Mortgage loans like loans against property are a great alternative option to unsecured loans with high interest rates. Since you mortgage your property to avail this loan, the risks associated are less, which is why the interest rates are quite affordable. Moreover, the repayment period for a loan against property is flexible, which makes it easier for applicants to pay off the whole amount.
Even though the interest rates are affordable compared to personal loans, they can still make the EMIs quite substantial. Moreover, there are several factors that can significantly affect the interest rates for your mortgage loan.
Therefore, before you apply for a loan against your property, you should have an idea about the factors that determine your loan interest rates. Go through the pointers given below –
- Credit score – It is a measure of your creditworthiness. Therefore, a poor credit score may reflect to your lender that you cannot handle credit responsibly and may be a high-risk borrower. As a result, you will be charged a high interest rate on your loan. On the other hand, if you have a credit score of 750 or above, it will imply that you can manage credit properly and will be charged a comparatively low interest rate.
There are several ways that you can adopt to increase your credit score. They are –
- Pay all your credit card bills and loan EMIs within the stipulated date.
- Do not apply for multiple credits at the same time.
- Keep your credit utilisation ratio to 30% of the total available limit.
- Employment status – An applicant employed in a reputable private or public company with a stable income has a high repayment capacity and is therefore considered low-risk by lending institutions. Therefore, he or she will be charged a low interest rate on a loan against property.
- LTV ratio – Loan to value or LTV refers to the maximum amount that a borrower can avail based on the current market value of his or her property. Lending institutions only sanction 60%-70% of the total value.
A lower LTV ratio means a lending institution is sanctioning less money and therefore it is a lesser risk for them. Consequently, the interest rates will also be low.
- Type of interest rate – There are two types of property loan interest rate that you can opt for – fixed and floating interest rate.
Floating or adjustable interest rate varies based on external benchmarks. Any change in these external benchmarks leads to a change in your interest rate. Consequently, interest rates may increase or decrease throughout the repayment period.
In case of fixed interest rate, as the name suggests, the rate stays the same for the whole repayment period. However, fixed rates are slightly higher compared to floating interest rates.
Therefore, you should know which interest rate is a better option for you when you opt for a LAP.
Apart from these two interest rates, borrowers can also opt for a mixed mortgage loan interest rates. In case of mixed interest rate, one pays interest at fixed and floating interest rate. Typically, during the initial years of the repayment period, one pays interest at fixed rate and then after a stipulated period switches to floating interest rate.
Before applying, you can use online tools like a mortgage loan calculator to ascertain the total interest that you are required to pay on the loan along with EMI. Follow the steps below to know how to use a calculator –
- Go to your lending institution’s official web portal.
- Click on the EMI calculator in the loan against property section.
- Enter the following values in the proper field –
- Loan amount.
- Interest rate.
- Once you submit the above values, the calculator will display the total amount payable, total interest and EMIs.
Thus, you can use an EMI calculator to compare interest rates on mortgage loans offered by different lenders and decide the most affordable option for you. Apart from interest rates, you should also check out and understand the charges on your loan against property that are collected by the lending institution such as processing fees, prepayment charges, foreclosure fees and so on.