Mortgage loans have become the go-to solution for people facing a financial crisis and needing significantly large amounts of funds. Mortgage loans are secure loans that are offered to individuals capable of offering their property as collateral. However, before applying for a mortgage loan, you need to learn about mortgage interest rates, types of interest rates, and the factors affecting the interest rates. This is essential to ensure that you only make this significant financial decision after clearly understanding its impact on your overall financial well-being. It will also help you better manage your loan by keeping track of interest rates.
An Overview Of Mortgage Loan Interest Rates
The interest charged on mortgage loans is known as its interest rate and can vary between 8.15% to 11.80% per annum. The exact interest rate varies from lender to lender and depends on various other factors related to the applicants. An essential aspect of a mortgage loan interest rate is its APR or annual percentage rate, which reflects the overall cost of the loan. The APR is based on the loan's interest rate and other charges levied by the lenders. These may include processing fees, pre-closure charges, insurance costs, and loan rescheduling charges. That is why loan APR is generally more significant than the actual interest rate of the loan.
Types Of Mortgage Loan Interest Rates
Lenders in India mainly offer two types of mortgage interest rates, which are explained briefly as follows.
1. Fixed Interest Rate
As the name suggests, with this type of interest rate, you are obliged to pay a fixed percentage as interest for the entire duration of loan repayment. This means that you will be paying the same interest rate with your first EMI, the last EMI, and every EMI in between. Since the interest rate is fixed, the amount of EMI also remains unchanged for the entire duration. Fixed interest rate proves more beneficial for the lenders than the borrowers as the former get the same rate despite the decreasing loan amount.
2. Adjustable Interest Rate
An adjustable interest rate is also known as a floating interest rate since the interest percentage fluctuates with time. The changes in interest rate correspond to the changes in the benchmark rate offered by the Reserve Bank of India (RBI. With a floating interest rate, the interest amount you will pay is likely to change after every 2-3 years. Hence the amount you will be paying at the start of the repayment tenure will be different from what you will be paying 6-7 years into the tenure and even towards the end of the tenure. This also results in your EMI amount constantly changing throughout the repayment tenure. That is why many private lenders set an upper limit for mortgage loan interest.
Factors Impacting Mortgage Interest Rates
Being a secure loan, the mortgage interest rates are lower than the interest rates on insecure loans. However, most lenders also consider the following factors that might significantly impact the interest rates.
- Type and Location Of Property: The type of property that has been offered as collateral and its location impact its market value. That is why lenders factor in these aspects of the property before deciding the interest rate. Hence, the interest rates for residential properties differ from those for commercial properties. Similarly, the interest rate is lower in the case of properties located in the heart of a city compared to those located on the outskirts.
- Credit Score Of The Applicants: Your credit score is among the most critical factors impacting interest rates. This is because a higher credit score reflects the applicant's creditworthiness and efficient loan management and repayment capability. In general, having a credit score of more than 775 can help you get a lower interest rate, and a lower score will cause an increase in the interest rate.
- Total Loan Amount: The total amount that you intend to borrow against the collateral is another important factor considered by lenders for deciding the interest rate. If the value of the property is way higher than the loan amount, you are likely to be charged a lower interest rate. On the other hand, if the loan amount is more than the current resale value of the property, you should be ready to pay a greater interest rate.
- Tenure Of Repayment: The loan repayment tenure also impacts the interest rates in a big way. For tenures of shorter duration, lenders generally charge a higher interest rate as they may perceive you as a risky borrower. However, the interest rate levied on loans with longer repayment tenure is generally lower as it ensures a convenient repayment option for borrowers and increases the overall interest amount.
Conclusion
Opting for a mortgage loan involves double that risk compared to other loans, which is why you should carefully consider all the aspects before applying.
