Important Factors that affect your Home Loan Interest Rates

One of the foremost things that one probes into while selecting a particular home loan scheme is the given interest rate. The rate of interest for home loans play a pivotal role in determining which loan offer is the most ideally suited to one’s needs.

It is usually the prerogative of the financial institution that generates the loan amount to decide the particular home loan interest rate. These decisions are however not made arbitrarily or in isolation. Several factors are accounted for and then the financial institutions arrive at an optimum rate of interest for home loans.

The prevailing market trends in the economy legitimizes the differential home loan interest rates in the various financial institutions. Especially the home loan interest rates in India function on a competitive basis. It is discreet on the part of the borrower to compare the various home loan interest rates and then zero down on anyone. It also helps to be mindful of the various factors that determine the rates of interest, before opting for a particular loan offer.

While the predominant market rates and the credentials of the borrower are the most strategic factors, the financial institutions look into various other aspects before evaluating the respective home loan interest rates.

* The cost of funds is an important factor that determines the home loan interest rates. The cost of funds essentially entail the funds that the lending institution has to incur in order to dispense the loan amount. If the financial institution requires raising fresh deposits for balancing liability asset books while releasing the loan, the interest rates are levied in a way to cover the incremental costs which have gone in to raise the required funds.

* When the financial institutions have capital fund surpluses, they can allocate the amount towards home loans. What they do is link the cost of liabilities to the available maturities. So the tenures of home loans which fall within this stipulated period do not incur any excess rate of interest. Whereas, for those home loans which have a longer time period, the rate of interest charged will also include the cost of liabilities management.

* Financial institutions devise a suitable home loan interest rate keeping in mind their profit margins. The pricing of the loans and the execution of the relevant schemes would determine the given margin, which in turn would affect the interest rate.

The market strategies and the prevailing competitions are other factors which fuel the rates that a financial institution offers on a given home loan.

On several occasions, financial institutions in order to gain an edge over the other lending institutions might modify their home loan interest rates in accordance with the rates offered by the competing firms.