How the Interest Rate Plays a Role in your Home Loan

There are many considerations that come into play when you are applying for a loan for your dream home. The interest rate that is levied on your home loan does play a significant impact on your financial situation during this period of time. Here are some things that usually influence the interest rate on your home loan.

Personal Credit Profile

This is a critical factor which determines if you can avail for your home loan and for how much amount. Personal credit profile includes your past and present credit history. While in the earlier system, the home loan amount was granted in such a way that your repayment amount could be only thirty per cent of your monthly income. But now things have changed. The bank will first carry out a thorough scrutiny of your credit records and credit rating to check the ‘credit worthiness’ or your ability to pay back the loan.

Loan-to-value Ratio

This basically means the ratio of the loan amount as a percentage of the value of the residential property. From the borrower’s perspective, this only means that you should have greater liquidity to make a down payment at the time of taking the loan if you wish to get a home loan rate lower than the existing prime rate in the market.

Personal Characteristics of the Borrower

The borrower’s own personal characteristics such as age, occupation, income play a vital role in determining the overall terms and conditions of the home loan including the interest rate on the loan.

Your Existing Relationship with the Bank

If you are already availing certain services with the bank such as existing accounts, other types of loans, credit cards etc., chances are that you can walk off with a lower interest rate with them.

Institutional Factors

There are also many institutional factors that have a bearing on the interest rate on your home loan. These include the repo rate and prime rate. Basically, the repo rate is that which is levied on commercial banks when they borrow from the South African Reserve Bank. The prime rate is the lending rate used by the banks. Then again the fluctuation of the South African rand vis-à-vis other world currencies impact the inflation rate. This inflation rate has a bearing on the interest rate levied by the bank.

All these factors do play a role in deciding the interest rate which will be levied on your home loan. While there are certain factors over which you can have no control over, you can certainly take some steps to ensure your home loan gets paid off smoothly in the event of hike in interest rates. You can start by making a realistic assessment of your other expenditures and use a mortgage calculator to understand the impact of increase of interest rate on your home loan. You should also carry out a thorough research to tap all financial sources to assess the possibility of getting the best possible interest rate and accordingly take the decision.

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