How to Reduce Home Loan Interest?

A home loan is a long-term financial commitment. Once you get the loan sanctioned, you have to keep making payments for many years. Therefore, even a small difference in the interest rate can result in considerable savings over the term of the loan. 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 as well as the various factors impacting interest rates. Read along!

Understanding Home Loan Interest Rate

First, let’s learn how home loan interest works. Interest is the cost charged by a lender for a loan. The interest varies from one lender to another. The interest rate is also different for different borrowers depending on their repayment capacity and credit repayment behaviour. 

The payment of interest is spread through the tenure of the loan. Each instalment (EMI) of a loan repayment contains a principal and interest part, which changes over time. There are two types of interest charged on home loans- 1) Fixed interest rate, where the pre-decided rate remains unchanged through the tenure and 2) Floating interest rate, which changes with the market.  

For borrowers, the interest rate is the most important factor determining home loan costs due to the long tenure (in decades) and high loan amount (in tens of lakhs of rupees) involved. By the time you repay your loan, you may end up paying more than the principal amount in interest. That is why you need to learn how to save interest on a home loan.

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 from time to time. In addition, there are different factors that determine the interest rate that 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. Repo rate is the benchmark rate of India’s central bank at which it lends money to commercial banks. When the repo rate increases or decreases, banks change the interest rates for home loans to pass 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 affects the interest rate as well. Longer tenures result in higher interest rates as they increase the lender’s risk and vice versa. 
• Type of Interest Rate: Floating interest rate changes every time there’s a change in RBI’s repo rate. Fixed interest rates remain the same through a loan’s tenure. 
• Employment Stability and Income: Lenders prefer loan applicants who have 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 before, lenders consider the credit score a crucial factor for home loan interest rates. When you have a high credit score, you prove yourself 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, which will also lower your interest outgo. 

It’s important that you 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. 

•  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 lower interest rates, longer tenure, or better services. 

Before opting for this facility, take into consideration 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 come with various benefits, including flexibility and lower costs over time. 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

If you pay a higher EMI, your loan is repaid faster, lowering the lender’s risks. This not only reduces your overall interest payment but also 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 choose to pay a higher down payment, which lowers the lender’s risks as it proves your financial stability. This allows you to avail 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, which will elevate your credit score and make you a more desirable borrower for lenders. Do ample research and compare the offers of different lenders to ensure that you get a good deal.