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Owning a home is a significant milestone, but the financial commitment involved can be overwhelming. One of the biggest challenges homeowners face is managing the home loan interest rate. This directly impacts the monthly EMI and the total amount payable over the loan tenure.
Reducing your home loan interest rate can save you a substantial amount of money and ease your financial burden. This article explores practical tips to help you achieve a lower rate of interest on home loan and manage your repayments more effectively.
Before attempting to reduce your home loan interest rate, it’s important to understand your loan’s structure. This includes the type of interest rate, tenure, principal amount, and repayment schedule.
Fixed vs Floating Rate: Fixed interest rates remain constant throughout the tenure, providing predictable EMIs. Floating rates fluctuate based on market conditions, often starting lower but with the risk of increase.
Loan Tenure: The duration over which you repay the loan affects the interest paid. Longer tenures mean lower EMIs but higher total interest.
Principal Amount: The original loan amount borrowed; reducing this through prepayments lowers your effective interest.
EMI Components: EMIs consist of principal repayment and interest; initially, interest forms a larger portion.
Example:
Suppose you have a ₹30 Lakhs loan at 9% interest for 20 years on a floating rate. Understanding how your EMI changes with interest rate fluctuations can help you plan prepayments or balance transfers to reduce costs.
Your credit score plays a vital role in determining the interest rate offered by lenders. A higher credit score signals financial discipline and reduces perceived risk, leading to better rates.
Maintain a High Credit Score: Borrowers with scores above 750 are likely to get more competitive interest rates.
Clear Credit Dues on Time: Timely repayments build a positive credit history.
Avoid Multiple Credit Applications: Frequent credit inquiries can lower your score.
Keep Credit Utilisation Low: Using only a small portion of your available credit improves your score.
Example:
A borrower with a credit score of 780 may secure a home loan at 7.99%. However, someone with a score below 700 might face rates above 9%, increasing their overall cost.
Choosing a shorter home loan tenure can reduce the total interest paid, although it increases your monthly EMI.
Lower Total Interest: Shorter tenure means fewer interest payments over time.
Faster Debt-free Status: You clear your loan sooner, improving financial freedom.
Higher EMI Affordability: Ensure your income can support the increased monthly payment.
Example:
A 20-year loan at 9% interest may have an EMI of ₹17,995. Now, reducing the tenure to 15 years could increase the EMI to ₹23,000 while saving lakhs in interest.
A home loan balance transfer lets you shift your loan from your current lender to another lender who might be offering you a lower interest rate.
Lower Interest Rates: New lenders may offer better rates, reducing your EMI and total interest.
Better Loan Features: Opportunity to negotiate flexible repayment options.
Charges Involved: Processing fees and legal charges may apply; so check if your effective savings outweigh the costs or not.
Example:
If your current loan is at 10% and you find a lender offering 8.5%, transferring your balance can save you significant interest over the remaining tenure.
Regular prepayments reduce the outstanding principal, which lowers the interest burden and shortens loan tenure.
Partial Prepayments: Pay lump sums when you have surplus funds like bonuses or tax refunds.
Full Prepayment: Clearing the entire outstanding amount early saves maximum interest.
Increase EMIs: Instead of reducing tenure, you can increase the EMIs to pay off your debt faster.
Example:
Suppose Mr. Verma. with a ₹20 Lakhs home loan at 9% interest, made a prepayment of ₹14.2 Lakhs after 10 years. This helped him save over ₹7 Lakhs in interest and reduced the tenure by almost 10 years.
Linking your loan to an external benchmark like the Repo Linked Lending Rate (RLLR) or External Benchmark Lending Rate (EBLR) can help you benefit from market rate reductions.
Rates Adjust with Repo Rate: When RBI cuts the repo rate, your home loan interest decreases automatically.
Transparency: Benchmark-linked rates can be more transparent than older base rate systems.
Risk of Increase: Rates may rise if repo rates go up, so assess your risk appetite before choosing.
Example:
Moving from a Marginal Cost of Funds based Lending Rate (MCLR) loan to an RLLR loan after RBI cuts the repo rate can lower your EMI and total interest.
Refinancing means replacing your existing loan with a new loan at a lower interest rate.
Lower EMIs: Refinancing reduces monthly payments and interest burden.
Extended or shorter tenure: You can choose to extend tenure for lower EMIs or shorten it to save interest.
Costs involved: Processing fees and other charges may be applicable, so ensure that the savings outweigh the costs.
Example:
If you took a loan at 10% five years ago and current rates are 8%, refinancing can reduce your EMIs and total interest payable substantially.
Don’t hesitate to negotiate with your existing lender for a better interest rate.
Leverage Strong Repayment History: Lenders value reliable borrowers.
Use Banking Relationships: Salary accounts, fixed deposits, or other products can strengthen your case.
Request Rate Revision: Some lenders offer rate cuts to retain customers.
Example:
A borrower with a stable income and timely EMIs may negotiate a rate reduction from 9.5% to 8.75%, saving thousands monthly.
Maintaining a clean credit profile is essential not only for loan approval but also for securing lower interest rates.
Avoid Defaults: Never miss deadlines of EMI repayments or credit card bills.
Limit New Debt: Excessive borrowing can impact lender’s risk perception of your .
Regularly Check Credit Reports: Correct errors promptly to avoid negative any impact.
Example:
A borrower who consistently pays bills on time and maintains low debt levels is more likely to be offered a lower home interest rate.
Utilising a home loan EMI calculator helps you plan better and choose options that reduce your interest burden.
Compare Loan Terms: See how changes affect your EMI and total interest.
Plan Prepayments: Understand impact of lump sum payments on tenure and interest.
Budget Effectively: Helps in deciding affordable EMI and tenure.
Example:
Using an EMI calculator, you can compare a 20-year loan at 9% interest versus a 15-year loan at the same rate to make an informed decision.
Applying for a joint home loan with a co-borrower who has a strong credit profile can help you secure a better interest rate.
Combined Income: Higher repayment capacity may qualify you for lower rates.
Shared Responsibility: Debt could be easier to manage EMIs with two incomes.
Improved Eligibility: Lenders tend to view joint applications as less risky.
Example:
A couple applying jointly can leverage both incomes and credit scores to negotiate a lower rate of interest on home loan than an individual borrower.
Reducing your home loan interest rate requires a combination of smart financial planning, understanding your loan structure, and proactive management. By improving your credit score, opting for shorter tenures, making regular prepayments, and exploring refinancing or balance transfers, you can significantly lower your interest burden and achieve your dream of debt-free home ownership faster.
Yes, transferring your home loan balance to a lender offering a lower interest rate can reduce your EMIs and overall interest paid. However, consider transfer charges and processing fees before making a decision.
A high credit score signals financial responsibility to lenders, making you eligible for competitive interest rates. This directly lowers your EMI and total repayment amount, saving you money over the loan tenure.
Yes. A higher down payment reduces the loan amount, which lowers the interest payable and EMI. It also portrays you as a less risky borrower, increasing chances of getting a better interest rate.
Yes, shorter tenures mean fewer interest payments, significantly reducing the total interest outgo. However, this results in higher EMIs, so affordability must be considered.
Regularly review your home loan interest rate, especially when market rates change or your credit profile improves. Negotiating annually or when refinancing opportunities arise can help secure better rates.
Switching to a floating rate can offer lower initial rates and benefit from rate cuts in the market. However, it carries the risk of rate hikes, so assess your risk tolerance before making the switch.
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