The rate of interest levied by the lender on a home loan has a direct impact on the EMI.
Home Loan
For many Indians, buying a new home is one of their biggest dreams. If you dream of being a homeowner and aspire to purchase a home you can call your own, you can make your dreams come true by applying for a home loan. Today, many NBFCs (non-banking financial companies) and HFCs (housing finance companies) offer home loans at competitive interest rates and with favourable terms and conditions to suit your specific needs.
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Although getting a loan from home loan companies has become easier than ever before, it is still a big financial decision and a commitment for years. So, it is paramount that you understand the different aspects of a home loan well, especially about the home loan interest rates.
The interest levied by the lender on your home loan directly impacts the EMI (equated monthly instalment). And, if the interest rate is high, managing the repayment can be quite challenging as you have to make monthly payments throughout the loan tenure, which could extend to 20 years or more.
So, in this guide, we discuss a few valuable tips on reducing the home loan interest burden to help you better manage your home loan repayment. Read on!
1. Improve your credit score
When you apply for a home loan, the lenders determine the interest rate based on their assessment of your repayment history and credit score. If you have never defaulted on any loan or credit card bill payments before and have maintained a high credit score of more than 750, the chances are high that you will get the loan sanctioned at a lower interest rate.
So, if you are wondering how to reduce the interest rate on a home loan, you must focus on maintaining a high credit score even before you approach any lender. You can do this by paying off all your outstanding dues and keeping the credit utilisation ratio to less than 50%.
2. Choose a shorter home loan tenure
As a home loan borrower, you must be prudent when choosing repayment tenure, as it plays a vital role in the interest rate levied by the lender. Generally, the longer the duration, the lower the EMI (equated monthly instalment). However, choosing the maximum repayment tenure, i.e., up to 30 years, also increases your interest payment tenure. This means your overall interest payment through the repayment tenure will be high.
In contrast, if you choose a shorter repayment period, your EMI will be high, but the overall interest you will pay will be much less. So, opting for a shorter repayment period is one of the most efficient and easiest ways to get the lowest home loan interest rates.
You can use the housing loan EMI calculator to better understand the difference in the interest rate and the overall EMI payments. The EMI calculator is a handy tool for knowing the exact EMI payable for the chosen tenure. So, make sure you use the tool to decide the right tenure to balance keeping the EMI affordable and reducing the interest burden.
3. Choose to pay a higher down payment than the minimum required amount
When discussing how to reduce house loan interest and how to reduce the interest rate on a home loan, the downpayment aspect must not be overlooked.
Generally, when you apply for a home loan, most lenders will fund only a certain percentage of the property’s value that you want to buy as a loan. While it varies from one lender to another, generally, lenders fund up to 80% of the property’s value. You must pay the balance amount from your pocket. This is called a down payment.
However, you should make a larger down payment than the minimum amount required to reduce EMI on a home loan. This will help you borrow less, and subsequently, you can manage the repayment better. Also, when you make a higher down payment, the lender may even provide a concession on the interest rate based on your strong financial standing.
4. Negotiate with the lender
Whether you are applying for a home loan for the first time or you have prior experience, don’t accept the loan offer you receive from the lender. Instead, you must try negotiating with the lender about the interest rate levied on the home loan.
Most lenders in India are always open to negotiating with their potential borrowers. If you have a good credit history and no major dues when you apply for a home loan, the lender may be willing to grant you a concession on the interest rate.
Even if you get a discount of 0.5% on the home loan interest, you can save significantly on the interest payments in the long run. So, use your strong financial situation, high credit score and clean repayment history to your advantage during the negotiation.
5. Transfer your loan to a new lender
If you are struggling to find a solution for your ‘how to reduce EMI of existing home loan’ problem, one of the simplest solutions is to opt for a home loan balance transfer. This essentially transfers your home loan from the existing lender to a new one that offers the loan at a lower interest rate and with better terms and conditions that are favourable to you.
Home loan balance transfer allows you to repay the loan at a lower interest rate, and your EMI will be more affordable for the balance period. However, it is better to opt for a balance transfer during the initial years of repayment when the maximum portion of your EMI goes towards interest payments.
Final Word
The rate of interest levied by the lender on a home loan has a direct impact on the EMI. So, use the above tips to reduce the home loan interest burden and manage your repayments better.
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