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5 Effective tips to reduce your home loan interest rate

5 Effective tips to reduce your home loan interest rate

A home loan is an efficient financial solution that helps many Indians achieve their goal of owning a home. However, its repayment includes an interest component, and a higher interest rate can make the loan seem unaffordable. Before availing of a home loan, borrowers must compare the offerings from various lenders. They must ask the representative how to reduce home loan interest so that the loan does not become a financial burden.

This article describes five effective tips for home loan interest rate reduction, the importance, and the benefits of doing so in making your EMI more manageable.

How to reduce your home loan interest rate?

Loan tenure directly impacts the size of the monthly installment and the affordability of the loan. It is the period over which you must return the amount you borrowed. While a longer tenure will reduce the EMI, it will increase the interest outgo. Similarly, a shorter tenure will increase the EMI but decrease the interest amount payable.

For example, if you apply for a loan of Rs. 50 lakh at 8% per annum for a tenure of 25 years, you will be liable to pay an EMI of Rs. 38,586. The total interest you will pay over the loan repayment period will be Rs. 63 lakhs. However, if the loan tenure is 15 years, you will pay an EMI of approximately Rs. 48,400, with a total interest amount of Rs. 34 lakh.

Thus, you must evaluate your financial condition based on your income and existing obligations before choosing a loan tenure. You must be comfortable with paying the EMI, and you must also save on interest expenses.

Pre-payment strategies to lower interest

Pre-payments and part pre-payments can significantly impact the overall interest component paid during the tenure of a home loan. So, use any spare cash, bonus, or savings to make lump sum payments. It instantly reduces the principal amount and the interest outgo of your loan EMI.

During the initial years of a home loan, a major portion of your EMI covers the interest, with only a small portion covering the principal. If you make pre-payments or part payments periodically, you can reduce the principal amount and loan tenure significantly, thereby saving on interest payments.

Banks do not charge a pre-payment fee on floating interest rate home loans, making them a more attractive option than fixed interest rate home loans. Always check with your lender before making a partial pre-payment or pre-payment to learn if you must incur any pre-payment charges.

Compare and negotiate interest rates online

Another effective tip for home loan interest rate reduction is to compare the interest rates different banks or financial institutions offer. Check the varying interest rates on third-party websites.

An online comparison of the home loan interest rates helps you understand how much you will be paying as interest and, accordingly, select the product that best fits your needs. A minute difference of 0.5% to 1% can also impact your interest expenses substantially over the loan tenure.

Many home loan borrowers forget to negotiate for a lower interest rate. If you have been a disciplined and trusted borrower, use your past credit score to negotiate for a lower interest rate with the existing lender. Banks and financial institutions give preference to loyal customers and are usually willing to re-evaluate the interest rates to keep their customers satisfied.

Home loan balance transfer explained

You can opt for the home loan balance transfer facility if you find a lender who offers a lower interest rate while you’re repaying a home loan sanctioned by a different lender. Home loan balance transfer refers to the process of transferring your existing home loan from one lender to another if their interest rate or loan terms are better. This step can help you enjoy significant savings on your monthly EMIs and overall interest payout.

Before opting for a home loan balance transfer, make sure you verify the transfer expenses that lenders levy. This includes pre-payment charges, processing charges, and hidden charges, if any. A cost-benefit evaluation comparing the savings from a lower interest rate against the transfer fees can help. The decision to transfer the balance is right if the rate of interest is 0.5% to 1% lower and the savings on interest are more than the transfer fees.

In a nutshell, balance transfer can help you manage your home loan repayments more efficiently.

Increase your EMI smartly

If you’re wondering how to reduce home loan interest, paying more EMI each month can help. It can reduce your home loan tenure and lower the overall interest expense.

You can increase the EMI when you receive an increment or switch jobs with a higher salary. The principal amount reduces significantly when you pay more towards your monthly installment. This results in decreasing your total interest due and increases your savings in the long run.

Suppose you’re granted a loan of Rs. 50 lakh at 7% per annum for 20 years. The EMI is estimated to be roughly Rs. 42,348, and the interest totals to Rs. 42 lakh over the loan tenure. In the scenario that you pay Rs. 5,000 more as EMI, you can clear the loan in 16 years and 8 months. Consequently, you pay a total interest of Rs. 35.5 lakh, resulting in substantial savings.

Additional tips to reduce home loan interest

Home loan interest rate reduction can cut down long-term costs significantly. Here are some more tips that can help.

  1. Improve credit score: A strong credit record of 750 or above helps you negotiate better rates. To increase your score, maintain timely payments, limit credit card usage, and avoid multiple loan inquiries.
  2. Consider applying for a joint home loan: A co-applicant with a stable income and good credit history can strengthen your loan application. Lenders often offer lower interest rates and higher eligibility for joint applicants.
  3. Check for festival or seasonal offers: Banks and financial institutions often introduce discounted interest rates, cashback deals, or zero processing fees during festivals. Watch out for such seasonal offers to help make your loan more affordable and financially rewarding.

Will home loan interest rates decrease?Will home loan interest rates decrease?

If you’re worried about how to reduce your home loan interest rate, follow the tips mentioned above to your advantage. The interest rate is a critical factor to consider while securing a home loan. Identifying a lender who offers a lower interest rate can help you save a lot of money over the loan repayment period.

Tata Capital offers customized home loan solutions to help you build your home without burdening your finances. Explore the competitive interest rates, starting at 7.75% p.a., and find the home loan product that suits you the best.

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FAQs

Will home loan interest rates decrease?

Inflation trends, RBI’s monetary policy, and market conditions influence home loan interest rates. Banks may reduce lending rates if inflation dips and the RBI cuts the repo rate. However, borrowers should monitor economic updates and inquire about the latest lender announcements for accurate rate change expectations.

Is RBI reducing the home loan interest rate?

The RBI doesn’t directly set home loan interest rates but influences them through the repo rate. When the RBI reduces the repo rate, banks often pass on the benefit to their customers by reducing home loan interest rates. This lowered interest rate makes borrowing more affordable for homebuyers.

How can I negotiate a lower interest rate?

You can negotiate a lower home loan interest rate by maintaining a strong credit score, indicating a stable income, and comparing multiple lender offers. Moreover, lenders offer better interest rates or lower processing fees to customers who have had a good repayment history and a long-term relationship with the lender.

What is the best time to refinance a home loan for lower interest rates?

The ideal time to refinance a home loan is when market interest rates drop at least 0.5% to 1% lower than your existing loan rate. Before opting for refinancing, you must complete the lock-in period and compare refinancing costs. This helps with potential savings and ensures that the option is financially beneficial.

Does credit score affect my home loan interest rate?

Yes, your credit score has a direct impact on your home loan interest rate. If you have a credit score of 750 or above, it indicates better creditworthiness, enabling you to negotiate lower rates. On the other hand, a poor score can either make loan approval difficult or result in higher interest rates.

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