How To Reduce Your Home Loan Interest Rate?
February 24th, 2022
Do you want to reduce your home loan interest rate? since you are planning for a home loan but are afraid of paying higher home loan interest rates. Here we covered everything which you should know to reduce your home loan interest rate. Let’s go deeper- Buying a home is an aspiration for most people and is one of the biggest financial decisions that one makes. Usually, people turn towards availing of a home loan to make this dream a reality.
A well-managed loan makes a life goal easily achievable and is a preferred option, even if you have the funds to buy a house without the loan. Availing of a home loan offers a bouquet of tax benefits. However, you could end up paying more EMIs due to higher home loan interest rates.
If you’re about to take a home loan, there are a few things that you must keep in mind. The first is your eligibility criteria, based on your income and repayment capacity. The other factor would be the cost of your home loan, which includes processing fees, administrative charges, prepayment fees, etc. Also, an important aspect is the tenure of your home loan, which can be sanctioned for a maximum period of 30 years, depending upon the customer’s eligibility.
But is there a way to reduce your home loan interest rates? Yes, there is! Here, we list out some of the most fool-proof methods to ensure that you pay lower home loan interests and don’t end up burning a hole in your monthly budget.
Table of Contents
10 Ways To Reduce Home Loan Interest Rate
Reducing the interest rate on your home loan is not a tedious task. Here, we’ve mentioned all the points that you can implement to save your hard-earned money.
1. Maintain A Great Credit Score
Your credit score reflects how responsible you deal with borrowed money. A score of over 750 is considered good as it suggests financial fitness. Lenders would evaluate you as a reliable borrower and would offer you better interest on a loan.
If you have a bad credit score, it could very well be because of late or missed payments. To improve your credit score, keep track of your payment history, how much money you owe, the length of your credit history, new credit, and types of credit in use.
2. Make A Larger Down Payment, Reduce The Loan Amount
A planned approach towards buying your house will be beneficial. You can work towards making a larger down payment and then reaping the benefits of a lesser loan amount with a significantly lower interest.
Most banks and financial institutions finance 75% to 90% of the value of the property, depending upon the borrower’s eligibility. Plan accordingly and ensure that you borrow less so that you can pay lesser interest.
3. Decrease The Loan Tenure
The tenure of your loan is one of the primary factors responsible for how much interest you will be paying. While your EMI may come down for longer tenures, you will end up paying more towards interest.
However, if you opt for shorter tenures, your EMI may be slightly more, but your overall interest payable will come down drastically. Hence, you must choose a tenure carefully before you avail of a home loan.
4. Compare Interest Rates Online
Do thorough research and compare rates before you finalise on a lender. Numerous third-party websites can provide you with comparisons that will offer a clearer picture of all charges that will be levied.
It’s ideal to get an in-depth knowledge of the home loan interest rates of all banks before you narrow down on the one for you. Also, banks offer preferential rates for existing customers or those with a good credit history. If your credit score is anywhere near 800, then you may get better rates.
5. Choose A Floating Interest On Your Home Loan
A floating interest rate rises and falls with the rest of the market or other benchmark interest rates, as opposed to the fixed interest rate. Since it is directly dependent on the market, it is usually 1 or 2% lower than fixed rates offered by the same lender.
This is why some borrowers find it appealing since lower interest means saving more money every month. Even if there is a situation where the floating rate exceeds the fixed rate, borrowers need not worry since such conditions are temporary and will not impact the entire tenure of the loan.
6. Make Regular Prepayments
Making prepayments periodically is one of the sure-shot ways to ensure a reduction in total interest. The EMI that is paid comprises two parts – one is the interest charged on the borrowed amount and the other is the principal.
In the initial stages of your loan tenure, you pay more towards interest and not as much as towards the principal. If you get a raise or a bonus or a salary hike, you can use it to make a prepayment. This will reduce the principal and therefore the interest too.
7. Revise EMI Every Year
You can revise your EMI annually with certain lenders. If you get a salary hike or if you consistently see a rise in your income, then you could opt to increase your EMI. This might seem odd at first but the more your EMI is, the shorter is your tenure and so you will see a significant reduction in your interest rate.
8. Refinancing Your Home Loan
If you think you’re not being given favourable terms from your existing lender, the first step is to approach the existing lender to lower your rate. Most lenders will try to keep their good customers and may oblige. You can ask the bank to match a competitor’s interest rate, or you could ask them to lower the interest rate based on your credit history.
Then you have the option of transferring the loan to a new lender. All you have to do is find another lender that offers interest rates that suit your requirements and also check for other charges that they would levy. You can then submit an application to your current lender and obtain necessary documents then head to your new lender to process KYC and other procedures. The new lender will then implement their procedures before approving it for you.
9. Take Long Tenure Home Loan And Start A SIP
Choose the smart way and make a Systematic Investment Plan (SIP) in Mutual Funds equal to 10% of the monthly installment amount, you can get the full home loan cost back.
If you take a home loan of Rs. 30 lakh for 25 years at an interest rate of 6.75%, your EMI would be Rs 20,727. At the end of 25 years, you would be paying Rs 62,18,204 towards the borrowed sum of Rs 30 lakh.
Now if you invest a month SIP of Rs 2000 which is 10% of the EMI, then for the same period of 25 years, you are getting Rs 65.7 lakh, estimated at 15% p.a. return. This way your loss can be reduced to zero.
10. Don’t Skip Payments
If you fail to pay your EMI for three months, then lenders can deem you a defaulter and take action against you. The lender will send a notice stating that you must clear your dues before a certain date, failing which you could lose possession of your collateral.
A single default is enough to bring your credit score down by at least 50-70 points. In case there is a break in your income, then you could approach the lender and request an EMI-free period. Banks do offer a waiver of three to six months on EMI payments if you’re in between jobs or your business operations have been held up.
The above-mentioned points have covered everything you need to know about lowering your home loan interest rates. Apart from this, another important aspect is to maintain a consistent and long-tenured work history. Lenders are likely to favour those who have been working at the same place for many years with a steady/growing income. Conversely, an erratic job history will make lenders wary of approving your home loan. In fact, before processing your loan, a loan officer will verify your employment status. If you change jobs or quit during the closing process, then it is most likely to affect your home loan approval.
Owning a home is a dream for everyone, and hence home loans have become an essential and inevitable part of our lives. Right now, the home loan interest rates are at an all-time low and it is an ideal time to avail it. If you have already taken a home loan, then it is ideal for you to switch to a lender offering lower interest rates. Paying off a home loan is one of the longest commitments of one’s life. A systematic and planned approach to availing and repaying a home loan is the ideal way to lead a stress-free life.
Now that you understand how to reduce home loan interest rate aspect taken care of, you can check out some of SOBHA’s projects across various cities, that are sure to give your opulent lifestyle a boost!
Must Visit: 2 BHK apartments in Bangalore
1. How can I reduce my home loan interest?
- Go for a shorter loan tenure - Maintain a great credit score - Pay more in down payment - Make regular prepayment - Negotiate well with the lender - Opt for a floating interest rate - Revise EMI payouts every year - Opt for a home loan balance transfer - Improve your eligibility - Look for better deals and offer
2. Can I negotiate my home loan interest rate?
Yes, a home loan interest rate can and should be negotiated. A responsible borrower will typically qualify for lower interest rates if they have made all their repayments on time. According to research, getting multiple quotes results in lower rates. Despite this, many home buyers and refinancer's skip negotiations and choose the first lender they speak with.
3. How do I ask my bank to lower my interest rate?
Write your bank a formal letter or email explaining the loan details. Highlight the fact that you have been a loyal customer of the bank for the past several years (mention the number of years) with a consistent history of transactions. You could also mention that other banks have offered lower interest rates for the same loan and hence seek a loan transfer. And conclude by requesting them to lower the interest rate since other banks are offering you X% interest while you’re paying Y% here.
4. How can I reduce my home loan EMI burden?
- Pay 10% more EMI every month on your current EMI. - Maximise your repayment tenure - Opt for a Co-applicant - Look for a low-interest rate on the home loan - Opt for a balance transfer
5. Will home loan interest rates go down in 2022?
Home loan interest rates have increased since the RBI raised the repo rates in 2022. The price of property has also risen across cities. Home loan rates have increased as the Reserve Bank of India increased the key rate by 190 basis points.
6. What happens if I pay more than my EMI?
You can reduce your interest burden by crediting more than your EMI amount into your loan account when you have available funds. In most cases, banks do not charge a prepayment penalty if you deposit more than your monthly EMI.
7. Why is my interest rate so high on my home loan?
The interest rate is based on the tenure of the loan. A long tenure of 25 to 30 years will reduce the monthly instalment amount, while a shorter tenure, such as 10 to 15 years, will reduce the overall interest amount.
8. How much EMI is too much?
If your loan EMIs exceed 40-50% of your net salary, then your EMI is too much for you. Even the banks and financial institutions ensure that your loan EMIs do not exceed 40-45 per cent of your net salary.
9. Is it better to reduce tenure or EMI?
Paying a higher EMI in such a scenario would reduce the amount saved every month. While if someone increases the tenure of the loan, they can save the extra amount and use it for repaying another loan or can invest the same for a return that can balance out the increased interest burden.