For several Indians, buying a home and being a homeowner is their biggest dream. Although you may have savings, given the skyrocketing real estate prices, you may not be able to afford to buy the property. However, you can still make your dream come true by applying for a home loan.
Today, many financial organisations in India, including banks and NBFCs (Non-Banking Financial Companies) offer different types of home loans at competitive interest rate, with flexible repayment options and favourable terms and conditions to suit your needs. That being season, availing a home loan is a big financial decision.
So, it is paramount that you have a good understanding of the different aspects of home loan, especially the home loan interest rate, as well as a sound repayment strategy. Without these, you may find yourself in a financial mess, and you may end up with more interest unnecessarily.
To help you manage your home loan repayments better, in this guide, we give you a few valuable tips to reduce home loan interest rate burden.
- Improve your credit score
When you apply for a home loan, the lenders will consider your credit score as one of the most important factors in determining your eligibility and the interest rate on your home loan. The higher your credit score, and closer to 900, the better your chances of getting the loan sanctioned at a lower interest rate.
Hence, if you are planning to apply for a home loan anytime soon, you must focus on maintaining a good credit score of at least 750 or more. You can do this by your outstanding dues, keeping the credit utilisation ratio to less than 40%, and not applying for too many credits at the same time.
You can easily check your credits core online and take appropriate measures to improve it.
- Choose a shorter loan tenure
The home loan duration you choose, plays a vital in the interest levied by the lender. The general rule of thumb is the longer the duration, the lower the EMI, but you pay more interest. However, if you choose a shorter loan duration, your overall interest payable is low but the EMI amount will be higher.
So, opting for a shorter duration is the most efficient way to get the lowest home loan interest rate. It is advisable to use the EMI calculator to better understand the difference between the interest rate and the overall EMI payments. You can then choose the right tenure based on your repayment capacity.
- Make a larger down payment
Most financial institutions in India finance only a certain percentage of the property’s value. While this percentage differs from lender to lender, it generally ranges between 75% and 80%. In some cases, if you have an existing relationship with the lender, they may finance up to 90% of the property’s value.
That means you must contribute the remaining 10% to 25% of the property from your pocket. However, if you are looking for home loan rate reduction ways, it is advisable to make a larger down payment than the minimum amount required. The more you pay upfront, the lesser the loan amount you would have to borrow. And, this has a direct impact on the interest you pay and the EMI.
- Negotiate with the lender
A lot of first-time home loan borrowers accept the offer made by the lender and hesitate to negotiate with them due to fear of rejection. However, the truth is that lenders are mostly open to negotiation with the potential borrower, especially if you have a good credit score and repayment history.
So, don’t hesitate to discuss the offer you receive from them and negotiate on the interest rate. This is one of the best ways to lower home loans interest rate burden. Even if you get a reduce of 0.5%, it can contribute to a significant savings over the loan tenure. Use your financial standing and clean credit record to your advantage during the negotiation.
- Go for floating interest rate
Most lenders in India offer home loans on either fixed-interest or floating-interest rate bases. In fixed-interest home loans, the interest rates remain unchanged throughout the loan tenure. In contrast, the floating interest rates fluctuate based on the existing market conditions. However, generally speaking, the floating interest rates are lower than a fixed rate, which makes it more cost-effective in the long run.
- Try to prepay the loan
Prepaying the loan essentially means paying off the loan partially or fully before the actual tenure. This is a great way to reduce your home loan interest rate burden. When you prepay the loan, you can actually reduce the principal amount and the interest is levied only on the balance amount. This automatically translates to lower interest payments overall.
Partially repaying the loan from time to time can significantly reduce the principal amount and lower the interest.
- Transfer your home loan
Home loan balance transfer is another effective method to reduce your home loan interest rate burden. However, you can opt for this only after you have started repaying the loan. If you believe your current lender is charging a higher interest than the market rate, then you can transfer the balance principal amount to another lender of your choice that is offering the loan at a lower interest rate and more favourable terms and conditions.
This allows you to repay the loan at a lower interest for the rest of the duration. Many finance experts recommend opting for a home loan transfer during the initial few years of the loan tenure when the maximum portion of your EMI goes towards interest payments.
In addition, before you switch to a new lender, it is advisable to assess the costs involved with the transfer, such as the processing fees, foreclosure charges, etc. and then make a final decision.
Final Word
The home loan interest rate levied by the lender has a direct impact on the EMI and affordability. So, you can use the above tips to reduce the home loan interest rate burden and make your home loan more affordable.
Also, whether you are applying for a home loan for the first time or transferring your loan to a new lender, make sure to choose a reputed home loan lenders that has a reputation for offering the best loan services to all at an affordable interest rate.
