A home loan is a long-term financial commitment and imposes a significant weightage on the financial capability of the borrower. Home loans are high value credits with long repayment tenors. Hence, an increase in home loan interest rate can be highly challenging to borrowers due to the increased financial burden they have to bear every month and cumulatively.
Consider this example – An individual borrows a home loan of Rs.20 lakh at an interest rate of 8.75% for a tenor of 15 years or 180 months. Monthly EMIs, therefore, are Rs.19,989 and total interest payable is Rs.15,98,006. If this interest rate is to be increased by 0.5% to 9.25%, then his monthly EMIs would increase to Rs.20,584, and his total interest payable would rise to Rs.17,05,057.
As is demonstrated in the example above, a marginal increase of 0.5% in home loan interest rate led to a rise of Rs.595 in EMIs and Rs.1,07,051 in the cost of loan. Here, even though there is no significant change in the EMI amount, cumulatively the borrower has to pay an additional Rs.1 lakh due to such an increase.
Thus, it is crucial to learn how to deal with increased housing loan rates to avoid any unnecessary financial leakage.
Ways to reduce home loan interest burden
In case you are a new borrower, these are the ways how you can opt for a lower interest rate on your home loan –
When applying for a home loan, opt for a higher down payment. This measure reduces the liability from the respective financial institution, which in turn prompts it to levy a lower interest rate. It is one of the top tips to get the lowest home loan interest rate.
Also consider that a higher down payment will in turn reduce the total loan availed which will automatically make your loan more financially feasible.
Opt for a shorter tenor during application as it will bring down the total interest you pay on your home loan cumulatively. Considering the above example, if the tenor were brought down to 12 years, the total interest payable would stand at Rs.12,37,108.
If you are an existing borrower, adopt the following measures to reduce home loan interest rates –
If in any month you possess additional idle funds, you can utilize it to make part-prepayments for your home loan. This measure would reduce your loan obligation and thus, lower the total interest payable. It is one of the ways to reduce home loan tenure and EMI.
Also, if your income increases, you can apportion a part of that hike towards increasing your EMIs, which would result in faster repayment of your home loan, thereby reducing the total interest payable.
You can also choose to balance your home loan to a different financial institution which levies a lower rate of interest. It is why you should be choosing a home loan balance transfer.
However, you should consider the phase of home loan repayment tenor in which you make a home loan transfer; it can have a significant effect over the profitability of the transfer.
It is, nevertheless, crucial to note that credit score does not impose much weight in case of home loan eligibility and approval as it is a secured line of credit. However, your employment stability and income will be major determinants in the loan.
Regardless, a substantial credit score allows you to fetch affordable home loan interest rates. Thus, it is crucial to improve your credit score by creating a considerable credit history and repayment history.