Is your home loan interest rate swallowing up a considerable part of your hard-earned savings? Is a high rate of interest on your home loan making you think twice about buying your dream home?
If your answer is yes to any of the questions above, this blog might help you. Because through this blog, we’ll be discussing the most valuable tips for reducing housing loan interest rate, along with some essential factors you must consider when opting for your housing finance option.
Increase the Amount of Down Payment to Reduce the Loan Amount
You can reduce the amount of your loan by paying a more considerable sum as your down payment, and as a result, your interest rate will also decrease.
Generally, you must pay 10-20% of the entire loan amount as a downpayment to process any bank loan application for a housing loan.
The rate can vary and depends on the borrower’s eligibility and repayment ability. Paying an enormous sum of the downpayment amount is an indicator of your sound financial condition.
Opt for a Repayment Plan with a Short Tenure
Opting for a shorter home loan tenure is depictive of the creditworthiness of the loan-taking party. One of the proven ways of reducing the interest rate of your home loan is to opt for a shorter tenure. You might have to plan your finances a little in advance, but if it reduces the overall interest cost, it’s worth it.
For example, a longer tenure of 25-30 years might cut the monthly interest rates short. But a shorter tenure of 15-20 years will reduce the overall interest rate, which is why shorter tenures are more prudent.
You can create a complete repayment plan with a shorter tenure and figure out in advance how to reduce your interest rate. Do this with the help of an EMI calculator.
Make Regular Pre-payments of the Loan Amount
Keep pre-paying your loan amount regularly to reduce the total interest rate. In the initial stages of the loan tenure, pay a monthly interest amount to the bank.
Pre-pay a part of the principal amount if an opportunity arises, say there is a pay rise. It will reduce your principal amount; consequently, the interest payable will also decrease.
Choose a Floating Interest Rate as Opposed to Fixed Interest Rate
Floating interest rates are subject to change every quarter, depending on the base rate decided by RBI after assessing the country’s economic scenario. On the other hand, fixed interest rates are static throughout your loan tenure and are typically 1-2% higher than floating interest rates.
Fixed interest rates provide a sense of predictability regarding finances (since you know the amount you have to pay back to the bank every month). It is still advisable to choose floating rates as they are cheaper, especially if the market goes up.
Over time, floating rates help you save more, allowing the flexibility to make pre-payments more often, thus reducing the overall interest rate cost.
Maintain an Excellent Credit Score
Your credit score directly reflects how well you deal with borrowed money. A good credit score might help you land lower interest rates from various lenders.
Banks often give preferential interest rates to customers with a good credit history. If you pay your monthly dues on time and don’t default on any of your loan-related payments, it’s highly plausible that your bank will offer you lower interest rates.
Balance Transfer your Home Loan
A home loan balance transfer is transferring your existing home loan to another lender offering a lower interest rate and other monetary benefits. When you transfer the balance of your home loan, the amount outstanding will be transferred to the new lender.
The new lender will then pay the remaining balance to the old lender.
To reduce your loan’s interest rate, you must focus on improving your creditworthiness. You must also conduct thorough research and talk to various bank/money lenders. Different banks will give you other offers, so you can compare and calculate where your interest rate amount will be the lowest.
The tips mentioned above will help you reduce your housing loan interest rate and give you a better chance of securing another loan by reducing your financial burden.