Before we talk about how to optimize home financing, let us first familiarize ourselves with the concept of the Statutory Liquidity Ratio.
What is the Statutory Liquidity Ratio or SLR? The RBI makes it mandatory for all banks to set aside a certain portion of their Net Demand and Time Liabilities (NDTL) as safe reserves in the form of cash, gold and other government-authorized securities. This is known as the Statutory Liquidity Ratio and it is only after a bank has set aside this reserve that it can start lending money to borrowers. It is legally mandatory for banks to maintain SLR. Not doing so can lead to the RBI implementing a penalty of 3% above the annual bank rate on the defaulting bank. In the case of banks that refuse to maintain SLR for a sustained period, the RBI can increase the penalty to 5% above the Bank Rate. The current SLR is 18%. However, the Reserve Bank of India holds the right to increase the SLR to 40%.
SLR helps the Reserve Bank of India maintain sustained growth of the Indian economy by controlling the flow of funds. Through SLR, the RBI also maintains the integrity of the Indian banking system as well as ensures that banks are invested in different government securities. Changes in SLR have a direct impact on home loans. When the SLR is high, banks have less money to lend and therefore, they charge a higher rate of interest on all loans, including home loans. On the other hand, when the SLR is low, all loans including home loans become cheaper. Thus, ideally, home loan borrowers must apply for a loan when the SLR ratio is low. However, since the SLR can go as high as 40%, now is a good time to avail yourself of a home loan.
If you are planning to get home loan, here are a few tips on how to optimize home loan financing and avail yourself of a low home loan interest rate.
Tips on How to Avail Yourself of Low Home Loan Interest Rates
- When it comes to home loans, the loan applicant’s credit score not only affects their chances of loan approval but also the home loan interest rate they get. Loan applicants whose credit score exceeds 750 are offered the best home loan deals. If your credit score does not meet the home loan eligibility requirements, you must first improve CIBIL score and then apply for a loan.
- The LTV ratio you opt for will also determine the home loan interest rates you get. High LTV ratio loans carry higher risk for lenders and thus, these loans are sanctioned at high home loan interest rates. Home loan applicants must therefore save as much down payment as they can and apply for a low LTV ratio loan.
- The debt-to-income ratio of a loan applicant tells a lender what percentage of their total income is going towards debt repayment. A high debt-to-income ratio is considered a red flag by lenders as individuals who are already devoting a considerable portion of their total income towards covering debt will find it difficult to take on the burden of another EMI. Thus, individuals with a high debt-to-income ratio are more likely to default on loan repayment and therefore, are charged a higher home loan interest rate by lenders.
- Young borrowers are offered lower home loan interest rates. Similarly, individuals involved in a stable job or a profession that gets them a stable income are less likely to default on loan EMI payments and therefore are offered loans at low home loan interest rates.
- External market conditions also impact home loan interest rates. Other than SLR, one of the key monetary policy tools that affect housing loan interest rates is the Repo Rate. Repo Rate is the rate of interest that RBI charges banks on borrowings made against collateral. Home loans are linked to the Repo Rate. Thus, when the RBI decreases the Repo Rate, home loans become cheaper. Loan applicants must apply for home loans right after a Repo Rate cut.
Other than the factors mentioned above, the loan tenor that one has opted for and the interest rate type that one chooses are the other factors that affect home loan interest rates. Developing an understanding of how lenders decide the rate of interest to be offered to a borrower and the factors that affect these interest rates will certainly help you optimize home financing.
