6 Ways to Reduce Your Home Loan Interest_banner_WC
6 Ways to Reduce Your Home Loan Interest_WC
Home Loan interest rate is one of the key components that determine the affordability of your loan. Low Home Loan interest rates help to keep EMIs on the lower side and build an asset in a convenient and stress-free manner. In this article, we share with you some tips on how you can reduce your Home Loan interest rate. However, before we do that, let us understand the types of interest rates that lenders offer in India.
Types of Interest Rates Offered by Lenders in India
There are majorly two ways in which interest is offered in India – fixed and floating. Let us understand both of them.
1. Fixed Interest Rate
Under a fixed interest rate regime, the Home Loan interest rate offered to a borrower does not change with changing market conditions and stays constant throughout the tenor of the loan. The biggest advantage of opting for this type of interest rate is that it makes financial planning easy. Since a borrower knows their monthly EMI in advance, they can adjust their other expenses and monthly budget to accommodate the EMI amount each month.
2. Floating Interest Rates
Floating interest rates on Home Loans depend on external market conditions – when Home Loan interest rates go up, the applicable interest rate and in turn, the monthly EMIs, go up too. The opposite is also true - when Home Loan interest rates go down, your EMIs will reduce. Though floating interest rates make monthly budgeting slightly tricky, they are cheaper than fixed interest rates, which is a great advantage.
Among the two types of interest rates, you have the scope to negotiate the floating interest rate. Let us understand 6 ways in which we can bag the lowest interest rate, particularly when looking for a home finance.
People Also Read: Difference Between Fixed and Floating Interest Rates
Tips to Reduce Your Home Loan Interest Rate
1. Research for the best deals on Interest Rates
At a superficial level, you may talk with various lenders who may offer you a housing loan. You will definitely find one offering you the lowest interest rate. However, you cannot expect a huge difference in their offerings as most lenders base their rate of interest on factors like credit score which remain common. Choose to go with the lender offering the lowest interest rate as well as added benefits and facilities, such as low or nil prepayment charges, and flexible loan prepayment tenor.
2. Maintain a Good Credit Score
A good score establishes you as a creditworthy and reliable borrower. Further, a good credit score also gives individuals high negotiating power. Thus, those with a credit score above 750 get the best home loan deals on lowest interest rates. To maintain a good credit score, clear EMIs on time, pay all bills religiously, clear more than just the minimum due on your credit card and check your credit report for errors from time to time.
3. Make a Higher Down Payment
Under a Home Loan, lenders sanction anywhere between 80% to 90% of your home's value as a loan. The remaining amount has to be paid by the lender in the form of a down payment. Lenders do this to ensure borrowers have some stake in the property they are buying and therefore, will be committed to paying EMIs on time and clearing the loan as soon as possible. Borrowers can choose to make a higher down payment. If you increase the value of your down payment, not only will your principal amount decrease, leading to reduced interest outgo in the long run, but the lenders will also be willing to offer you a lower interest rate since the risk involved for them in lending you the money will decrease.
4. Make Prepayments Whenever Possible
If you are an individual borrower paying off a Home Loan on floating interest rates, know that you can make part-payments at any time at no additional costs. If you are an individual borrower paying off a loan at fixed interest rates, know you can make prepayments at any time of the loan tenor without paying any additional fee if you use your savings to pay off the loan. Thus, make prepayments whenever possible -- whenever you get a bonus, good commission on a sales deal, money from selling shares, etc. This will lower your total principal amount, the total interest outgo and therefore, the effective interest rate.
5. Increase Your EMIs With Time
You can also reduce the total interest outgo by increasing your EMIs in the initial years to match the increase in your income each year. This way, you may not reduce the interest rate but you will save on the interest amount.
6. Opt for Home Loan Balance Transfer
Lastly, if you think your current EMIs are becoming unaffordable for you, you can opt for a Home Loan Balance Transfer. A Home Loan Balance Transfer is a facility that allows borrowers to transfer their pending Home Loan from their current lender to another lender offering them lower interest rates and other benefits. Sometimes, Home Loan balance transfer involves a hefty fee and therefore, one must avail of this facility only after proper financial planning. Further, this option helps borrowers save maximum interest when availed of during the early years of the loan tenor.
People Also Read: Home Loan Balance Transfer Process
The interest rate on a Home Loan is a very important factor that affects Home Loan affordability in the long run. Follow the tips shared in this article to avail yourself of the lowest interest rates on your Home Loan.
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