How Does The Loan-to-value Ratio Affect Home Loan Interest Rates?

By Author: Shreya Eppili
Total Articles: 48
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These days, a Home Loan can make it possible for you to purchase your dream home. Various banks offer this secured Loan. Apart from letting you buy a new or resale house, this Loan enables you to renovate or extend an existing home and construct a new one.
The bank lends you the money at a particular Home Loan interest rate, and you need to repay it using equated monthly instalments within a specific duration. Your Home Loan’s affordability depends on these EMIs, which enable you to repay the interest and principal amounts. The EMI depends a lot on the Home Loan interest rates.
Various factors influence these rates. They also vary across lenders. One such factor is the Loan-to-Value ratio. Here, we determine how the Loan-to-value ratio affects Home Loan interest rates. Other factors also influence the rates.
Effect of Loan-to-Value ratio
The LTV ratio is the percentage of the property value which could be financed through the loan. A larger Loan amount attracts a higher interest rate since it is a higher credit risk and vice versa. Paying a larger amount as a down payment can help ...
... bring down the quantum of the Loan. Consequently, this could reduce the interest rates as well.
Other factors influencing Home Loan interest rates
Apart from the LTV ratio, various other factors may affect the interest rate on your Home Loan:

Credit scores

The credit score are the numerical representation of your creditworthiness. It is compiled based on your credit history. Banks usually use this score to determine the risks of lending you the money. A higher credit score generally indicates a lower risk for the bank. This could enable you to qualify for a competitive interest rate on your Home Loan.

The Loan term

The tenure of your Home Loan can also influence the rate of interest. Typically, if you opt for a Short-Term Loan, you can enjoy competitive Home Loan interest rates over Long-Term Loans.

Income stability

Applicants with a steady income stream and a reliable employment history are usually offered more favourable interest rates on their Home Loans.

Relationship with the bank

If you have a long-standing, positive relationship with your bank, they may offer you a more favourable interest rate on your Loan.

Interest rate types

You can choose a floating, fixed, or mixed interest rate when opting for a Home Loan. When you choose a fixed interest rate, the rate remains the same throughout your Loan tenure. Floating interest rates keep changing based on the changes by RBI. On the other hand, a Home Loan with mixed interest rates begins with a fixed rate for a particular period and then switches to a floating rate.
Conclusion
Now that you know how the LTV ratio and other factors affect Home Loan interest rates, you can remember them when applying for a Home Loan.