Owning a house is a dream of almost every salaried or self-employed Indian, as it bestows a sense of identity, status, and peace. As the saying goes, there is no better place on earth than your home. Besides that, it can guarantee financial freedom in the future as you can use it to take loans to meet your requirements.
Not everyone can afford to buy a home. Thus, applying for a home loan seems to be a better option to manage your finances. However, your home loan interest rate can cause stress on your monthly budget if you avoid chalking out a plan. Your principal loan amount, interest rate, and loan tenure are primary components in determining your monthly EMIs.
We have prepared a list of things you can do to reduce your home loan interest rate. Follow these tips and avail of the best home loan deal for yourself.
- Choose a shorter loan tenure
Your home loan tenure is a crucial component while calculating the interest rate. While a longer loan tenure may reduce your monthly EMIs, it is worth noting that your total interest payable will be higher in the long run. So, it would be wise to choose as short a loan tenure as you can afford without straining your monthly budget, as lenders often offer a lower interest rate to borrowers who choose a shorter loan tenure.
You can use the home loan EMI calculator to understand the balance between the EMI amount and the shortest tenure you can choose. So, before you apply for a home loan, make sure to choose a loan tenure that fits your needs.
- Make use of prepayment
As the Reserve Bank of India, Lenders are not allowed to charge prepayment or loan foreclosure charges on floating rate of interest loans. So, whenever you have a surplus income, such as a bonus or incentives from work, it would be wise to use these funds to make prepayments at the beginning of your loan tenure, as the interest rate during the first years of your home loan is higher. Paying even upto 1 EMI extra per year can help you save a lot of interest and complete your loan repayment a lot faster. It also helps towards building your credit score, which would be useful in case you need a top-up loan for home renovation / remodeling some years later.
You can avail of a significant reduction in the principal loan amount by making regular prepayments, thus reducing the total interest. It is worth noting that lenders do charge a fee on fixed-rate home loan prepayments and foreclosures. So, make sure to know your lender’s charges before you apply for a home loan.
- Compare interest rates
The home loan interest rates vary across lenders, due to which it is advised to do a thorough research on home loan products and compare interest rates before choosing a lender. Thanks to the internet, you can visit your preferred lender’s website and get an idea of their interest rate offers with just a few clicks. So, make sure to compare different interest rates and then choose a lender for yourself. However, do note that while lenders may advertise their lowest interest rate, the actual rate offered to you will depend on your overall eligibility.
- Choose a higher down payment
Lenders are allowed to offer up to 80% to 90% of the property’s value as a loan. It means that you are required to pay the remaining amount of your property as a down payment. A golden piece of advice would be to pay more towards your down payment. Paying a higher down payment reduces your loan amount, which directly lowers your home loan interest rate.
- Consider a home loan balance transfer
A home loan balance transfer is a way to secure a better deal from another lender. Suppose you feel that your current lender is charging you a higher rate of interest. In that case, you can transfer the balance loan amount to another lender at a significantly lower interest rate. However, you should opt for a balance transfer if you do not have another option as payment defaults on balance transfer-based home loans have higher penalties. You must also take into account foreclosure charges by your current lender and processing fees by your next lender.
- Maintain a healthy credit score
Your credit score is one of the crucial parameters lenders consider to determine your creditworthiness. Lenders offer a lower interest rate to borrowers with a good credit history. For instance, if your credit score is above 700 and you have a very good repayment history, you can negotiate with your lender to get a better deal.
So, if you have made all your repayments on time, you will likely be offered a lower interest rate by your lender. But, if your credit score is below 700, you will need to leverage your current relationship with your lender to secure a lower interest rate, or work on improving your credit score before applying for a home loan. You can also wait for the festival seasons wherein lenders have favourable offers and discounts that you can avail of.
- Increase your EMI
Some lenders allow borrowers to alter their equated monthly instalments every year. It allows you to set an EMI based on your needs. So, if your salary has increased, you may want to consider increasing your EMI to reduce the loan tenure. A lower loan tenure means that you will have to pay less interest. You will need to check it with an online home loan calculator which is available on the lender’s website to know if they have such a facility before applying for a home loan.
Since a home loan tenure can go upto 20 years, the interest rate can cause a severe burden on your monthly budget. You can follow the above tips to reduce the burden of paying higher interest on your home loan.