Highlights:
- Types of Home Loan Interest Rates and How to Lower Them
The interest rate offered on a loan determines its affordability. Lenders offer high-interest rate loans to high-risk individuals. Under this category fall borrowers whose past repayment behaviour has been questionable and whose current credit score is below 700. A high rate of interest on Home Loans not only leads to high EMIs but also increases the total cost of borrowing by increasing the total interest pay-out. A low-interest-rate housing loan, on the other hand, not only helps one keep EMIs affordable but also reduces the total interest pay-out on the loan. Borrowers are, therefore, advised to negotiate with their lender for the lowest Home Loan interest rate they can get.
The rate of interest offered on a house loan depends on several different factors. However, before we attempt to understand these factors and their impact on Home Loan interest rates, let us look at the type of interest rates offered in India.
Types of Home Loan Interest Rates and How to Lower Them
Borrowers primarily offer two different types of Home Loan interest rates: fixed and floating. In the case of fixed-rate Home Loans, the rate of interest applicable on the loan, and therefore a borrower's EMIs, remain the same through the tenor of the loan. In the case of floating-rate Home Loans, the rate of interest and therefore, one's Home Loan EMIs vary depending on external economic conditions. A third type of interest rate is also offered by some lenders: hybrid-rate Home Loans. When one avails of this type of rate of interest, they pay loan EMIs on a flat, fixed rate of interest during the first few years of the loan, post which the rate of interest changes to the floating type.
In our next section, we discuss with our readers simple tips on what they can do to reduce their Home Loan interest rate.
1. Shop for Interest Rates and Learn to Haggle
When borrowers decide to become homeowners, they are almost always in a hurry to legalize their purchase. Thus, they often accept the first offer that a lender makes. Borrowers should refrain from making this mistake - they must arm themselves with information and negotiate with each lender for a better interest rate. Use offers from other lenders to negotiate for a better interest rate from your preferred lender.
2. Maintain a Good Credit Score
An individual's credit score also determines the interest rate they will be offered. Borrowers whose credit score is above 750 are seen as low-risk borrowers and get offered the lowest interest rate by lenders. Therefore, if you are planning to apply for a Home Loan soon, make sure your credit score is at least 750 or above. This will help you reduce the Home Loan interest rate you are getting.
3. Make a High Down Payment
Lenders sanction anywhere between 75% to 90% of a property's value as a loan. When borrowers make a higher down payment, they reduce the loan size and therefore, the total interest payout on the loan. Further, making a big down payment reduces the risk involved for the lender in lending money and therefore, when a borrower makes a sizeable down payment, the lender also offers them a lower interest rate, to begin with.
4. Opt for a Short-Tenor Loan
The risk involved for the lender in the case of long-tenor loans is much higher than in the case of short-tenor loans. Therefore, lenders offer their best Home Loan interest rates on short-tenor loans. Further, when borrowers opt for a short tenor, the total interest payout automatically decreases, which also reduces the effective rate of interest.
5. Home Loan Balance Transfer
One of the best ways to reduce one's Home Loan interest rate is to opt for a Home Loan balance transfer. A Home Loan balance transfer is the facility using which borrowers can transfer their Home Loan to another lender offering lower interest rates and other better loan terms and conditions.
Borrowers on floating interest rates can choose to close their loan at any time without paying any additional fee. However, a Home Loan balance transfer involves a Home Loan balance transfer fee, which is charged as a percentage of the total loan amount. Borrowers must opt for a Home Loan balance transfer only if the reduced interest rate is low enough to help them cover the Home Loan balance transfer fee alongside helping them save money by way of reduced interest outgo in the long run. Home Loan balance transfer should be opted for when there is at least a 50 bps difference in the new and old interest rate and when the borrower is still in the early years of loan repayment.
People Also Read: A Quick Guide to Securing a Better Interest on Home Loans
Final Words
The rate of interest on a Home Loan is one of the key factors that will determine how easy or difficult it will be for you to repay the loan: a low Home Loan interest rate will make it possible for you to repay your loan in a comfortable and stress-free manner. A high Home Loan interest rate, on the other hand, might make Home Loan repayment a burdensome task for you. If you are planning to avail of a Home Loan, use the tips shared in this article to secure yourself a low-interest rate Home Loan.
