Buying a property is an expensive bet. Since most of us invest in real estate using home loans, the most critical factor is the interest rate. And understandably so, because home loan EMIs usually are the biggest monthly expenditure for a household. It is long-term and usually 10 years and beyond. So, even the smallest of differences in the interest rates offered by various banks and financial institutions can significantly reduce EMIs in the long run.
One thing to be kept in mind is that the home loan offered by a lender is based on the property valuation of the apartment you wish to buy and not the house price you are getting at. So, choose the loan amount wisely and the lender, even wiser.
Choosing the right lender is the first step on your mind. Subsequently looking out for ways to reduce the burden of the home loan, is crucial. Interest rate is one of the primary concerns when finalizing a home loan. Since 2020, due to the ongoing epidemic of Covid-19, the banks and financial institutions are offering attractive housing & mortgage loans.
Let us run through a few pointers on how you may reduce home interest rates on your loans.
Top 6 Tips to Reduce Interest Rate
- Shorter Home Loan Duration
This is the best means to reduce interest pay-out. This will certainly ensure that your principal amount is paid off much earlier. However, you must keep in mind that going for a shorter duration will increase the EMI amount. Since the interest rates are calculated on the principal amount, early payment of the principal amount will marginally reduce absolute interest to be paid as well.
Since setting up the housing loan duration is a one-time activity, you must be prepared to pay thick EMIs from the first month itself. Plan your monthly pay-outs and accordingly opt for this option.
- Pay Extra EMIs
This is tough, but paying extra EMIs along with your regular EMIs may help you clear your loan earlier than you expected. Paying an extra amount with EMIs will also help in the reduction of your principal amount and thus the interest in turn.
- Pay Off Extra Annually
You can save some amount for part payment of your home loan every year. This annual payment gives you the comfort to pay off a lump-sum amount against your outstanding loan. Thereby, the principal amount is reduced and so also the interest on your loan.
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- Check Prevailing Interest Rates
A smart move could be to keep an eye on the interest rates prevailing in the market. Apart from your current lender, you may check lending rates of other banks or financial institutions; you might land up with one offering you lower mortgage rates.
Here is where you may switch your lender. But before making the switch, you must check on all the terms & conditions attached with it. However, before switching to another lender, you must check all the terms and conditions attached to it. Here what you consider is that the savings accrued from a lower rate of interest are not lower than the cost of switching to a housing loan provider, with a lower interest rate.
- Shift to Marginal Cost of Funds Based Lending Rate
All banks shifted to MCLR or marginal cost of funds based lending rate from base rate since May 2016. This a welcome step for loan borrowers who stand to benefit from any change in home loan interest rate.
- If NBFCs is your lender, go for a lower rate
If you have taken a loan from housing finance companies (HFCs) or non-banking financial companies (NBFCs), you have the option to reset your interest rate by paying a conversion fee. NBFCs and HFCs do not change the base rate, they change the spread. For instance, a lender with a base rate of 15 percent and a spread of -5%, would allow you to change your spread to -6%. This would result in a reduced rate of 9% [15 + (-6)]. Note that the conversion fee varies from lender to lender.
Conclusion
Monthly EMIs are a regular expenditure that you end up paying for years. While applying for any loan, please make sure you zero in on a loan that matches your monthly budget. If you follow the above-said smart tips, even a small difference in the interest rates offered would help you save on a few bucks every month.