Nowadays, most financial institutions offer credit facilities to make purchase or construction of homes affordable for the citizens of the country. However, many people find it difficult to afford a loan due to the expensive rate of interest on home loans offered by banks and financial institutions. As a result, there may be incidents of defaults in loan payments.
Borrowers looking for low interest home loans can go through this article for more insights.
Ways to reduce Home Loan Interest
Listed below are some of the common ways to reduce home loan interest rates:
- Build a good CIBIL score
CIBIL score is one of the most important factors responsible for the easy approval of loan and a lower rate of interest. A CIBIL score of 650 and above is considered good and will help one to get a home loan from the majority of the prominent lenders.
- Compare interest rates
Before finalising a home loan with a particular lender, one should carry out proper research on the desired loan product and compare the rates with as many lenders as possible. One can also check the website of different lenders and find the best deal. Also, they should check the charges associated with it along with an affordability check of the monthly EMI amount by using a housing loan EMI calculator.
- Larger down payment
Making a sizable amount of down payment with a planned approach would reduce the total loan amount; as a result, it would significantly reduce the amount of interest.
- Reduce loan tenure
Always consider opting for loans of shorter tenures. Shortening the tenure will increase the amount of monthly EMI but the rate of interest will get reduced, which will be beneficial in the end.
- Balance transfer for lower rates
Many prominent lenders provide a facility of balance transfer of the outstanding loan amount for those who have already taken a home loan. Consumers generally look for a lower rate of interest than the rate provided by the current lender. However, there are certain transfer charges involved with the process.
- Making prepayments
There are many banks or financial institutions that don’t levy prepayment or foreclosure charges on a floating interest rate home loan. Therefore, depending on the financial condition of the borrower, whenever the financial health permits, one should try to make prepayments. On making frequent prepayments the outstanding principal amount will get reduced, thus decreasing the payable amount of interest.
Types of Interest Rates
Nowadays most lenders provide two types of interest rates for home loans which are:
- Fixed rate of interest: Fixed rate remains constant and does not change throughout the tenure of the loan. These types of loans are independent in nature irrespective of the market conditions. Borrowers opting for these types of loans get a fixed amount of EMI.
- Floating rate of interest: It is a type of interest rate where the interest rate varies from time to time and changes with change in external factors (market condition). The rates are usually linked with interest rate benchmarks like RLLR, EBLR, PLR etc. For instance, Repo Linked Lending Rate (RLLR) as the name suggests, is the lending rate which is linked with the repo rate which is revised by the Reserve Bank from time to time. Floating rate home loans are considered good for those who want to pay less EMI and save money.
Factors affecting interest rates
Several factors can affect the interest rates, including:
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- LTV ratio: Loan to value or LTV ratio refers to the proportion of the property’s value that is available as credit. For most lenders, this ratio is about 70% to 80% of the property’s value.
- Type of interest: Loans typically have two types of interest rates. In case of fixed interest, the rate is decided initially and the borrower will have to pay the same rate throughout the tenor. In case of floating interest, the rates can vary depending on market conditions.
- Tenor: The tenor or duration of a loan can also affect the interest rates. In general, borrowers opting for a longer tenor usually need to pay a higher rate of interest since they represent a greater risk on the lender.
- Property location: When buying a property, the location and amenities greatly influence its value. Therefore, if the property is situated in a well-connected location, the interest rate will be slightly lower.
- Income stability: Individuals with a stable and regular income source are considered more likely to repay a loan than those without fixed income. Therefore, salaried employees with a regular income are more likely to receive credit at lower interest rates than those without a stable income.
- Credit score: Since a home loan is a secured loan, having a high credit score is not mandatory. However, a decent credit score helps borrowers negotiate for lower interest rates when opting for a home loan.
Several financial institutions also provide pre-approved loan offers to their existing customers. These offers significantly speed up the loan approval process, and are available on a variety of products, including home loans and loans against property. Borrowers can check their pre-approved offers by providing a few basic details, including their name and phone number.
Hopefully, this article has provided clarity on availing low interest home loans. Furthermore, it is always recommended to read all the terms and conditions of the particular home loan scheme and check all the fees and charges associated with it.
