Home Loan Interest Rate

5 Simple Tips to Reduce Your Home Loan Interest Rate

Homes are assets that last a lifetime and make a good investment option too. These investments are most often funded through a home loan. The rate of interest that you pay on a home loan is an important determinant of the total cost of the house.

It is simple: The higher the rate of interest, the more you end up paying towards your home.

So how can you reduce your home loan interest rate? We rounded up some of the best ways to do precisely that. Note that some of these tips work before you get an approval on the home loan.

Ensure you have a good credit score

There’s no lender on the market who doesn’t love a good borrower – the one who will pay back the loan satisfying all pre-determined terms and conditions. A lender can determine the worthiness of any borrower by looking at his/her credit scores.

A good credit score can be your avenue to better interest rates and more favourable terms on the loan. Lenders like SBI or the Bank of Baroda often give discounted interest rates for those with good credit scores.

Negotiate for better rates

Just as you scout around for good homes before finally deciding to buy one, it is good to scout around for home loans too.

If you are armed with a good credit score, you have the power to negotiate with lenders for better interest rates on your home loan.

What if you already have gone in for a home loan without any negotiation? Will you be stuck with a higher rate of interest for the rest of the loan period? No! It need not be the case as there are ways by which you can bring down your rate of interest.

Balance transfer

If you are servicing a loan with a high rate of interest and you are in the initial years of loan repayment, opting for a home loan balance transfer may make it worthwhile. The home loan balance transfer is an option by which your outstanding loan balance is transferred to another lender at a lesser rate of interest. There is a small fee charged on the balance transfer (often a percentage of the outstanding loan amount). So, it is good to conduct a cost-benefit analysis before taking this option.

Pre-pay your home loan

Prepaying is another option that you could use to bring down the rate of interest on your home loan.

By using the prepaying option, you pay back some amount against the principal amount of your loan. Exercising this option can go a long way in reducing the overall interest paid on your home loan.

Example: A home loan of Rs 50 Lakh with an interest rate of 9% and a 20-year tenure can be paid off within 9.3 years by making a prepayment of Rs 3 Lakh at the end of every 12th EMI while keeping the EMI constant. If the prepayment figure of Rs 3 Lakh feels too high, you could use your bonus or any onetime gain towards prepaying your home loan.

Increase the EMIs

Increasing your EMIs is another simple trick that works well to reduce your overall rate of interest. As your income/salary gets a raise every year, so should your EMI. A small increase of even 5% or 10% in the EMI every year means that you would have paid a lesser amount as interest through the term of your loan.

As home loans have long tenures, a huge chunk of the EMI goes towards interest payment. If financial circumstances allow you, then being debt-free earlier is always better!

4 Comments

  1. Great points! I like that the most important point has been mentioned at the top. One must analysis their credit score deeply before applying for a home loan. If not done with right metrics, there can be a lot of stress and problems in the future.

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