Paying High Interest on Home loan? Here is How to Reduce Your EMI

• In May 2020, the Reserve Bank of India reduced the repo rate by 40 basis points, down to 4%.
• Due to the repeated reduction in these benchmark rates, HFCs have also lowered interest rates on home loans by up to 90 basis points or 0.9%.

However, borrowers must understand that the lowest home loan interest rate is generally reserved for individuals with a perfect credit profile. If one wants to avail such long-term loans at these rates, he/she would need to satisfy the eligibility criteria in every measure.

With this in mind, here are certain simple yet effective ways to lower the interest burden on housing loans.

1. Improving credit rating and score
A prospective borrower must check his/her credit score regularly, constantly working towards improving the same. Most lenders welcome applicants with credit ratings of 750 or higher. However, to avail the most favourable terms on a housing loan, one must possess higher CIBIL scores and a long credit history.

The simplest way to improve one’s creditworthiness is to handle existing debts responsibly. For instance, if you have credit card bills pending, ensure you pay the sum in full within its stipulated date. Similarly, if one is currently servicing other loans, defaulting on payment can hamper his/her credit history, affecting home loan rates and eligibility adversely.

2. Increased down payment
While the principal amount does not affect home loan interest rate, it does influence the interest outgo related to this credit. An individual opting for a larger sum as housing loan will have to pay a considerable amount as interest over the credit tenure, and vice versa.

Although home loan LTV is around 75-90%, it is always recommended to self-finance a greater portion of housing loan than the minimum percentage mentioned in the RBI guidelines. For example, let’s consider the following scenario –

Kriti and Arup avail housing loans worth Rs.1 crore each (interest rate of 8.2% and tenure of 15 years are the same for both) to buy properties.

Kriti makes a down payment of Rs.25 lakh and funds the remaining through the loan (maximum LTV).

Arup decides to down pay Rs.40 lakh and uses a home loan to finance the remaining amount.

Due to the increased down payment, Arup’s total interest outgo will be limited to just around Rs.44.46 lakh.

However, in Kriti’s case, the interest amount payable on her loan would be Rs.55.57 lakh approximately.

3. Compare the available offers
One of the things a borrower must know before taking a home loan is whether competing lenders are offering better terms on such credit. The simplest way to determine this is to check the home loan interest rates offered by the various HFCs operating in India.

Using eligibility calculators, one can find the rate at which home loans would be extended to him/her, based on their credit profile, principal amount, chosen tenure and more.

4. Consider home loan refinance
One of the prime reasons to refinance a home loan is to acquire better rates. Existing home loan customers may find that other lenders are offering attractive rates on their housing loan products. At such a time, one can decide to shift the remaining principal outstanding sum to a new lender to avail these lower rates.

This process is known as a home loan balance transfer. However, refinancing a loan is only beneficial when one undertakes it at the right time of his/her home loan repayment.

For instance, a balance transfer is highly profitable when a borrower chooses to do it in the first 3-4 years of home loan repayment(provided the total tenure is 10 years).

During this initial stage, the ratio of interest to principal payment in EMIs is higher. Later, EMIs comprise mainly of principal repayment, and interest component is limited.

Thus, home loan refinances at this phase would not be as profitable, especially after considering the processing fees and other charges.

Apart from these techniques to limit home loan interest rates, borrowers can also save income tax on interest payments for such credit.

According to Section 80EEA, an individual servicing a housing loan can avail tax rebates of up to Rs.3.5 lakh on their interest payments in a financial year.

Such a home loan tax benefit indirectly assists a borrower in saving more. For additional interest savings, an applicant can also check his/her eligibility for subsidy schemes, such as the Pradhan Mantri Awas Yojana or PMAY.

Eligible borrowers can avail interest savings of more than Rs.2 lakh with PMAY’s subsidised housing loan rates. However, only a select few HFCs offer home loans under this affordable housing scheme.

Reputed institutions usually provide other types of features and benefits, including pre-approved offers, ensuring a convenient and time-efficient loan application process. Such offers are available on secured loans, such as home loans and loan against property. You can check your pre-approved offers by providing your name and contact details online.

Following the above-mentioned tips to decrease your home loan interest rate can also help minimise the chances of overburdening your finances. Lastly, borrowers should go through the terms and conditions of their loan to find additional ways to cut the cost of such a credit.