Complete guide on how to reduce house loan interest rate
Do you have a home loan or plan to get one? If yes, you would know that interest rates on housing loans are a crucial aspect that influences your decision. Any change in loan rates affects your monthly payment as well as your overall loan cost. Thus, any option to reduce the house loan interest rate would help ease your monthly burden.
Ways to reduce a housing loan interest rate
Below, we discuss a few ideas that will help you reduce the house loan interest rate and the loan cost.
Opt for a shorter loan term.
Your Equated Monthly Instalment (EMI) depends on the principal, interest rate, and loan term. A longer tenure will reduce the EMI as you have more time to repay your loan, but it will increase the overall interest cost as you pay more interest during the loan term. Balancing the loan term and the EMI you can afford is crucial when you choose the tenure for housing loans.
Lenders offer lower interest rates for loans with shorter terms when compared to loans with longer terms. Use an EMI calculator to pick the most suitable loan term for you.
Consider making prepayments.
For floating-rate housing loans, you can make small prepayments from time to time or in larger chunks if you have spare funds. Lenders do not levy any prepayment penalties for floating-interest home loans. In the initial years, your EMIs cover more interest than principal. The prepayments will help reduce the loan principal and the overall interest burden. For a fixed-rate loan, check with the lender about the prepayment charges before you prepay your loan.
Research well before you choose a lender.
Many banks and non-banking finance companies (NBFCs) offer housing loans, so you have a wide range of lenders from which to choose. You can go through lender websites or check various websites that let you compare home loan offers. Thorough research can help you find the lowest home loan rates. When comparing lenders, pay attention to other expenses like processing fees and legal and technical charges, as these also raise your overall loan cost.
Keep a lookout for special deals.
Often lenders come out with special rates for a small window or a select group of borrowers. If you are planning on taking a loan, keep an eye on these deals that can help you avail of a loan at a lower rate. In some cases, banks may offer special interest rates for women or employees of a particular sector or organisation. If you work for an organisation, they may have a special arrangement with a lender to offer a lower house loan interest rate. You can take advantage of these special arrangements to reduce your interest rate.
A home loan balance transfer can help.
If you have a running home loan and feel that your current lender is charging a higher rate, you can consider the balance transfer option. In this option, the new lender takes over the unpaid part of your housing loan, and your loan with the current lender is closed. Instead of paying EMIs to the existing lender, you pay them to the new lender. A balance transfer makes sense in the initial years of your loan. Though a balance can help you reduce your loan interest rate, it may involve some costs. Consider all the expenses you may incur and compare them with the savings you will make due to the lower interest rate.
Focus on your credit score.
Lenders look at your credit score before they sanction a loan. When you apply for a housing loan, the lenders seek your credit report from the credit rating agency. This is the first step in your loan application assessment; a low score could lead to an outright rejection, or you would have to borrow at high rates. A high score indicates a good credit history and a low-risk assessment; hence, lenders are willing to offer house loan interest rates.
Pay more as a down payment.
Another way to reduce your housing loan interest rate is to make a larger downpayment. When you apply for a loan, the lender offers a proportion of the house’s value as a loan. The remaining part you pay from your savings, which is known as the downpayment. A larger downpayment reduces the lender’s risk; hence, the lender is willing to sanction a loan at a lower rate. Paying more as a downpayment also reduces your EMIs; however, it could reduce your liquidity. Consider this aspect before you make a decision.
Negotiate with the lender.
Apart from all the above tips, pure negotiation with the lender can also get you lower rates. Even a minor reduction in the rates can help you reduce your EMIs, and the overall loan cost considerably, as housing loans usually run in the lakhs and last for almost 15 to 25 years. Meeting the eligibility requirements, having a good credit score, and having a lower debt-to-income ratio are all factors that can help you negotiate a lower interest rate. If you already have a relationship with the lender, you can get a better rate. You can use your negotiation skills to get a better deal.
Increase your EMI annually.
In floating-rate housing loans, banks offer you the option to increase your EMI. As your annual income grows, you can afford to pay a higher EMI without burdening yourself. You can increase the EMI by 5 to 7% yearly; this will allow you to repay your loan faster and lower your overall interest burden. Check with your lender to explore this option.
Conclusion
Housing loans help you fulfil your dream of owning your own home. A few simple tips can help you reduce your house loan interest rate or the overall interest on the loan. Be a well-informed borrower, find the best home loan deal after careful research, and enjoy your new home.