Home loan is a significant liability that lingers on for anytime between five and thirty years. Proper planning is vital for seamless, stress-free repayments. However, borrowers often overlook some basic factors while availing of a home loan and hence, pay higher interest rates than they should.
This article enlists the five best tips you need to make your home loan interest rates less burdensome while streamlining the repayments.
5 Best Tips to Lower Your Home Loan Interest Rates
Here is what you can do to make home loan interest rates less burdensome.
- Use a Home Loan EMI Calculator
Quite often, borrowers choose a loan amount by looking at their net income rather than the repayment capability. For instance, if you avail of a loan whose EMI consumes 50% of your net monthly income, you might need to curtail costs from other important areas. And if inflation goes against you, you may face difficulty managing the repayments.
A home loan EMI calculator not only makes repayments easy but also lets you understand the impact of the interest rate on your monthly budget. You may change the interest rate, tenure, or loan amount to analyse your net liability every month and make the right decision.
The following sections throw more light on how to handle the individual elements like tenure or loan amount to reduce the housing loan interest rates.
- Decrease the Loan Term
The loan term and EMI share an inverse relationship. So, if you reduce the loan term, the EMI will increase, and vice versa. But, while opting for an extended term might lower your EMI, it comes at the cost of a higher interest rate. Since an extended term also enhances the risks, lenders increase the interest rate to minimise the credit risks.
Consider whether you really need the amount you are planning to borrow or if it would be enough if you take a smaller loan. You can also opt for an extended term which will reduce your EMI, but increase the interest over the years.
A loan term is the duration for which you have obtained the loan. Reducing the loan term enhances your EMI and vice versa. Few people understand this relationship between the loan term and EMI, apart from just increasing or decreasing it. Because, EMI increases and decreases with respect to the loan term.
Hence, a wise way to reduce home loan interest rates is by shortening the loan term. While this might add a few numbers to the EMI, it will offer you much-needed relief from paying high interest rates.
- Prepay If You Can
Prepaying is another good option to lower your home loan interest rates. During the early part of the repayment period, the lender collects the interest amount more than the principal. And repaying a part of the principal early might decrease the overall interest rate.
Prepaying your mortgage loan is a good option if you can manage to do it, especially if you have very high interest rate. Prepayments are the amount of money you pay during the early part of the repayment period, with the result that less money will be spent on interest payments and more on the principal.
Also, unlike fixed-rate loans, lenders do not levy any prepayment penalty on floating-rate loans. So, you can utilise this feature to lower your interest rate for free.
- Transfer Your Balance to Another Lender
Some borrowers often treat home loan balance transfer as a last resort to reduce their home loan interest rates. You can change your lender anytime you want, provided you have understood the implications. When you change your lender, you have to pay some account closure fee and processing fee. A high processing fee may nullify the gains made from lower interest rates.
- Increase the Downpayment Amount
When you avail of a home loan, the lender requests you to make a downpayment of 10% of the total loan value. However, if you make a higher downpayment, the interest rate will come down. Hence, making a higher downpayment is an excellent way to reduce your home loan interest rates.
Spend some time evaluating the factors mentioned above before applying for a home loan. You can easily lower your home loan interest rates by being a bit more careful and taking the necessary steps.
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