When you decide to avail yourself of a home loan, you must necessarily go through the list of factors that affect the home loan interest rates you get. Housing loan interest rates affect the overall affordability of the loan. Securing low home loan interest rates is considered important.
One of the factors that will affect your chances of securing low home loan interest rates is the FOIR. Read on to know more about FOIR and how it impacts the home loan interest rate you get and therefore, the overall cost of borrowing funds.
What is FOIR?
FOIR refers to the fixed obligation-to-income ratio. It is essentially the ratio of your total monthly income that is being diverted towards covering debt. Also known as the debt-to-income ratio, FOIR helps lenders correctly assess the repayment capacity of a loan borrower and therefore, their ability to repay loan EMIs on time. FOIR can be calculated using a simple formula:
FOIR = (Total fixed monthly obligations/ Total monthly income ) × 100
If you want to calculate FOIR, here’s how you can do a FOIR calculation.
1. To start with, make a thorough list of all your monthly earnings. Include your monthly salary and income from other sources, such as rental income, income from interest, and business income.
2. Once you have your net monthly income, the next thing you must do is create a list of all your fixed expenses. This includes the money you are paying towards monthly rent, any car or home loan or any other EMIs you may have, your children’s tuition fee, credit card bills, etc.
3. Now, divide your net monthly liabilities by your total monthly income and multiply the results by 100. Once you do this, you will get your FOIR.
How Does FOIR Impact the Home Loan Interest Rates One Gets
The Fixed Obligation to Income Ratio or FOIR directly impacts the rate of interest that an individual gets offered on their home loan.
Individuals with a low FOIR have only a small portion of their net income going towards the repayment of various obligations they have. Thus, these people have surplus income and can afford to direct a major portion of their total income towards covering fixed obligations.
A low FOIR is often considered indicative of people with high creditworthiness and repayment capacity. Therefore, when individuals with a low FOIR apply for a home loan, not only are they approved easily but lenders also sanction the loan on the most beneficial loan terms and conditions. On the other hand, people with high FOIR, already have a high amount of debt.
Therefore, when such people apply for a home loan, the risk for the lender is high and therefore, to cover for the risk, lenders generally charge a high rate of interest from such individuals. The ideal FOIR is 40%. In simpler words, no more than 40% of your net monthly income should be going towards the repayment of debt if you wish to establish your candidature for the lowest home loan interest rates.
Final Words
If you are planning to apply for a home loan, make sure you do not have a very high FOIR or fixed-obligation-to-income ratio or debt-to-income ratio. In fact, consider paying off some of your debt by making lumpsum payments towards your loan whenever and wherever possible.
This will help you reduce FOIR and allow you to negotiate for better loan terms and conditions. So will maintaining a high CIBIL score, a stable job and income and opting for a low LTV ratio loan. Securing a low rate of interest isn’t an easy task sometimes.
You will need to talk to at least a few different lenders. More importantly, you will need to negotiate and bargain with each lender. All of this will take time, so be prepared. However, once you secure the lowest housing loan interest rate you can get, life will become easier for your loan EMIs will be affordable and the total cost of borrowing money will be low, thereby helping you fetch better return on your investments.
