Most of the existing housing loan borrowers get so busy with their day-to-day lives that as soon as repayment starts, they forget to check how their EMI has been changing. In the past 10-12 years, there have been changes in the way banks charge interest on housing loans. For instance, before July 1, 2010, all loans were linked to the Benchmark Prime Lending Rate (BPLR). They were then linked to the base rate.
After April 1, 2016, floating-rate bank loans were linked to the Marginal Cost of Funds Based Lending Rate (MCLR). This was altered and changed to External Benchmark Rate (EBR) on October 1, 2019. Even though all interest rate regimes ideally must charge the same housing loan interest rate, in reality, this does not happen. If you switch your loan to an EBR-linked loan, there are chances that your housing loan interest rate may drop and so would your EMI.
How to Reduce Your Housing Loan Interest Rate
A housing loan is one of the biggest liabilities one takes on during a lifetime. It is also the loan that has the longest tenor. Owing to this, most of those on a home loan look out for ways to reduce their housing loan interest rate. Here are five simple ways home loan borrowers can reduce their EMI.
Opt for a Shorter Loan Tenor
The loan tenor is one of the deciding factors for the interest. Though longer tenors of about 25 to 30 years lower the monthly installment amount, shorter tenors, for instance, 10 to 15 years, bring down the amount of interest payable. You can check how the interest gets reduced for loans with shorter tenors with the help of a housing loan calculator. So, before you sign up for a loan, choose the tenor wisely so that you do not end up paying higher interests against the housing loan.
Prepayments Are a Good Option Too
Lenders do not charge loan foreclosure or prepayment charges on floating rate loans. If you have availed of a housing loan, try making prepayments because during the first few years of your loan, you pay more toward the interest than the principal amount. Making prepayments will bring down the principal amount, reducing the interest. However, you must keep in mind that lenders often charge a certain percentage as prepayment charges on fixed-rate loan prepayments. Check with your bank/lender to know prepayment charges.
Do Housing Loan Rate Comparison Before Choosing to Go with Any Specific Bank
It is necessary that you do proper research on loan products and compare rates before deciding on a particular bank, product, or lender. Many third-party websites offer a clearer picture of the rates and charges levied by various lenders. So, it is best you compare the housing loan interest rate for various banks first and then decide on a particular housing loan product or a bank.
Opt for Housing Loan Balance Transfer as the Last Resort
A balance transfer is possible only when you have started prepayments against the existing loan. If you think that the loan interest charged by the current lender is higher, you can choose to transfer the principal amount (that is remaining) to another lender or bank that is offering a lower interest rate. A balance transfer, however, is the last resort. In case of missed payments on any balance transfer-based loans, there will be high penalties.
Try to Go for Maximum Down Payment
Most financial institutions, including banks, finance 75% to 90% of the total value of the property. You are required to contribute 10% to 25% of the remaining cost of the property. Instead of paying the lowest amount possible, contribute more as down payment. The higher the amount you pay upfront, the lower will be the loan amount. This will directly reduce the housing loan interest rate.
If owing to medical emergencies, accidents, or other needs, you need money urgently, experts suggest that instead of taking a personal loan or loan against fixed deposits, mutual funds, or maxing out a credit card, opt for a top-up loan on your existing housing loan. A top-up loan means the bank will add an amount to your existing housing loan. However, know that most banks offer this facility only to existing customers, and as a bank customer, you must be maintaining regular payment records besides having a decent credit score to avail of a top-up loan.
The Final Word
Banks and other financial institutions conduct an end-to-end process to determine the eligibility of an applicant for a housing loan. The maximum eligible amount and interest rates are determined by the bank/lender based on the applicant’s profile that includes employment type, income, credit score, and so on. The home loan eligibility criteria in India can be increased by:
- Adding co-applicants
- Maintaining a credit score above 750
- Repaying debts religiously
- Starting an account with a preferred lender
- Declaring additional income sources
So, play smart and choose the right product, the most appropriate lender, and follow the above mentioned tips to reduce your housing loan interest rate.