5 Tips on How to Reduce Interest on Home Loan Effectively

Paying off your home loan is one of the most significant financial commitments you'll ever make. It requires allocating a portion of your income every month toward EMIs, often for a tenure of up to 30 years. This long-term financial obligation can become challenging, especially during times of financial strain.
A lower interest rate on your home loan can significantly ease the burden of monthly payments and reduce the overall cost of the loan.
Read on to discover 5 effective tips on how to reduce interest on home loans.

1. Compare Multiple Lenders

To get a low-interest rate home loan, start by comparing interest rates from multiple lenders. This will help you to identify the rates best suited to your profile and financial circumstances.

Remember that the interest rate, while important, is not the only factor that contributes to the total loan cost. Be sure to get clarity on associated fees and charges, such as processing fees, late payment fees, and prepayment penalties.

Use an online EMI calculator provided by lenders to estimate your monthly repayments for different loan amounts, tenures, and interest rates (set by the lender).

If you have a strong credit score (ideally above 700) and a stable source of income, consider negotiating with lenders. Demonstrating creditworthiness and financial stability can often work in your favour.

2. Choose the Loan Tenure Wisely

Always choose a tenure that helps you strike the right balance between manageable EMIs and optimising overall interest costs.
Typically, shorter tenures reduce the lender’s risk and often come with lower interest rates. While they can help you save on interest costs paid over the loan’s life, they result in higher EMIs. On the other hand, longer tenures reduce monthly EMIs but can lead to higher interest costs.
For example, a loan amount of INR 10,00,000 with a 10% annual interest rate will have monthly EMIs of INR 9,650 for a tenure of 20 years. The total interest paid will be INR 13,16,052, making the total repayment INR 23,16,052.

For a 10-year tenure with the same loan amount and interest rate, the monthly EMI will be INR 13,215. The total interest paid will be INR 5,85,809, making the total repayment INR 15,85,809.

In addition to these calculations, consider your financial stability and career growth prospects when selecting a tenure. If you anticipate steady growth in your income, you may opt for a shorter tenure to save on interest costs while still maintaining manageable EMIs.

3. Enhance Your Credit Score

Lenders consider your credit score as a crucial factor when determining the home loan interest rate.  A good credit score will increase your chances of securing a loan with a low interest rate.

Therefore, maintaining a healthy credit score is essential when strategising how to get a low-interest home loan. Here are some tips to boost your credit score:

• Avoid applying for multiple loans simultaneously, as it may indicate financial instability.
• Ensure timely payment of EMIs and any outstanding debts.
• Keep your credit usage at or below 30% of the available limit.
• Regularly monitor your credit report to identify and correct any errors that could negatively impact your score.

Additionally, check your credit score regularly to track your progress. Remember, it may take anywhere from 4 months to a year to see significant improvements in your credit score.

4. Increase the Down Payment Amount 

Paying a larger down payment can be an effective way to get a lower interest rate on your home loan. By contributing a higher lump sum upfront, you reduce the amount you need to borrow, thereby reducing the lender's risk.
Making a down payment that exceeds the minimum required amount demonstrates financial stability and a strong repayment ability. This positions you as a trustworthy borrower in the lender's eyes, which can encourage them to offer you a lower interest rate and more favourable loan terms.

5. Opt for a Home Loan Balance Transfer

A home loan balance transfer allows you to shift your existing loan to another lender offering a lower interest rate. By doing so, you can potentially save significantly on EMIs and reduce the overall cost of the loan over its tenure.

Before proceeding, ensure you have a good repayment history with your current lender, as this increases the likelihood of your transfer request being approved.

Additionally, carefully evaluate the transfer fees, revised interest rates, and any associated charges (such as processing fees or documentation costs) to ensure that the potential savings on interest and EMIs will outweigh the total cost of the transfer. A balance transfer is particularly beneficial during the early stages of the loan tenure when interest costs form a significant portion of the EMIs.

Conclusion

Employing strategies such as comparing multiple lenders, maintaining a strong credit score, and opting for a larger down payment can significantly improve your chances of securing a home loan with a lower interest rate.

Are you searching for your dream home? Consider an SMFG Grihashakti home loan of up to INR 1 crore* with competitive interest rates starting from just 10%* per annum. Use our convenient home loan EMI calculator to estimate your monthly payments and apply online today!