Buying a home is nothing less than an adventure. It starts with the homeownership costs, which you are most likely going to finance via a home loan. It’s a no-brainer that a lower interest rate will mean lesser repayment liability.
However, how will you get a lower interest rate than the market?
It is based on multiple factors that you might know about- credit score, loan type, financial stability, loan size, etc. However, interest rates vary from lender to lender by several percentage points depending on numerous other factors that you might not be aware of. Being aware of these influential factors and using this knowledge to negotiate with the bank on your interest rate substantially impacts the monthly payments plus hundreds of thousands of rupees saved on interest payments.
These are the 11 hidden factors that you must consider to save maximum on your home loan interest:
1. Get your credit score in order:
Just as you scout around to buy beautiful homes, it is equally important to scout around for home loans with a reasonable interest rate too. The foundation for the best interest rate is a good credit score. A higher credit score shows good financial competency to repay the loan. In contrast, a lower credit score proves high risk -which means a high-interest rate. A lender determines the creditworthiness of a borrower based on their credit score.
2. Ask about MCLR
Ensure your home loans are linked to the Marginal Cost of Lending Rate (MCLR) and not a base rate. Home loan interest rate linked to MCLR gets reduced each time RBI reduces the repo rate, whereas the base rate doesn’t have this provision.
3. Switch from Fixed Rate to Floating Rate
If you have availed home loan for 20 years at a fixed rate and RBI has consecutively reduced the repo rate, switch from fixed rate to floating rate. The floating rate of interest gets reduced every time the bank’s MCLR decreases.
This pandemic had an unfathomable impact on the economy, including the housing loan interest rates. To revive demand, RBI unleashed a series of cuts in the policy rates that brought the interest rates down to historic lows. This lead to a new opportunity for homebuyers to take advantage of the low rates while they last.
4. Shop around for the best rate
Different lenders have different criteria; hence, shopping for the best rate is the smartest move. Diligent research on loan products and a lender can ensure the best interest rate suitable to your financial needs. It is simple to compare the interest rates levied by various lenders. Many third-party portals online offer summarized details of interest rates, fees, and other charges..
Pro Tip: Lenders are more than willing to work with consumers with less-than-stellar credit profiles.
5. Consider a shorter tenure
Long tenure means ending up paying more interest. Longer tenure of 30 or 35 years can reduce your monthly installment amount; however, shorter tenure of 10 or 15 years can reduce your overall interest payable.
6. Maximize your down payment
Banks finance 80-90% of the property value, and the borrower mobilizes the remaining 10-20%. However, if you pay a higher down-payment, it will lower your loan amount and overall interest. The logic is simple – the bigger your down payment, the lesser loan, and the smaller risk you pose. As a result of the low-risk borrower, you may get a low-interest rate loan.
Note: Lenders usually offer lower rates to those who have a lower loan-to-value ratio.
7. Get a Balance Transfer
If you are servicing a loan with a high-interest rate, you can opt for a balance transfer facility. You can transfer the remaining principal amount to another bank that offers a lower interest rate. Banks charge a small transfer fee (% of the outstanding loan). Therefore, conduct a cost-analysis before taking the final plunge.
8. Prepay the loan
Another option for a better interest rate is a prepayment of the home loan. The timely prepayments is better because, during the initial period, you pay more towards the interest levied and less towards the principal. Hence, regular prepayments can substantially reduce your principal amount and thus reduce the total interest.
9. Increase in EMI
Another trick to lower the interest rate is to increase your EMI. After receiving a salary hike or raise in your income, you can increase the EMI amount. A small shuffle in EMI amount by 5% or 10% will decrease your tenure, thus substantially reducing the overall interest. Ensure to check with the banks if they allow revising EMI’s annually.
10. Solidify your income
Lenders consider income stability and consistent employment history as critical factors to determine home loan eligibility. Ideally, lenders want to see you with the same employer for atleast two years. Income stability indicates that you are capable of repaying the loan in time, and this enhances your chances to get a better interest rate on your loan.
11. Debt-to-Income ratio
Even a high credit score doesn’t guarantee a borrower can be debt-free. The debt-to-income ratio is the ratio of income compared to the overall EMI payments. Lenders expect atleast 40% of your income to be allocated for the loan, credit card bill payment, and more—the lower the ratio, the lower the interest rate.
In this competitive market, you need to be astute in negotiating your loans to save up on your interest. Presently, with interest rates at historic lows, it is ideal for exploring homeownership for living or investment purposes. Equipped with this information, we hope you can fetch a competitive home loan quote.
