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Factors affect your Home Loan interest rate and EMI

Updated: Jan 24, 2022
7 Factors That Influence Your Home Loan Interest Rate and EMI

In any type of loan category, whether it is secured or unsecured, the rate of interest plays a very important role in determining its affordability and the true cost. For instance, you may not feel the true impact of interest cost on short term loans, but when it comes to home loans, which comes with long repayment tenure, the impact of the rate of interest is highest. Therefore, you must be aware of the factors that affect home loan interest rates before applying for a home loan.

List of 7 Major Factors that Affect Home Loan Interest Rates

There are many factors that affect home loan price. Some of these factors are out of your control as they are based on external factors such as the current RPLR rate, or the lender’s policy. So, let’s understand what affects home loan interest rates in detail.

1. MCLR:

The full form of MCLR is Marginal Cost of Funds based Lending Rates. It is the minimum rate prescribed by the Reserve Bank of India, below which no lender can lend money. The MCLR of the loan is based on loan tenor premium (the higher the duration of the loan, the greater will be the risk and premium), the marginal cost of funds, operating costs, and the negative carry on the cash reserve ratio (CRR).

MCLR rate is updated as and when there is a change in RBI’s monetary policy. It is used as an internal reference rate by the lender and by adding spread to it, the actual interest rate is calculated. Please note that at Grihashakti, the interest rates are linked to the RPLR or the Retail prime lending rate.

2. Type of Interest Rate

Home loan interest rates can be fixed and floating interest rate. In the fixed interest rate, the interest rate on the home loan remains the same throughout the tenure of the loan. Whereas, in floating interest rate, the interest rate changes based on the change in MCLR rates by the Reserve Bank of India (RBI). Generally, the rate of interest is lower in floating interest rate compared to fixed interest rate, thus helping you to reduce the overall cost of borrowing. At Grihashakti, we offer floating interest rates on home loans.

Credit Score:

Credit score has a significant impact on your home loan interest rate. For instance, lenders always prefer borrowers with a good credit score of 750 and above, because of the lower credit risk associated compared to borrowers with poor credit scores. Having a high credit score helps you to get a home loan at a lower interest rate from lenders.

Loan-to-Value (LTV) Ratio:

The LTV ratio indicates the ratio of loan to the value of the asset purchased. In the home loan category, lenders generally finance up to 90% of the value of the property as a loan, and the remaining amount has to be paid by the borrower as a down payment.

If you make a larger down payment, it could help you to fetch a lower interest rate on the home loan as lenders see a lower credit risk when you have a higher stake in the property.

Tenure of the Loan:

In case, if you have chosen a longer tenure for your home loan, be ready to pay a higher interest rate because, in longer repayment tenure, the lender carries an increased level of risks compared to a loan with shorter repayment tenure. You can use our emi calculator for home loan to choose the right repayment tenure as per your finances.

Location of the Property:

Location of the property matters a lot when applying for a home loan and determination of the interest rates. For instance, house properties that are in a good locality having good road connectivity, near to market, railway station, and educational institutes will always command a higher resale value. Therefore, for such properties, lenders charge a lower interest rate due to a lower level of risks. In case, the borrower defaults, the lender can sell the property to recover the loss.

Also, the lender checks the age of the property, whether it is newly constructed or you are buying an old house property. Newer properties are more stable, thus commanding a higher resale value.

Employment Status:

If you have a stable job with a good income, the chances are higher that you will be offered lower interest rates on loans compared to people having unstable income sources. For example, employees of public sector enterprises, reputed private organisations and doctors and chartered accountants in the self-employed category are usually considered to be low-risk borrowers by lenders.


As you have noticed, barring some of the factors to determine home loan interest rates, you can work on the remaining factors that are completely in your control to improve home loan interest rates.

However, before applying for a home loan, always do your research on the lender and check the basic eligibility criteria. Ensure that you have all the necessary documents ready.

SMFG Grihashakti offers affordable home loans to eligible applicants with tenures upto 30 years. Apply online today to know more.

Must Read : How Much Home Loan can I get on My Salary?

Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.

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SMFG India Home Finance Co. Ltd. (Formerly Fullerton India Home Finance Co. Ltd.)
CIN number: U65922TN2010PLC076972

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