulous and prudent in our financial decisions, especially when it comes to a home loan.