It is good to know that you attained the best interest rate when you apply for a home loan. But getting that is easier said than done. You need to shop, negotiate, compare, and analyze each clause to save better on the deal.
The tenure of the loan, the down payment you require to pay, and the cost incurred like administrative charges, processing fees, and prepayment charges the banks levied, all these factors help you get the best interest rate and map the monthly payments you need to make.
That being said, let us discuss 5 proven ways for reducing the rate of interest on your loan. Through this article, we will guide you through methods you can use to research, identify better current interest rates, and figure out how to save money on home loans.
You need to be patient while inquiring around as every lender quotes interest rates that might be different from one another.
For every lender you visit, you need to find out the interest rate they offer and if that rate is fixed or a floating rate. If it is fixed, you will be paying the same interest rate throughout your loan tenure and if it is floating, when the Marginal Cost of Lending Rate (MCLR) changes, so does your interest rate. So, whenever the MCLR goes down, you will pay a lower interest rate and when MCLR goes up you will be paying more.
If your loan has a floating rate, then you need to know what index the rate is linked to, along with the processing of that index and whether it is internal or external. And, see where the margin for your interest rate is fixed and how the payment you make vary. If your loan has a fixed rate, then enquire about the reset clause which allows the lender to reset the interest rate after a certain period.
The home loan you pay also comes with the culmination of various fees that include factors we mentioned earlier like processing fee, administrative fee, along with these, you will be charged with documentation, changing and reconstructing the loan, legal fee, technical inspection fee, document retrieval charges, recurring annual service charges, etc. You can ask your lenders to explain the estimate they put before you. You need to remember that some of these charges can be negotiated or waived.
After having a clear idea of what you are being charged after negotiation, compare these rates with other lenders. If you can look around, banks like SBI, HDFC, ICICI, Bank of Baroda, etc, are willing to offer home loan interest rates around 6.65% to 6.75%, provided you meet their eligibility criteria. The banks are going with lower processing fees of 0.25% to 0.5% of the loan amount. Take your time and check which bank or lender has a better offer in store for you.
A balance transfer is one of the smartest ways to keep the interest rate in one’s favor. Simply put, you find a lender who is ready to offer a cheaper interest rate and you choose to transfer your loan to that lender from your current one.
Although the lender treats your balance transfer as a new home loan application, their approach will be slightly different as they need to refinance your current home loan. This process is also called Home Loan Take Over.
A few charges might still be applicable if you are not paying attention. Billing like processing fees can be negotiated or waived upon agreement. Provided, the banks/lenders must be really satisfied with your credit score for a home loan.
Along with finding a reduced interest rate, a balance transfer can help you with reducing the monthly EMI, paying off your home loan from time to time, and adjusting the loan tenure to your favor. By doing that, you are eventually improving your credit score and building a trustworthy profile.
For example, let us assume that you are taking a loan amount of Rs. 30 Lakhs with an interest rate of 7.5% for a 20-year tenure. Your monthly EMI will be calculated to Rs. 24,168, with your total interest paid, will be Rs. 28,00,271 which adds up to the total loan repayment of Rs. 58,00,271. If you are opting for a balance transfer after one year with an interest rate of 6.5% with the same tenure, your monthly EMI is coming down to Rs. 22,367, your total interest paid will be Rs. 23,68,127 and the total loan repayment will come down to Rs. 53,68,127. As you can see, you are saving Rs. 4,32,144 by opting for the balance transfer.
You don’t find the interest rates on an equal scale among the lenders. So, inquire about the market, and using a balance transfer, go for the lender who has a better interest rate. Gather all the required documentation you need including the NOCs from your existing lender. After verifying and approving your application, the new lender will pay off your balance principal and transfer your outstanding loan amount.
Loan pre-payment is a truly convenient way to reduce the loan interest rate. When you get a pay raise or if you got access to surplus cash on hand, you can choose to prepay the loan and lower the payable interest.
While prepaying the entire loan will let you be hassle-free, part prepayment helps you bring down the principal, reduce the loan tenure, and eventually reducing rate of interest. A higher outstanding loan is bound to be integrated with a higher rate of interest.
Many banks charge up to 2 to 3% of the outstanding principal amount as prepayment charges also known as prepayment penalties. These charges vary depending on the source of the payment. For instance, if you are taking a new loan to prepay the existing home loan, the charges are usually high. If the source is your own, then the charges are low, in general.
Periodic basis payments are generally not charged by the lenders. If you can plan to pay off more than your EMI amount periodically, then you are eventually bringing down the interest burden.
Let us understand how prepayment works with a better example. Let us assume you are taking a bank home loan of Rs. 30 lakhs with a 6.5% interest rate and tenure of 20 years for a property that values Rs. 45 lakhs. Your total monthly payment is calculated to be Rs. 22,367. That adds up to the total interest amount of Rs. 23,68,127. Adding this to the total amount you are paying by the end of tenure goes up to Rs. 53,68,127. This amount excludes the other payments like taxes, insurance, maintenance, etc. Adding all those costs, your total payment by the end of tenure is around Rs. Rs. 81,95,612.
Now let us say you are willing to prepay the total loan amount after 10 years. Let us say your balance is Rs. 20,72,325, after 10 years. In the 11th year, if you decided to pay off the loan in one go as prepay, you are willing to pay the balance amount of Rs. 19,34,563. Your interest payment now adds up to Rs. 16,64,714, combined with the rest of the principal, Rs. 27,29,611. And, the total payments inclusive of all the costs, you are paying, Rs. 70,68,074. As you can see you are saving Rs. 11,27,538 by prepaying the total loan amount.
In another example, let us say you are willing to increase the periodic basis of EMI payments. After 10 years passed in the loan tenure, you have decided to pay Rs. 10,000 extra every month. Assuming that the rest of the conditions are the same, now your interest has come up to Rs. 20,80,500. Combined with the principal, the total comes up to Rs. 43,40,500. And, the total payment inclusive of all the costs comes up to Rs. 77,44,860. By increasing the monthly payment, you are reducing the loan tenure. In this case, your loan tenure has come down to 16 years from 20 years.
Maximizing Credit Score Before you apply for Home Loans
A credit score is a numerical representation of the credit report that has all the information regarding your credit lines along with the records of your monthly payment towards those credit lines. If the score is higher than 750, it is considered to be a good profile and less than that undergoes scrutiny and even rejection.
Along with the payments you make every month, the credit bureaus also study the type of loan you take to determine your credit score and creditworthiness. Mortgage-backed loans such as home loans, loans against property, or auto loans give you decent raises whereas unsecured loans such as personal, travel, or credit cards, usually end up having negative impacts.
You might think that not having any loan might be a point in your favor. But financial experts say that your credit score is still bad compared to the individual who has taken a loan and is making their timely monthly payments.
Not only having a loan but having a balanced credit mix is also vital in determining your credit score. According to Rajiv Raj, director and co-founder of CreditVidya, an individual who has mixed credits on profiles like secured and unsecured, shows high potential whereas too many unsecured loans in their name might make them look like a liability.
Let us discuss a few more ways to improve your credit score:
Firstly, you need to check your credit score to know where you stand. The report lets you know if there are any faults on your end or your lender’s end. You can rectify them immediately and improve the score.
As we mentioned earlier, payment history is a key factor credit information bureaus consider. So, if you have any dues on credit cards and loans, you better plan on making those payments as soon as you can.
Credit utilization shows how dependent you are on the credit you take. It is advised to keep the utilization less than 30% of the total credit limit.
If you paid off a few debts earlier, keep those records in your report. Removing those records will affect your credit score negatively.
Out of the two types of inquiries, hard and soft, hard inquiries which are done by employers and banks can have a negative impact on the credit score. However, hard inquiries that take place with a decent gap will not affect your score much. So, limit hard inquiry as much as you can.
Having too many debts against your financial status can affect your score, thus affecting your loan application and maybe even affecting your interest rate. Banks and credit unions offer debt consolidation loans which you can use to pay off all other debts and have only one consolidation debt to pay on your record.
You need to plan your credit well to have a decent credit score. Many individuals plan on taking more credit cards to improve their scores faster. Such desperate measures only make you end up with huge outstanding debts and unfortunately, delayed payments. You better plan your payments or instead go with a personal loan which has more potential to improve your credit history.
A personal loan, though unsecured, can improve your credit score. Provided, if you make the payments on time and pay off the loan faster. A personal loan reduces the credit utilization ratio which eventually lets the credit bureaus give you a better score.
These are a few methods to improve your credit score which makes your profile stronger and keeps finances in your favor by reducing rate of interest.
Home Saver Loan
Home saver loans or Offset loans are currently available in a limited number of banks such as SBI, HSBC, IDBI, Bank of Baroda, Citi Bank, Union Bank, and Standard Chartered Bank with their brand names such as MaxGain, Smart Home, Home Loan Interest Saver, Home Loan Advantage, Home Credit, and Smart Save.
A Home Saver Loan allows the borrower to deposit the excess amount such as savings in a current account that is linked to the home loan account. The bank then calculates the interest compound and deducts the current account balance from the outstanding principal. The bank also calculates the monthly balance average to make it happen. In case you are in an emergency, you can draw the money from the current account and use it anytime.
The main purpose of the Home Saver loan is to help borrowers who are in turmoil whether to prepay the loan with their excess amount in hand or to keep that amount for unforeseen expenses in the future. So, you are leaving the excess amount in a safe place that utilizes the money in your stead to pay your loan when it is not used. And, it allows you to use that money when an unknown expense knocks on your door. This helps you reduce the payable interest and reduce the loan tenure. However, the interest rate for a Home Saver loan is 0.5 to 1% higher than a regular home loan.
The conditions for Home Saver loans are similar to regular home loans. Provided, you will be given a current account linked to that loan account. Your monthly EMI is calculated and you pay them like any other home loan. Only when you have excess savings amounts like a bonus you receive at your work or a gift, you can deposit them in the current account which will be debited from the loan’s outstanding principal amount.
As your principal home loan amount goes down, so does your payable interest. This way, you are prepaying your home loan at your convenience without being charged with prepayment penalties. And, You are given the flexibility to withdraw the excess amount you deposited whenever you want and deposit again whenever you can.
Let us get a better understanding of this concept with an example. Assume that you have taken a Home saver loan of Rs. 25,00,000. As it is a Home Saver, the interest rate is higher, let us say 11%. Which gives you a monthly payable EMI of Rs. 25,805 for a 20-year loan tenure. Assume that you received a bonus or gift of Rs. 5 lakhs, which you will deposit in the current account linked to the home loan account. The excess savings you deposited is debited from the loan principal, bringing down your loan to Rs. 20,00,000. Now, the interest is recalculated along with the loan tenure. You will be saving around Rs. 19.65 lakhs in interest and your tenure comes down to 11.3 years or 136 months reducing 8.6 years or 104 months.
You need to keep in mind that the Home Saver loan is indeed expensive. In general, the excess amount you deposited in the linked current account can be used to generate monthly returns by investing elsewhere. Mutual funds for example. Also, the eligibility criteria to get this loan varies from bank to bank heavily and is super tough. Unless you have a higher income and deal with excess liquid cash often, this option may not work for you.
While you are at it, look at how you can reduce EMI on your Home Loan
Your EMI is calculated based on three major factors, the principal, the applied interest rate, and the tenure of the loan. Out of the three, the principal is a constant figure that you have to deal with unless you wish to buy a smaller house or pay more on your own for your dream home as a down payment. Be that as it may, interest rate and tenure are the two variables you can handle to bring down your EMI.
Lowering the interest rate, as you have been reading so far, is good to have. On the other hand, tenure is something that needs to be delegated neatly as it is a bit tricky. You can choose to stretch your loan tenure for a longer period like 30 years. But, you would end up paying more as total interest.
One smart way to make this work in your favor is to manage to make part payments whenever you can. While your EMIs are low, if you manage to save some cash or come across some as a gift or pay raise, use it to prepay. That would reduce the principal and reduce your interest burden.
Whether you go with a new loan or refinance the existing one, it is conceivably true that getting the lowest interest rate is the best way to reduce the EMI. We have been discussing different ways to reduce the interest rates on your loans in this article. But instead of going through all those procedures by investing your time and energy, you can turn to mymoneykarma.
You can get the best-personalized package of solutions that cover the above factors ensuring the cheapest home loan in the market by signing up on the mymoneykarma website. It will take care of repairing your credit, comparing lenders for you, and identifying the perfect fit for your profile. And, it also provides dedicated expertise that oversees the whole process, right from credit check to disbursement.
It is not only the smart thing to do but also the right thing to find better interest rates. As we listed out 5 methods, you now, hopefully, can understand that attaining better interest rates is in your hands. First, make sure your credit score is in your favor. Then shop smart and find the best lender who has a better interest rate. If you find a decent lender with a decent interest rate after you sign up for one lender, use the balance transfer option.
To make your finances smooth by the time you retire, plan out your monthly payments and better go for prepayments whether fully or partially. Finally, if you have a decent income and possess constant liquid cash, then opt for lenders who provide Home Saver loans which allows you to use extra savings in one of many better ways. Invest right and become financially sound!
Mymoneykarma is a tech-powered platform that keeps track of the interest rates in the market and secures specially negotiated rates that cannot be found in the open market. The platform also offers a comprehensive service that ensures the processing time, effort, and fee charged are mere formalities and never a barrier or stumbling block.