9 Easy Ways to Reduce Home Loan Interest Rates

Did you know that even a 1% reduction in your home loan interest rate can save you thousands, if not lakhs, of rupees over the loan tenure? For instance, on a ₹50 lakh loan with a 20-year tenure, a 1% decrease in interest rate could save you over ₹5 lakh in total interest outgo. These figures highlight why minimising your home loan interest rate is critical to financial well-being. In this guide, we explore data-backed strategies to help you achieve substantial savings on your home loan.

1. Maintain a High Credit Score

Your credit score is one of the primary factors banks consider when determining your home loan eligibility and interest rate. A higher credit score, typically above 750, indicates financial responsibility, increasing your chances of securing a loan at a lower interest rate.

Tips to Improve Credit Score:

• Pay all your EMIs and credit card bills on time.
• Keep your credit utilization ratio below 30%.
• Avoid applying for multiple loans or credit cards simultaneously.

Improve your credit score to get access to credit.

2. Opt for a Shorter Loan Tenure

While longer loan tenures reduce your monthly EMI, they increase the total interest you pay over time. Opting for a shorter tenure can help you save on interest expenses, even though the EMIs might be slightly higher.

Example:

For a loan amount of ₹50,00,000 at an 8% interest rate:

• Tenure of 20 years: Total interest paid = ₹48,36,384
• Tenure of 10 years: Total interest paid = ₹24,77,240

3. Regularly Monitor Interest Rates

Stay updated on market trends and interest rate movements. Financial institutions periodically revise their rates based on RBI policies. If you find a lender offering significantly lower rates, consider transferring your loan.

Steps for Loan Transfer:

• Compare the new lender’s interest rate with your existing rate.
• Calculate the savings after including processing fees and other charges.
• Ensure the savings outweigh the costs involved in the transfer.

4. Make Regular Prepayments

If your financial situation allows, make partial prepayments on your loan. Prepayments reduce the outstanding principal, thereby lowering the interest burden.

Key Points:

• Most lenders do not charge prepayment penalties for floating-rate loans.
• Aim to prepay during the initial years of your loan when the interest component is higher.

5. Negotiate with Your Bank

If you have a good repayment history and a strong relationship with your bank, you can negotiate for a lower interest rate. Banks often provide preferential rates to loyal customers.

6. Switch to a MCLR-Linked or Repo-Linked Loan

If your loan is based on the older base rate system, consider switching to a Marginal Cost of Funds-based Lending Rate (MCLR) or Repo Rate-linked loan. These rates are more transparent and responsive to market conditions, offering potential savings.

7. Utilize Balance Transfer Facility

A home loan balance transfer involves moving your loan from one lender to another offering a lower interest rate. This strategy works best if done during the early years of the loan tenure when the interest component is higher.

Things to Consider:

• Ensure the new lender’s rate is at least 0.5% to 1% lower.
• Factor in processing fees, documentation charges, and other costs.

8. Choose a Bank with Fewer Hidden Charges

Sometimes, the effective cost of a loan is not just the interest rate but also the additional fees like processing charges, administrative costs, and prepayment penalties. Opt for a bank that’s transparent about these charges.

9. Fixed or Floating Rate Loans

Decide whether you want to apply for a fixed rate or floating rate home loan. The interest rate of a fixed rate home loan remains fixed throughout the tenure irrespective of RBI’s revision of repo rate. So, if the bank decides to increase the home loan interest rate based on RBI’s monetary policy, your home loan rate remain unaffected. However, let’s say the bank decides to reduce the home loan rate. In case of a fixed rate home loan, you won’t be able to get the benefits of reduced rates. In such cases, those who have opted for floating rate home loans would benefit from the reduced rate. For floating rate home loans, the interest rate could go up or come down based on the bank’s revision of interest rates.