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.