Home loan rates continue to plummet in India, resulting from multiple factors like the current economic crises, subsequent repo rate cuts, etc. Financial institutions have thus reduced housing loan rates by as much as 200 basis points or 2% in the last year.
- RBI slashed the repo rate subsequently, bringing it down to 4% in May 2020, keeping in mind the current economic factors.
- Repo-linked home loans are directly influenced by this external benchmark. Therefore, lowering of repo rates also means reduced home loan interest rates.
Apart from these external factors altering the rate of interest on such loans, a borrower can also undertake certain measures to reduce accruing interest liabilities.
- Limit the repayment tenure of a home loan
While repayment tenure does not affect the interest rate of a loan per se; it can affect the total interest outgo. For instance, a borrower would have to pay increased interest in case of a 20-year home loan when compared to a loan with a 10-year tenure. Consider that the principal (Rs.45 lakh) and home loan interest rate (8%) is equal in both cases.
With that assumption, one can determine that for the 20-year loan tenure, the monthly EMIs would be Rs.37,640. Total home loan payment over the tenure would be Rs.45,33,484.
On the other hand, for a 10-year tenured loan, EMIs would be Rs.54,597. However, here, the total interest outgo would be limited to just Rs.20,51,719.
As is evident, shortening home loan tenure results in higher EMIs but lowers the overall interest liability significantly. Borrowers should thus know how to trim their home loan tenure effectively for optimal benefit.
- Always compare the available rates online
Comparison is essential when it comes to acquiring the most favourable home loan offers. Fortunately, the comparison is not an arduous process today due to the online availability of required information. Potential borrowers can acquire pertinent details regarding home loan interest rates online.
- As of November 20 2020, home loan interest rates in India range between 6.75% and 11% per annum.
Thus, depending on the lender you choose, the difference in interest can be more than 4%. It is a significant margin, especially for big-ticket credit options, such as housing loans.
- Take advantage of refinancing
Refinancing a home loan refers to switching one’s home loan provider mid-way through its repayment tenure. The most common reason to undertake a balance transfer is to avail better interest rate offers. Financial experts suggest that a balance transfer can be beneficial if the difference in interest rate between one’s current and the future lender is 40 bps or more, amounting to an interest rate difference at a minimum of 0.40%.
Even so, comprehending the home loan amortisation schedule is essential when planning for a home loan balance transfer. Keep in mind that a major portion of your loan’s interest outgo is recovered by lenders during the initial years of repayment. Thus, undertaking a balance transfer during the 18th year of a 20-year loan repayment tenure may not benefit the borrower much as compared to one undertaken in the 5th year.
- Make a higher down payment
The simplest way to reduce home loan interest liability is to opt for a higher down payment when financing a property purchase. Loan-to-value or LTV for housing loans can range anywhere from 75% to 90%, depending on the property price. Nevertheless, choosing to limit the loan principal by down paying a significant sum can benefit borrowers in two major ways.
Firstly, it lowers the monthly instalments associated with this form of credit. Secondly, it reduces the total interest outgo since the principal amount is lowered.
Borrowers with other suitable eligibility criteria can also negotiate for a better rate with such down payments.
- Negotiate with lenders
Suppose an individual decides to avail a home loan from a housing finance company with which he/she has an amicable relationship. In that case, the resulting home loan interest rates offered may be easily negotiable due to the lender’s acquaintance with his/her credit behaviour. Further, the key to getting a better home loan interest rate is to maintain a clean credit rating, without any history of defaults.
A CIBIL score of 750 or more also helps borrowers when it comes to negotiating with a financial institution. A high score is indicative of reliable creditworthiness, which is why lenders may agree to extend home loans at a negotiated rate, offering increased affordability.
Eligible applicants can also take advantage of pre-approved offers from reputed HFCs, expediting the loan application process to secure funds in minimum time. These offers are available on home loans, loans against property, and several other financial products. A borrower can check his/her pre-approved offer by submitting a few essential personal details.
- Prepay your loan to reduce principal outstanding
Home loan prepayment enables borrowers to reduce the principal outstanding effectively, thereby also bringing down interest liabilities. Individuals with floating-rate housing loans can further prepay without needing to worry about additional charges. However, a fixed rate borrower may need to pay a certain amount as prepayment charges.
At any rate, following the tips mentioned here should help reduce the interest accruing as per the applicable home loan interest rates significantly. Potential borrowers can utilise a home loan EMI calculator to assess the extent of difference that each of these tips can bring in to their overall cost of the loan.