A home loan is usually taken for a higher amount and the tenure ranges from medium to the long term. While buying a house is a dream come true for many, paying back the monthly EMIs over a long period can be stressful and may put a lot of strain on an individual's financial situation.
Interest on a home loan is one of the major elements that is paid back along with the principal to the lender. Although home loans are available at lower rates compared to most other loan categories, the long tenure of the loan makes the interest component balloon in no time.
Consider this: A loan of Rs. 25 lakh for a tenure of 30 years at 8% interest per annum will attract an EMI of Rs. 18,344. In these 30 years, the customer will be returning to the lender a total sum of Rs. 66,03,881 which will include Rs. 25 lakh as principal and Rs. 41 lakh as interest.
There are various ways that can help you reduce interest on your home loan. These are tried and tested routes with which you can reduce the interest outgo on your home loan while you realize the dream of owning your house. As it is your hard-earned money at stake, it is always better to know what can be done to reduce your interest component on your home loan.
Here are the top 8 ways which can help you reduce interest on your home loan:
1. Opt for a shorter tenure
The long tenure of a home loan is the primary reason why the interest is so high at the end of the tenure. It is important to opt for a shorter tenure so that you can control the interest outgo from the very start.
Continuing from the example stated earlier wherein a loan of Rs. 25 lakh would attract an interest of Rs. 41 lakh over a 30-year tenure. If the tenure is reduced to 15 years, the interest amount would fall to less than half at Rs. 18 lakh with the total outgo at Rs. 43 lakh. In the latter scenario, although the EMI amount has increased from Rs. 18,000 to Rs. 23,000, an additional Rs. 5,000 can save you a massive Rs. 23 lakh.
It is very important to select the right tenure based on your financial commitments and requirements. You can make use of the Home Loan Calculator that will give you a fair idea about the EMI amount that you can pay.
2. Make regular part pre-payments
When you take a home loan that is expected to run for a long time, you tend to forget about the increase in income that you will see over those years. It is a good practice to make regular part pre-payments to your lender to reduce the principal and thus the interest component and total outstanding. You can use your increased income or any bonuses or gift that you may receive over a period to make these part pre-payments.
It is important to note that the interest charged during the initial years of a loan is more as compared to the latter part. Therefore, you should start making part pre-payments as soon as you can in the loan cycle.
It is suggested that you check with your lender if there are any charges for pre-payments. There are some lenders which levy some charges for making pre-payments on a loan.
3. Check interest rates online
It is better to check all the available options that you have when it comes to selecting a lender. You can check the official websites of all shortlisted lenders and check if they are running any special offers. Also, several third-party websites and platforms allow you to compare and check rates and other terms across lenders.
This helps you in looking at the big picture of what all the lenders are offering in the market. This way you can select the most appealing offer for a home loan. Also, this comes across as a good reality check on what must be compared across lenders as these platforms often give you a comparison on important metrics like rate of interest, processing fee, pre-payment charges, etc. By doing adequate research online, you can be assured that you are getting the best deal and can secure the home loan at the lowest possible interest rates in the market.
4. Opt for a home loan balance transfer
Even after you have selected a lender and you feel that you are paying much more than what the other lenders are charging, you can always go for a home loan balance transfer. In this case, your remaining principal on an existing loan is shifted to a new lender selected by you and you are expected to pay the remaining EMIs on the new lower interest rate to the new lender.
You can always negotiate with your existing lender before opting for a balance transfer. In many cases, if your track record has been good, the lender is willing to make the terms better once it is told that you are looking for a balance transfer. Your CIBIL score also plays an important role here for the lender. Remember, retaining an old customer is five times cheaper than looking for a new one.
However, if your efforts go in vain, you have the option to go for a balance transfer and opt for a lender that is willing to extend you the loan at lower rates.
Do check the penalties being charged by the lender once you opt for a home loan balance transfer. Some lenders charge a higher amount on penalties as compared to the normal charges. For instance, Poonawalla Housing Finance allows for a balance transfer by which you can reduce your home loan EMI today.
5. Make a bigger down payment
Typically, a bank or a financial institution will finance close to 75% to 90% of the property value. The balance of 10% to 25% is expected to be spent by the customer as a down payment for the property.
It is always better to spend more out of your pocket early on and take a loan of an amount that is necessary as a home loan. This will help you in controlling the loan amount and thus reduce the interest and total outgo on the loan.
Making a bigger down payment may seem like a challenging task at first. However, it is better than spending much more in interest later on. You can dip into your investments into stocks, mutual funds, etc. to mobilize additional funds for the down payment.
6. Increase your EMI amount
If you are not able to make regular part pre-payments, another way that can help you in reducing your interest on the home loan is by increasing the EMI amount. As your income will increase over the years, you can review your EMI every year and decide if you can increase the EMI amount.
By increasing your EMI yearly, you would be able to cough up higher principal and thus will be able to reduce the interest outgo on your home loan.
The higher EMIs that you opt for on an annual basis will help you to reduce the loan tenure which will, in turn, reduce the interest component. It is better to check with the lender if they allow increasing EMI amount during the loan tenure at the time of selecting the lender.
7. Check interest regime
This is one of the most important ways with which you can reduce interest on your home loan. A layman would not check the changes taking place in the marketplace once the loan has been disbursed and it enters the stage of monthly EMIs.
Over the last decade, there have been many changes in the way lenders are supposed to charge interest from the consumers. Most importantly, after July 1, 2010, all loans that were issued were linked to the base rate as against the Benchmark Prime Lending Rate (BPLR) earlier. Further, on April 1, 2016, all floating rate loans were linked to Marginal Cost of Funds Based Lending Rate (MCLR) and on October 1, 2019, this was again changed to the External Benchmarking Rate (EBR).
Depending on the time and date of your loan approval and disbursal, your loan would still be continuing in the old regime if you have not opted to switch to the new regime.
In other words, these changes that have been announced by the government over the past decade have been done for consumer welfare. The benefits of the regime change would not reflect in your account in case you have not asked your lender to apply the new regime on your loan account. Although consumers believe that all interest rate regimes will charge the same rate, it is not such.
There is a high probability that you are paying a higher interest rate by not switching your interest rate to the new regime. If you are paying your EMI as per the BPLR, base rate, or MCLR regime, there is a high probability that you would be able to reduce your interest and EMI amount upon shifting to EBR.
For instance, under the MCLR regime, you would be paying interest at a rate of 7.3%. But if you shift the EBR regime or Repo Linked Lending Rate (RLLR) linked loan from your lender, you would be able to pay interest at a rate of 6.8% which is 50 basis points cheaper than what you were paying earlier.
As a result, it is very important to check the regime that you are currently following and get that changed to the latest regime so that you can reduce interest on your home loan.
8. Switch to a floating rate, from fixed
In case you have taken a loan on a fixed rate, chances are you would paying a much higher interest rate as compared to a floating rate. For instance, in case you had taken a fixed home loan around five years ago when the floating rate was around 9%, a bank or financial institution would have extended a fixed rate home loan to you at 10.5%-11%. Typically, fixed-rate home loans are 100 to 200 basis points expensive as compared to floating home loan rates.
In the current scenario when the floating home loan rates have reached historic lows, it would be sensible to switch from a fixed-rate home loan to a floating rate home loan. A floating home loan rate would work out much cheaper even after taking into account any fees or charges that may be levied by your lender. In case the lender does not allow for a switch, you can always opt for a new lender and make a balance transfer to a floating rate with the new lender.
These are some ways that can help you reduce your interest on your home loan. As you would have noticed, some of these steps are useful at the start of your home loan journey while some are useful when the home loan is in existence. It is important to remember that you should keep track of the terms and interest rates that are being extended by the lender to you and keep a regular check with what the market has to offer. By keeping a regular tab on these, you would be able to get your home loan in line with the market ecosystem. Even a 50 to 100 basis points difference in the home loan interest rate can save you a good amount of money over the loan tenure.
Poonawalla Housing Finance is one of the leading names in the industry which you can trust for your home loan requirements. Known for end-to-end doorstep service with competitive interest rates and flexible repayment tenure, Poonawalla Housing Finance provides affordable housing loans. Present at 100+ locations with 50,000+ loans disbursed, Poonawalla Housing Finance can be a partner that you can trust.