What you should know about mortgage loan interest

Using your home to get finances to meet big expenses is a great way to leverage the value of your biggest and most valuable asset. A big chunk of your finances is stuck in your home investment so if you can utilize this chunk without having to sell your home, it makes a great deal of sense. However, it is important for you to understand the intricacies of doing so. For example, you must know what impacts your mortgage loan interest because this factor affects your repayment ability of this loan as well. In this post, you will learn all that you need to know about this aspect of taking a loan against your home property.

The basics

The mortgage loan interest is the rate of interest charged on the loan you take against your property. The lender fixes this interest rate based on several different factors.

In general, interest rates across the country are based on the Repo rate fixed by the RBI- that is, the rate at which banks can borrow funds. When the Repo rate changes, you will find interest rates across products following suit too sooner or later. This is not in your hands but it helps to know about this and understand it so that when the Repo rate has been reduced, you know that mortgage loan interest may also drop soon. This may be a good time to take a loan and keep it more affordable.

The next thing to know is about how interest rate changes according to the type of loan. A mortgage loan is a loan that comes with a collateral, your home. This makes it a secured loan, that is, a loan that is secured with an asset. If you default on the loan, the lender has a lien over your home and he can enforce it to sell the property and make up for the money you have not repaid. Since he has a security to cash in on in event of default, this kind of secured loan is a lower risk for the lender to undertake than an unsecured loan. This is why the loan secured with your property as collateral comes with a lower interest rate usually than, say, an unsecured loan that you take for a different purpose.

Other points to note

When you are doing the groundwork about your loan against property eligibility, and loan products that match your needs, pay special attention to the interest rate offered. This interest rate determines whether the loan is affordable for you or not, in many ways. A high-interest loan will have larger EMIs too or a longer tenure over which you pay many more installments with a more affordable interest. Either way, your total cost of the loan is also high. Doing your research to find a mortgage loan with the most attractive interest rates pays off very well for you in the long run.

How your loan against property eligibility affects interest rates

Many factors that determine your loan against property eligibility also impact the kind of interest rates that you are offered. For example, your income earned is one of the eligibility criteria that lenders require you to divulge. A borrower with a regular higher income is more likely to get a mortgage loan at an affordable interest rate than a borrower with irregular, low income. In fact, the one with irregular income may find his loan options far fewer.

The reason behind this is the same- the lender has a lower risk of default or late repayment with a borrower who earns a steady, high income. This borrower’s financial ability to manage EMIs is better than a low-income borrower’s. Thus, the high-income borrower is a more attractive customer for the lender and to attract this customer, the lender may offer a lower interest rate.

Another eligibility factor that can affect your mortgage loan rate is your credit score. Although this affects your rates to a lesser extent in a secured loan than in an unsecured loan, your credit score still has an impact. A low credit score tells the lender that you are a poor risk, and that you have not had a good history with your financial responsibilities so far. To make up for the higher risk you represent, the lender charges higher rates.

If you have a high credit score, that is, above 750, your ability to fulfill financial obligations responsibly is showcased clearly. This makes you a great credit risk for the lender. To ensure you take the loan from them, they offer you great interest rates too.

In short, taking the time and effort to improve your credit score before you apply for a mortgage loan is a great idea. It is a simple way to wield some control over the mortgage loan interest rates you are offered and to keep the cost of your loan low as far as possible.