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Tips to Reduce Your Home loan Interest Rate

Updated: Mar 22, 2022
tips to reduce your home loan interest rate

Planning to buy a house but afraid of hefty home loan interest rate? Wondering how to reduce the home loan rate of interest? No need to worry anymore. Continue reading to learn the tips and tricks for your home loan reducing interest rate.

Building a house is an ambition for many people. But only a few of them are able to make wise financial decisions. Generally, people need to take a home loan to make their dream home a reality. A carefully planned loan makes your life easier, even if you have sufficient funds to buy a house without a loan.

In home loans, the interest cost constitutes a significant part of the home loan EMI. And depending on the home loan tenure, the longer it is, the share of interest cost in total repayments can shoot over 50%. This significantly increases the homeownership cost and hurts the financials of the borrower.

However, planning your EMIs can help you to reduce the total interest and homeownership cost. The following are some of the tips on how to reduce home loan interest rate.

10 Tips on How to Reduce Home Loan Interest Rate

Go for shorter loan tenure:

Longer tenure in a home loan means you will end up paying a lot more in interest cost. Using the home loan EMI calculator, you can check the EMIs for different loan tenures and the difference in interest cost between two tenure.

For example, on a home loan of Rs 30 lakh at 7.99% annual interest, the EMI for 15 years tenure is Rs 28,652, whereas, EMI for 18 years tenure is Rs 26,231. The difference in the total interest amount is Rs 5,08,432.

Therefore, choosing a shorter tenure may increase the EMI amount, but will be inexpensive in the long term.

Negotiate hard with the lender:

If you fulfill all the eligibility criteria with a good margin and have provided all the necessary documents, negotiate with the lender to lower the interest cost. Financial institutions generally offer lower interest rates to borrowers with good CIBIL score, low or zero existing EMIs, and stable income sources. A small difference in interest percentage can result in huge savings in the long term.

For example, compared with the above-mentioned example, at a 7.49% rate of interest for 15 years tenure, the total interest cost comes at Rs 20,02,797, a saving of over Rs 1.5 lakh during the loan tenure.

Pay more in down payment:

A higher down payment is one of the effective ways to get a low home loan interest rate. Most lenders generally ask for a minimum down payment of 10%-20% of the value of house property. This ensures the borrower has some stake in the property, which reduces the credit risk for the lender. This percentage could be higher, depending on the eligibility of the borrower.

However, making a larger down payment is an indicator of good financial position, and reduces the quantum of the loan needed from the lender, thereby enabling you to get a lower interest rate.

Make regular prepayment:

If the home loan is taken under a floating interest rate structure, there is no prepayment penalty involved, as per RBI guidelines. Making regular part-payments in small amounts substantially brings down the principal amount and reduces your overall interest outgo. At Grihashakti, all home loans are provided at floating rates of interest.

For fixed-rate home loans, you may need to incur some prepayment penalty and you should check out with the lender for fees and whether they provide such options.

Revise EMI payout every year:

Consider increasing your EMI payouts every year. In home loan repayments, you get the flexibility to shorten the loan tenure by increasing the EMI payouts, which reduces your interest expenses substantially.

For example, increasing your EMI amount as per the increase in salary percentage or when you have switched your job for a higher salary can help with the cause.

Opt for a home loan balance transfer:

Home loan balance transfer is also known as home loan refinancing, where you refinance your outstanding home loan amount with another lender at a lower interest rate and easy terms. The process is very similar to applying for a new home loan with another lender.

However, it should be your last option, only after exhausting all other options. Before going for home loan refinancing, calculate the total interest savings and check out with your existing lender, whether they allow such options.

Improve your Eligibility:

High credit scores, a stable income source, and an excellent repayment capacity (monthly income minus existing EMIs / obligations) can help negotiate better interest rates. Use our home loan eligibility calculator to get an estimate of the maximum amount you may be able to borrow. If you need more funds, you can add a close family member with a good credit score and income as a co-applicant, thereby improving your repayment capacity. Also, pay off any outstanding debts to the extent possible, so that your monthly obligations are less than 30% of your income. If you have a low credit score, take steps to improve it before applying for a home loan.

Look for better deals and offer:

Lenders generally offer attractive terms on home loans to existing customers with a high CIBIL score (preferably above 750). Therefore, if you have a good working relationship with your lender, you can ask for better rates. Also, check on the offers rolled out by the government and financial institutions in the home loan segment for first time home buyers.

Maintain a Great Credit score

Your CIBIL score reflects how responsible you are while dealing with borrowed money. CIBIL scores vary from 300 to 900. The higher the score, the better it is considered. A good CIBIL score would be 750 and above because that is an essential score that enables you to get your loan sanctioned. If your CIBIL score is below 750, the bank may outrightly decline your loan application or extend the loan at a higher interest rate. Therefore, you should maintain a CIBIL score of 750 and above, as nearer as possible to 900.

Achieving a decent CIBIL score exhibits good financial well-being and habits, thus improving the probability of getting an affordable loan sanction on flexible terms. With a good CIBIL score, the banks/ financial institutions can assess your creditworthiness and capability to repay the borrowed loan timely.

Opt For A Floating Interest Rate

A floating interest rate rises and falls with the market or other benchmark interest rates, unlikely the fixed interest rate. It is generally 1 or 2% lower than fixed interest rates offered by the same lender since it is directly dependent on the market.

It is also a reason why it attracts some people since lower interest means increased savings every month. Sometimes you may face a situation where the floating interest rates exceed the fixed rate, but you need not panic since such conditions are only for a short duration and will not affect the entire loan tenure.

Wrapping up

By following the above tips on how to reduce the home loan EMI burden, you can significantly reduce your interest cost and repay your home loan earlier.

However, before applying for a home loan, compare interest rates and fees & charges, reviews, and other aspects of different lenders. And, explore all the tax deduction provisions under Income Tax Act 1961 and consider co-applying for the home loan to get maximum benefits through tax deductions, while repaying the home loan.

Make sure, your every step towards reducing your home loan interest rate should not impact your CIBIL score or hurt financial stability.

Must Read : How to Get a Home Loan at the Lowest Interest Rates?

*Terms and Conditions apply. Loans are disbursed at the discretion of Fullerton Grihashakti.

Fullerton India Home Finance Company Ltd
CIN number: U65922TN2010PLC076972

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