Buying a home is one of the important decisions every individual has to make. It requires a lot of your effort, time and in-depth knowledge of the home loan you are applying for. Whatever may be the case your final decision is always influenced by the interest rate on the home loan.
Despite the recent cut down in the interest levels on current home loans, the minuscule variations in the lender’s interest rate value will make all the difference. From a home loan borrower’s perspective, the interest costs have increased as of now and you have to devise a few impactful strategies to adapt to the changes. If buying your home is your number one priority then these simple tips will really help you to cut down on your home loan interest.
#1. Opting to go for a short duration
If you are going through a crunch period you can shorten your home loan tenure. This will not only increase your EMI but also makes sure that the amount is paid much earlier. Since the rate of the interest is calculated on the principal, the bank will be able to recover the principal amount and the overall absolute interest will be paid marginally.
#2. Gradually increasing your EMI annually
As you get your annual appraisal, you get the habit of increasing your EMI every year by at least 5 to 6%. This will help you in repaying your principal amount faster thereby reducing your interest.
#3. Shifting to a marginal fund-based lending rate
After April 2016, most of the banks moved from base rate to marginal cost of fund-based lending rate since the borrowers will be benefitted from the changes in the rate of interest.
If you had availed for a loan before April 2016, then you must ask your bank to switch your loan to MCLR. Banks generally tend to levy taxes as well as a conversion fee of 0.5% on the overall outstanding amount that remains to be repaid. Therefore, in these circumstances, a cost analysis would help you.
#4. Setting an EMI target
Set an EMI target every year. The goal is to pay an additional EMI every year. This will help you complete the full payment before the stipulated time. Another advantage with this is that your finances will have a better cushion, add the surplus amount to your EMI as it will help reduce your principal amount as the interest.
#5. Availing for a floating interest home loan
Home loans interest rates vary greatly across different banks and financial institutions, so you must choose your lender wisely. You must pay attention to the floating and fixed interest rates. Normally, the home loans that come with a floating interest rate will offer you much more affordability and flexibility. Therefore, when the lending rates drop, you can enjoy the benefit on your loan’s interest rate.
#6. Prepaying your home loan
If you ever get an opportunity to prepay a part of the home loan before the end of the tenure, then it will reduce your overall interest payment. However, banks usually will charge a prepayment penalty fee for such an allowance.
#7. Transferring the balance to the EMI amount
If the lending institution is charging you extremely high rates, you must consider switching to a bank which offers a lower rate of interest. Because of the high competition between the banks and other financial institutions, banks prefer to retain the services of their loyal customers. If there is a possibility, you can negotiate for a lower interest rate with your existing bank to avoid all the paperwork that is needed to switch your loan to another banking institution.
#8. Refinance your home loan
If you ever come across any financial institution which offers an interest rate that is lower than the one that is being offered by the current lender, then you can comfortably switch to another lender. This will help you in reducing your interest repayment burden by reinforcing your home loan at a lower rate of interest. Moreover, before you take the plunge, you must check the legal fee and the prepayment penalty associated with that process. The best you can do is a smart cost analysis to make sure the savings from a lower rate of interest is higher than the amount spent during the refinancing process.
#9. A Higher down payment process
You can also go for a higher down payment while obtaining a home loan as this will assist you in reducing the principal amount. Lower principal amount means lower interest rates and EMI payments.
Last but not the least, please don’t fall for rate hikes while opting to take a fresh home loan or a balance transfer. It doesn’t matter if you are a first-time home loan seeker, a new borrower or an existing one, you must not make the same mistakes that other borrowers make. Implement the aforementioned steps to reduce your home loan interest.