How to Reduce Home Loan Interest?

A home loan is a long-term financial commitment. Once the loan is sanctioned, you must keep paying for many years. Therefore, even a small difference in the interest rate can result in considerable savings over the loan term. This will lower your debt burden, allowing you to easily manage your monthly expenses. 

But how can you get these benefits? Go through the following sections to understand how to reduce home loan interest rates and the various factors impacting interest rates. Read along!

How Are Home Loan Interest Rates Determined?

Every bank and housing finance company has its own range of interest rates for home loans, which changes occasionally. In addition, different factors determine the interest rate a lender will offer to a loan applicant. Understanding the factors given below will help you figure out how to reduce home loan interest payments: 

• Credit Score: The first and foremost thing a lender will check is your credit score. A credit score denotes your creditworthiness, a measure of how likely you are to repay your debt obligations. The higher your credit score, the higher the loan amount and the lower the interest rate you can avail. 
• Repo Rate: One of the primary factors determining the home loan interest rate is the repo rate of the Reserve Bank of India. The repo rate is the benchmark rate at which India’s central bank lends money to commercial banks. When the repo rate increases or decreases, banks change the interest rates for home loans to pass on their cost of borrowing to customers. 
• Loan-to-Value Ratio: LTV ratio is the percentage of the loan amount granted against the value of the property used as collateral. A larger LTV ratio increases the lender’s risks, which results in a higher interest rate. 
• Loan Tenure: The period over which you want to repay your loan also affects the interest rate. Longer tenures increase interest rates as they increase the lender’s risk and vice versa. 
• Type of Interest Rate: A floating interest rate changes every time RBI’s repo rate changes. Fixed interest rates remain the same throughout a loan’s tenure. 
• Employment Stability and Income: Lenders prefer loan applicants with stable employment and consistent income. Salaried professionals and government employees are considered to have stable employment. Your income must also be sufficient to cover all debt payments without affecting your finances.

How You Can Reduce Home Loan Interest Rate?

Learn how to reduce home loan interest rates by going through the tips below: 

• Improve Your Credit Score:

As mentioned, lenders consider the credit score a crucial factor for home loan interest rates. When you have a high credit score, you prove to be a responsible borrower who regularly repays debts on time. You can get a good credit score by lowering your credit utilisation, using different forms of credit and never missing repayments. 

However, some borrowers fail to improve their credit score before applying and opt for higher interest rates. This results in significant costs over time. If you have opted for high interest rates, you can renegotiate your terms once you have improved your credit score. 

•  Make Regular Prepayments

Prepayments allow you to lower your debt burden with small payments outside the regular repayment schedule. When you have surplus cash (from investments or bonuses from your employer), you can make prepayments to reduce your EMIs or tenure, lowering your interest outgo. 

You must know the right time to make such payments. The earlier you make prepayments, the more you reduce your expenses, as the interest component of an EMI is at its highest during the earlier periods of the tenure. Also, check the charges that you have to pay for each prepayment. Having a floating rate home loan helps as it carries zero prepayment charge. 

Calculate: Home Loan EMI Calculator

•  Opt for a Home Loan Balance Transfer

If you are wondering how to reduce the EMI of an existing home loan, a balance transfer is an easy solution. This facility allows you to transfer the outstanding balance of your existing home loan to a new lender. You can transfer your home loan to avail yourself of lower interest rates, longer tenure, or better services. 

Before opting for this facility, consider the different charges you have to pay for this facility, including processing fees, loan closure charges, etc. Opt for a balance transfer only when the savings you will get outweigh additional expenses.  

•  Switch Your Loan from Fixed to Floating

Floating interest rates have various benefits, including flexibility and lower costs. Moreover, no foreclosure or prepayment charges apply for floating-rate home loans. If you are stuck with a high fixed interest rate, you can either renegotiate with your current lender or opt for a balance transfer to switch to a floating rate. 

Switching is most beneficial when the market interest rates are falling or about to fall. Lenders also charge slightly lower (around 1%-2%) interest rates on floating-rate loans than fixed-rate loans. However, beware of rising interest rates, as they can suddenly increase your instalment costs. 

•  Revise Your Monthly Instalments

Paying a higher EMI means your loan is repaid faster, lowering the lender’s risks. This reduces your overall interest payment and allows you to get lower interest rates. Many lenders allow mortgage loan modifications, through which you can modify the terms of your existing home loan. 

You can renegotiate the terms of your loan with your lender to revise the EMI amount. Opt for this facility when you have leverage, such as when you get a salary hike, or your credit score increases. Note that not all lenders are open to renegotiations. 

•  Offer Higher Down Payments

Lenders require applicants to pay around 10%-20% of the property value as a down payment. However, you do not need to pay the minimum required amount. Instead, you can pay a higher down payment, which lowers the lender’s risks as it proves your financial stability. This allows you to avail yourself of a lower interest rate. 

Try to make a down payment as high as possible, as it will lead to more savings over time due to lowered interest rates. Rely on market-linked investments or save money over a long time to get the necessary funds for a substantial down payment. 

Conclusion

Knowing how to reduce home loan interest will allow you to save a considerable sum of money over time. By following the essential strategies detailed above, you can comfortably make repayments on time, elevating your credit score and making you a more desirable borrower for lenders. Do ample research and compare different lenders’ offers to ensure you get a good deal.