How To Reduce Your Home Loan Interest Cost?

If you are looking to own your dream home, then home loans can really help in transforming your dream into reality. However, it is a long-term liability that stays with you for decades. Therefore, the interest rate is considered an important element when it comes to home loan. A slight difference in the interest rate, offered by your bank or financial institution, can make a significant difference in the interest rate you will be paying.

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EMI is another element that as a home buyer you should consider. Roughly, EMIs make 30%-40% of the monthly expenditure. Without a doubt, this financial responsibility is a major part of your monthly budget. In order to keep this expense affordable, it is important you have chosen a long repayment term. Though this really cuts down the monthly outflow, the interest payout tends to increase. Let me discuss some important tips that can help you reduce your home loan interest rate.

Switch to MCLR

After April 2016 every bank in India has switched from base rate to MCLR (marginal cost of funds based lending rate) as it lets you enjoy the benefit of interest rate variations. Let us assume you have taken a loan before April 2016, then you can request your bank to move your loan to MCLR. Banks levy taxes along with a conversion fee of 0.5% on the outstanding amount you have to repay, therefore a cost evaluation will be again beneficial.

Refinancing Your Home Loan 

If you find a bank or a financial institution offering a competitive interest rate as compared to what your existing bank is offering, then make sure you have chosen that bank/financial institution. Your home loan interest rate will be considerably reduced if you choose to refinance your loan at a lower interest rate. However, before you make your final choice, make sure you have made yourself familiar with the legal fee and the prepayment penalty linked with the process. Make sure you have also done a cost analysis just to be sure that you get to save more from a lower interest rate than the amount you spend during the refinancing process.

Have EMI Targets 

If you pay extra EMI annually, then you will reach your goals much before then your expectation. In addition, within months you will notice that your finances have a better cushion, include surplus to your EMI as this will play a pivotal role in bringing down the principal amount along with the interest.

Shorter Duration 

Even if you have a shorter home loan term, there is a possibility that your EMI will rise, but it will also ensure that your principal amount gets repaid earlier. As the interest rate is calculated on the principal, once the principal amount is recovered by the bank, the total interest payout will come down slightly.

Increase Your EMI Every Year 

Another choice you can opt for reducing your home loan interest rate is to raise your EMI amount by 5% annually. Assuming you will receive a salary hike of 5% every year, this will not be too burdensome on your monthly budget. You will be able to repay your loan much faster and the best part is that you get to enjoy significant savings on the interest cost as well.

Go For Home Loan Balance Transfer 

Using this option, you have the advantage of transferring your outstanding balance to another lender. Your new lender will pay the outstanding amount to your original lender and in return, you will receive a new loan at a lower interest rate and with relaxed terms and conditions. In case your existing lender is not interested in reducing the interest rate or relaxing the terms and conditions, then you can go for this option.

In fact, if you are looking to take a housing loan from housing financing corporations (HFCs) and nonbanking corporations (NBFCs) then this option can be opted to transfer your loan to the banks and make the most of the MCLR-based lending rates.

If you are able to reduce your home loan interest rate, then it is only going to benefit you. Yes, you can use the above-discussed tips to reduce the home loan interest rate cost. However, make sure you choose an option that suits your monthly budget. If you are unable to pay the installments on time, then it can have negative results. Therefore, easy affordability of EMI should be a determining element if you really want to avoid any financial issues.

Author Bio
Hi, my name is Ankita Dixit. I started writing from the young age and most of my writing skills and knowledge are self-taught. Currently, I am working as a professional writer at I have written on various topics including travel, motivation, finance, technology, credit cards, insurance, and entrepreneurship etc.

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