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Important Factors that Affect Your Home Loan Interest Rate

By IIFL Home Loans | Published On Dec 18 2023 7:51 AM 1 min read 29 views 365 Likes

The Indian housing market is witnessing a strong recovery after the COVID-19 pandemic, with a surge in demand and sales across various segments. According to a report in India Today, the residential market recorded the highest sales in the last 10 years, driven by factors such as urbanisation, middle-class expansion, infrastructure development, foreign investments, and government support. This makes it a perfect time for homebuyers to invest in their dream homes with the help of home loans.

The interest rate for a home loan can significantly impact the overall cost. This article explores the key factors influencing home loan interest rates, empowering you to navigate this essential financial decision with confidence and lower home loan interest.

Discover the perfect home loan options, interest rates, and financial resources that resonate with your aspirations. Explore the wide variety of housing finance options available on IIFL Home Loans.

Get House Loans at Low-Interest Rates

Importance of Good Credit Score for Lower Interest Rates

Credit scores are numerical values that reflect your creditworthiness, or how likely you are to repay your debts on time. Credit scores are calculated based on your credit history, which includes your past and current loans, credit cards, and other credit accounts. Credit scores typically range from 300 to 900, with higher scores indicating better credit behavior.

Different lenders have different criteria for setting interest rates based on credit scores, but a common way to categorize credit scores is as follows:

  • Excellent: 800 and above
  • Very Good: 750 to 799
  • Good: 700 to 749
  • Fair: 550 to 699
  • Poor: 300 to 549


Borrowers with higher credit scores are deemed less risky, thereby gaining access to lower home loan interest rates.

Tips to Maintain and Improve Credit Scores

  • Timely Payments: Consistency in paying bills, loan installments, and credit card dues on time significantly contributes to a positive credit score.
  • Credit Utilization Ratio: Maintaining a low credit utilization ratio - the amount of credit used versus the total available credit - helps bolster credit scores.
  • Diverse Credit Types: A diverse credit portfolio, such as a mix of credit cards, loans, and mortgages, positively impacts credit scores.
  • Regular Credit Report Checks: Periodic assessment of credit reports helps in identifying discrepancies or errors that could impact credit scores adversely. This helps in getting house loans at lower interest rates.
  • Avoiding Multiple Credit Inquiries: Repeatedly applying for credit can lead to hard inquiries on your credit report, potentially influencing credit scores negatively. Therefore, limiting credit inquiries is advisable.


By implementing these strategies, individuals can gradually improve their credit scores, positioning themselves favorably to access lower house loan interest rates, thereby making significant savings over the loan tenure.

How to Reduce Home Loan Interest

Economic Factors and Their Impact on Interest Rates

Economic indicators, such as inflation rates, GDP growth, employment rates, and central bank policies, significantly impact interest rates. For instance, in times of economic growth and low unemployment, central banks might increase policy rates to prevent overheating, which can result in higher interest rates for borrowers.

However, during economic downturns, central banks may lower rates to stimulate borrowing and spending, offering more favorable interest rates to consumers.

Market Dynamics and Home Loan Interest Rates

The real estate market in India is one of the most dynamic and fastest-growing in the world. It has witnessed rapid growth in recent years but has also faced many challenges due to the Covid-19 pandemic.

However, it has made a strong recovery in 2021, with a surge in demand and sales across various segments. This is driven by factors such as urbanisation, middle-class expansion, infrastructure development, foreign investments, and government support.

Moreover, global economic factors, like geopolitical events or changes in the international market, can similarly influence interest rates. Understanding these economic and market conditions provides insight into the volatility and fluctuation of house loan interest rates.

Leveraging a Larger Down Payment for Better Rates

Making a larger down payment can significantly impact the interest rates offered on a home loan. Lenders often view a larger down payment as a sign of financial stability and commitment, reducing the risk associated with lending. A substantial down payment decreases the amount borrowed, which, in turn, lowers the loan-to-value ratio.

Link Between Down Payments and Interest Rates

The more substantial the down payment, the more equity a borrower possesses in their home. Hence, lenders might offer more favorable interest rates to borrowers who demonstrate a larger equity stake. This is because a borrower's financial investment through a down payment signifies their commitment and responsibility toward the loan, which can result in house loan low interest rates

Lower Home Loan Interest Rates

Bottom Line

Understanding the factors influencing home loan interest rates is crucial when venturing into homeownership. This article explores these significant influences to empower borrowers in making informed financial decisions.

The various factors at play - credit scores, economic indicators, market conditions, and down payment size - collectively impact the interest rates on home loans. Borrowers can leverage this understanding to navigate the home loan landscape more confidently, aiming for better rates and substantial savings.

If you want to find the best home loan options with competitive rates, check out IIFL Home Loans. Get tailored financial solutions that match your home ownership requirements. Also read the blogs to get more insights and tips on home loans, such as how to improve your credit score.


Q1. What credit score is ideal for obtaining a lower home loan interest rate?

Ans. A credit score plays a vital role in determining the interest rates offered on a home loan. Typically, a credit score above 700 is considered good and can lead to better interest rates.

Q2. How long does it take to improve your credit score for better home loan rates?

Ans. The duration to improve a credit score to secure better home loan rates varies depending on individual financial behaviors. Enhancing a credit score generally requires consistent and disciplined financial management.

Q3. What are the factors that affect your credit score?

Ans. Your credit score is affected by your payment history, credit utilization, credit mix, credit age, and credit inquiries.

Q4. How can you check your credit score and report?

Ans. You can check your credit score and report online from any of the four credit bureaus in India: CIBIL, Experian, Equifax, or CRIF HIGHMARK. You can get one free credit report per year from each bureau.

Q5. How can you improve your credit score for better home loan terms?

Ans. You can improve your credit score by paying your bills on time, using your credit wisely, maintaining a good credit mix, and avoiding too many hard inquiries.


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