A home loan provides a pathway to realizing your homeownership aspirations, yet the surge in real estate prices elevates loan amounts, resulting in higher interest rates. However, there are strategic approaches to diminishing your interest rate and overall interest expenditure throughout the loan term. Despite not being widely disclosed by banks, these proactive measures offer practical ways to alleviate the financial impact of interest payments on your home loan.The extended duration of repaying a home loan poses challenges, particularly during unforeseen crisis, as monthly installments can strain your budget for an extended period. Nonetheless, adhering to these insightful tips can contribute to significant savings on interest payments. Explore the following recommendations for optimizing your home loan expenses and fostering a more financially sustainable future.
Here are some tips to save interest on home loan:
Improve your credit score
A crucial factor influencing the interest rate on your home loan is your credit score, a metric closely evaluated by banks and lenders. A higher credit score typically translates to a lower interest rate. Therefore, maintaining a favorable credit score is imperative for borrowers. To enhance your credit score, it’s essential to prioritize timely bill payments, maintain a low credit utilization ratio, avoid applying for multiple loans simultaneously, and refrain from opening an excessive number of loan accounts. An effective pro tip for rapidly boosting your credit score is to obtain a credit card and use it for transactions, ensuring timely payments. This method can lead to a remarkable improvement in your credit score within a relatively short time frame.Negotiate with your lender
In the realm of negotiations, Indians have a reputation for adeptness, but a significant number of home loan borrowers overlook the potential benefits of negotiating for a more favorable interest rate with their preferred lender. If you possess a strong credit score, a stable income, and a positive repayment history, leveraging these factors can empower you to negotiate confidently with the bank. Establishing and maintaining a positive relationship with the bank is a wise approach, and having a long-standing account can serve as a solid foundation for negotiating improved terms.Make prepayments
One of the most impactful strategies to minimize the interest on your home loan is by increasing the monthly EMI installment, which consists of both principal and interest components. The principal represents the fixed amount of the loan issued, while interest is the charge for borrowing. Incrementally adding extra funds to the principal amount each month can result in substantial savings in total interest over the loan tenure. This approach not only decreases the loan amount but also lowers the monthly interest payment, as interest is calculated on the remaining loan balance.To maximize the benefits of this strategy, it is advisable to initiate prepayments early in the loan tenure rather than midway or towards the end. This proactive approach can significantly enhance the overall cost savings throughout the loan duration.Just by adding an INR of Rs. 8000 per month to the principal payment every month in the loan of 1 Crore at an interest rate of 8.5 % per annum reduces the total interest payment by Rs. 40 Lakhs
Transfer your home loan
If you’ve initiated prepayments on your loan and find the existing payments to be on the higher side, exploring a home loan transfer to another bank or lender with a lower interest rate could be a viable option. Commonly known as a home loan transfer, this option is offered by most banks. However, before making the switch, it’s crucial to calculate associated costs, including processing fees and foreclosure charges. Additionally, a thorough comparison of interest rates, loan tenure, and other terms and conditions is advised.Exercise caution when considering a home loan transfer, as missed payments on such loans may incur higher penalties. This option should be chosen judiciously and executed only when there are limited alternatives to reduce the overall interest amount.Make a higher down payment
A down payment is a significant upfront amount that a buyer contributes toward the purchase of a home or other assets. This sum plays a crucial role in determining the interest rate applied to the remaining balance. Typically, banks and financial institutions provide financing for 75% to 90% of the total property value, with the buyer responsible for covering the remaining 10% to 25% of the property cost. Opting for a higher down payment translates to borrowing a lesser amount, leading to a naturally lower interest rate and reduced monthly EMIs.Choose a shorter loan tenure
The loan tenure denotes the duration within which you repay your home loan. Opting for a longer loan tenure results in lower monthly EMIs, but it also leads to higher cumulative interest payments over the repayment period. Your choice of loan tenure should align with your budget and other financial commitments. To identify the optimal tenure for your home loan, consider utilizing tools like EMI calculators that help assess the most suitable repayment period based on your financial circumstances.
FAQs:
Certainly, if you possess a favorable credit score and an established relationship with the bank, it is advisable to engage in negotiations with the lender. Utilize the credibility you have cultivated over time to potentially secure a reduction in the interest rate.
Yes, interest rates affect your mortgage loan because as the interest rate increases you will be paying more in interest accrual which can lead to growing debt if you are unable to pay down the principal and interest in full in each month.
It depends on the interest rate charged by the Reserve Bank of India (RBI) to the banks while lending money which is called the Repo rate. Banks charge an additional rate on this Repo rate to arrive at the home loan interest rate.
Banks usually charge interest in three different ways – daily reducing, monthly reducing and annually reducing. Usually banks use the daily reducing method for home loans, while some housing financing institutions use the monthly method. Under the daily reducing method, the principal reduces on the day you pay EMI.
