Buying a new home is often a long-pending dream come true for most of us. However, to convert it into a reality, one may opt for a Home Loan to back this big asset purchase. Home finance invariably ends up being large in size, and repaying it can often be a long-drawn and stressful process.
The burden of a Home Loan can weigh anyone down while also reducing the monthly disposable income at disposal. Home Loans also have an interest element attached to it, and paying it off for decades can indeed inflate the overall repayment schedule by as much as two to three times. This is why, finding ways to reduce the overall interest burden should be one of the key priorities. Luckily for you, we have listed down nine such tips, which can help in decreasing the interest element on your Home Loan.
At the time of Applying for a Home Loan, you will be presented an option to choose your Home Loan tenure. This can range from anywhere between 5 to 30 years. While it makes for a very tempting proposition to opt for a longer 25-30-years loan, the reality is that it is best to take a loan for the shortest tenure you can afford. Choosing a shorter loan tenure ensures you can make the complete loan repayment quicker, thus resulting in lower interest outgo. Moreover, financial institutions also lay preference to applicants who opt for a shorter repayment period. Opting for a shorter tenure might lead to an increase in your overall EMIs, but eventually, it will help you in decreasing your Home Loan pay-out.
Your Home loan is essentially divided into two parts, the Principal, and the Interest. In the initial years, the ratio of interest repayment is higher as compared to the principal. This is why, whenever the opportunity presents itself, try to prepay part of the Home Loan as it will help in reducing the total interest levied on you. For instance, in case you get a bonus from work, a sudden windfall, or possibly a hike in your salary, you can use it to make part prepayments. That said, you should check with your financial institution if they allow part-payments. A lot of banks tend to charge a prepayment penalty whenever you opt to make a prepayment, so it is important to assess the situation properly.
For example: In case you were to opt for Rs 45 Lakh Home Loan with a 20-year tenure at 9.5 percent interest, your EMI would work out to ~Rs41,945. Besides paying off your EMIs regularly, if you were to pay an additional Rs. 3500 per month, you will end up saving off nearly 4 years from your loan tenure (16 years instead of 20 years). Moreover, you will also save an additional ~ Rs. 12.4 lakh by way of savings on interest cost. It also makes sense for you to check with your bank about prepayment charges before you consider making any prepayments.
While choosing a Home Loan, you have the option of paying a substantial amount upfront as a down payment. What this does is reduce the overall amount you need to borrow. If you can afford it, making a larger down payment makes a lot of financial sense. This will not only help you save big in the long run as it will help reduce your total loan amount but also help in lowering your resulting EMIs in effect.
At the time of taking a loan, the first thing you should consider is applying for a loan at the bank where you’re already an existing customer. If you have a good relationship with your current bank, you will find yourself in a favourable position to negotiate with the bank for a lower Home Loan Interest Rate. Lower rates of interest translate to lower EMIs.
On occasion, you weren’t able to secure a lower interest rate from your bank, you should scout the market for better rates. With intense competition prevailing amongst financial institutions today, it’s easy for you to find a Home Loan lender such as Indian Bank Home Loan which offers a better rate of interest. However, before making the switch, make sure to exercise caution by reading the fine print and looking out for any additional fees such as processing fees, prepayment penalty, etc.
Home Loan Balance Transfer is a facility offered by several banks for moving the outstanding balance on your Home Loan easily & at a lower interest rate. In the event you find yourself paying a higher interest rate than what’s being currently offered in the market, a balance transfer is an option you can consider opting for. You can avail attractive and affordable interest rates, which make the Home Loan repayment easier on your pocket.
You can opt for an annual increase in your Home Loan EMIs as some lending financial institutions enable the revision of EMIs. In the event, you get a salary hike, or your business is booming, you will have the additional disposable income to play around with. You can subsequently choose to increase your EMI by a small percentage, concurrent to the increase in your net income, which will help in decreasing your tenure, thus enabling you to repay the Home Loan faster. Moreover, it will also help in saving interest.
From October 2019, RBI has mandated banks to offer floating rates linked to external benchmarks such as repo rates. If your loan is charged on a fixed rate of interest, you can consider switching to a floating rate. For, repo rate linked Home Loans are more affordable than the fixed interest rate.
Finally, the last tip for saving interest on your Home Loan is through opting for a Home Loan Overdraft facility with your loan account. With the aid of this facility, you can deposit any surplus funds you may have into your loan account in addition to your normal EMI. Thereon, these additional funds will be deducted instantly from the outstanding principal balance on your loan, thus reducing your loan tenure as well as lowering your interest payments.
Moreover, you can keep depositing and withdrawing amounts in your Home Loan account. You get the flexibility to manage your cash flow better while minimising your interest outgo. That said, in case you need to make a withdrawal, do so only in the event of emergencies. For constant withdrawals can result in an increase in the outstanding balance on your Home Loan, which, in turn, will also lead to an increase in your loan interest outgo.
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