While getting a home loan, everyone wants to know tricks to reduce the home loan.
The first and foremost thing one has to do to bring down his/her home loan is to find out a good lender who offers home loan at a lower rate of interest. But is that all one can do to reduce your home loan interest? what are the main determinants of the amount you pay as equated monthly instalment (EMI), the interest component of it, and the tenure of your home loan? What if most of the banks are quoting the same interest rate on home loans? Let us explore how and by what all means one can go for a better home loan interest or bring down the interest rates on the existing home loan to realise the dream of owning a home where he/she can start a family or retire peacefully.
How to Reduce Home Loan Interest Rates?
Get the right banker: Have you chosen the right banker? The one who offers you the best of interest rates on home loans and one that has a credible name in the market? It need not necessarily mean the largest banker or most popular banker. The number of branches a bank has or its assets base is not likely to bring down your home loan interest. So do a market study on your own by comparing the best rates and services offered by the banks. One good way is to go online and check for home loan providers. There are various websites and online portals which give summarised view of the rates of interest, eligibility criteria, processing fee, pre-payment charges, responsiveness to rate changes, documentation, turnaround time and other hidden charges (if any) of the different lenders. Once you are armed with these details, picking the lender will no more be a daunting task.
Higher down payment: A higher down payment when obtaining a home loan will help bring down the principal amount. Most often, with home loan lenders financing up to 80-90 per cent on the value of the house or flat you want to purchase, those looking to avail a home loan will only have to contribute 10-20 per cent as a down payment. But if you are arranging a higher contribution from your pocket — for instance, if you are going for a Rs 60 lakh home and if you can meet 50 per cent of it, i.e. Rs 30 lakh as down payment — instead of arranging just the minimum down payment, it would prove to be more prudent. A lower principal amount means lower interest and EMI payments. The higher you contribute as down payment, the lower will be your loan-to-value (LTV) ratio of the property purchased. Better LTV ratio will also enhance your loan eligibility and increase the chances of loan approval.
Shorter loan tenure: You can opt for a shorter loan tenure. It will ensure that your home loan repayment is done faster; resulting in lower interest cost. It is not the higher interest rate alone that is factoring in your higher interest pay-out. More than that what decides the volume you part with from your pocket as interest pay-out is the loan tenure. With a smaller loan tenure, the principal amount is repaid much faster. Remember that the interest is calculated on the outstanding principal amount. So, a quick repayment of the principal amount leads to lower absolute interest pay-out. However, also keep in mind that the EMI amount is okay with your pocket, i.e. you will be able to repay it without any strain. Though a shorter loan tenure will indeed lead to lower absolute interest pay-out, it will also increase your EMI burden. So, always remember to keep affordability as the key factor while deciding on your home loan EMI amount.
Prepayment & extra payment: If you can afford, then pay more than the regular EMI. Make use of every opportunity to prepay a part of the home loan before the end of its tenure. The surplus amount you pay on your home loan will not only reduce your principal outstanding but also your interest burden. This is an effective trick to reduce your loan tenure and in turn the overall interest payments. Earlier, banks used to charge a prepayment penalty fee for such an allowance. Now, most of the banks have waived it off.
You can also opt to pay one more EMI (than the usual number of EMIs) every year. Most often, the employees receive annual bonuses etc in addition to the annual increment which can be used to make this extra payment. This not only saves on your home loan interest rate but also help to enjoy home loan free and rent-free days.
Increase EMI annually: Though the value of the currency come down and the government, public sector units and private companies announce annual pay increase for their employees, the EMI that you have agreed with your lender remains the same. So, when you are enjoying an increase in net income every year, you should also make it a point to increase your payment on your home loan (annual) EMI by a small percentage. This will help you save on interest payment as you will end up repaying your home loan faster.For existing borrowers: If you are an existing home loan borrower, keep looking out for lower interest rate offers. You can go for the refinancing of the loan or change your lender in case you think that you are paying a high interest rate and the lender is unenthusiastic in refinancing it. Refinancing your home loan at a lower interest rate can prove to be a great decision in reducing your interest repayment burden. Home loans taken after April 2016 follow the marginal cost of funds based lending rate (MCLR) wherein the borrower can benefit from the change in interest rates. If you have taken a home loan before April 2016, you can switch over to MCLR tax regime on payment of a conversion fee (for some lenders it will be processing fee, legal charges etc). You should perform a cost analysis to find out if switching over to MCLR is beneficial as the conversion fee is a percentage of the outstanding loan amount that is yet to be repaid. You can also take the help of the online home loan EMI calculator that is available on the bank website to find out how much you will benefit out of refinancing your home loan.
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