When applying for house loans, who wouldn’t want to be the recipient of good rates? Most of us already know that the loan rates differ according to different banks.
However, there are many other reasons that affect your loan rate besides which bank you go to. Which begs the question:
“What are the factors that affects one’s interest rates when it comes to house loans?”
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1. Your Base Lending Rate (BLR).
Simply put, BLR (Base Lending Rate) is a minimum interest rate calculated by financial institutions based on a certain formula. As shown below, this formula takes into account the cost of funds and other administrative costs.
BLR = Operation Costs + Credit Risk + Liquidity Risk
This means that the higher the operation costs of the banks, the higher the interest rates will be. The breakdown of the loan interest rate is BLR + x% where x is the bank profit rate.
For example, if a Loan Interest Rate agreement is 5% = BLR + 2%, this means that the bank profit rate is 2%.
It should be known that is standard practice within the industry for the BLR to rise or drop from time to time. The BLR is adjusted by banks and different banks will have different rates.
Hence, it is important to be aware of the rates and changes offered by the various financial institutions present.
2. Your Credit Profile
Your credit profile is specific to you as an individual and represents your “creditworthiness” based on your credit history.
Simply put, a credit score represents how well you repay your debts, resolve bills, charges and etc. This means that having a poor credit history or a low credit score can seriously impact you financially.
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For instance, you could be denied a line of credit as a poor score indicates to lenders that you are a high-risk borrower and they may not be willing to lend you money.
Also, credit scoring is not unique to banks alone as the same practice is part of the system in other sectors such as mobile phone companies, insurance companies, government departments and even landlords employ the same techniques.
How is this score determined, you ask? Generally, a credit score is based on a credit report with information obtained from credit bureaus.
This information includes your payment history, period of credit history, credit mix and loan amounts owed, new credit applications in the past year, number of rejected credit applications and legal track record.
There are other factors that affect your credit score such as CTOS, RAMCI & CCRIS Report, your income, the type of occupation (contract staff or permanent staff) as well as the industry you work in.
Lenders also use credit scores to determine which customers are likely to bring in the most revenue. Hence, an individual with a stable.
High income who resolves any bills/debts diligently will have a higher credit score. Moreover, this will also translate to higher chances of getting their loans approved with lower interest rates.
3. Your House Loan Terms
Just like any other application or agreement, the terms of your house loan application will also affect your interest rate. Let’s have a look at how the following specific terms of your house loan generally affects your interest rate.
Amount – the larger the amount you intend to borrow, the more leverage you possess, and the lower the interest rates for your home loan.
Do note that the larger the amount, the larger the total debt (regardless of the interest rate) Period – the shorter the term of the home loan, the higher the interest rate.
This would mean that the home loans with longer terms would have a lower interest rate. Some would adopt a strategy of extending the term of the loan in response to this.
However, do note that the amount of interest one pays is typically less on a loan with a shorter term. Insurance – the more reliable your insurance coverage, the lesser the risk you pose as a borrower.
How does this work? Some banks offer a discount on your interest rate if your loan application is coupled with an application for a mortgage insurance.
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For example, in the event of an unfortunate death or permanent disability, the Mortgage Reducing Term Assurance (MRTA) will help cover any outstanding loan, thus reducing your risk as a borrower.
4. Location of your home
The physical location or area of your home also affects the interest rate on your home loan. The logic here is that different locations provide different levels of risk (and reward) to the bank.
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For example, a booming location with an influx of development experiencing property price increase will result in these locations becoming more profitable.
This effectively reduces the risk of these homeowners defaulting on their loans, thus deeming them less risky to a bank.
Therefore, it is highly recommended that you look into the potential state of development of your prospective neighborhoods as this can also influence the interest rate of your house loan.
5. Are you a loyal and profitable customer?
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Finally, just like all businesses, banks are profit-driven. If you have subscribed to many products :-
- current accounts
- credit cards
- car loans
- insurance packages from the same bank
Odds are you will receive a much better rate for your home loan from that same bank (versus other banks).