- external factors (e.g. the state of the economy) which are beyond your control, while others you may have some influence over
There are a number of factors that could influence the interest rate on your home loan. Some are external factors (e.g. the state of the economy) which are beyond your control, while others (e.g. your credit score) you may have some influence over.
Let’s take a quick look at some of these factors:
Base Lending Rate (BLR)The BLR is a reference interest rate used by banks to decide how much to charge for various products they offer. It is a rate that takes into account banks’ cost of operations, and is typically similar among the major banks.
In Malaysia, home loans are normally quoted as a percentage above or below the BLR. This means, if the BLR increases or decreases by a certain amount, the interest rates charged on floating rate home loans also increase or decrease by the same amount.
Your personal credit profile or credit scoreYour personal credit profile or credit score is important as it can often decide whether you will qualify for a home loan or not, as well as the amount and interest rate the bank is prepared to lend to you.
Banks normally look at two things: your credit worthiness, and the level of your income. To enjoy lower home loan rates, you need to have both a good credit profile and a decent income.
Your home loan termsThe interest rate on your home loan may vary depending on the terms of your loan.
Home Loan Amount– Generally the more you borrow, the more bargaining power you have, and the lower the interest rate on your home loan.
Home Loan Period– Loans with a shorter term are generally more expensive (i.e. higher interest rates) than loans with a longer term. While it may seem like a good strategy to extend the term of your loan, you should be aware that the dollar amount of interest you pay is generally less on a loan with a shorter term.
Home Loan Insurance– Some banks offer a discount on your interest rate if you apply for a mortgage insurance along with your loan. These insurances (e.g. Mortgage Reducing Term Assurance or MRTA) help cover your outstanding loan amount in the event of death or permanent disability, thus reducing your risk as a borrower in the eyes of banks.
Location of your homeThe interest rate on your home loan can vary depending on where your property is physically located. The rationale here is that not all locations provide the same level of risk to the bank.
An area that is growing and experiencing property price increase will be less risky to a bank. As the price of property increases, borrowers in these locations effectively become “richer” and will less likely default on their loans.
Are you a profitable customer?Like all businesses, banks are profit-driven. If you have many products (e.g. current accounts, credit cards, car loans) from the same bank, chances are, you will receive a much better offer for your home loan from that same bank (versus other banks).