As of the monetary policy of January 2021, RBI has kept the repo rate fixed at 4%. This decision is ideal for current and potential home loan borrowers looking to avail such credit at affordable rates.
Apart from the repo rate, there are several other factors that can lower the housing loan interest rate. Some of them include:
- Prepayments
Loan foreclosure or prepayment charges are only applicable to housing loans with a fixed rate of interest. Therefore, prepaying at certain intervals would be a wise decision as, during the initial few years of the loan, the amount of interest is paid more than the principal amount. Hence prepayments would lower the principal amount, which would eventually reduce the total interest to be paid.
Nevertheless, a certain percentage is charged by financial institutions on loans with a fixed home loan interest rate. Therefore, borrowers must check with financial institutions regarding charges for prepayment which they would incur.
- Opting for a short loan tenor
Loan tenor determines the amount of EMI and overall interest cost. Longer tenor, for instance, 20 to 30 years, reduce monthly instalment amount. On the other hand, shorter tenor like 15 years would cut down total interest payable. A home loan EMI calculator acts as a handy tool as it helps borrowers check how interest would vary according to loan tenor. Hence, it is highly beneficial to use it before signing up for a loan so as to avoid paying a high interest amount against a loan.
- Paying a greater amount of down payment
Usually, out of the total property value, financial institutions finance around 75% to 90%, and borrowers are required to make a contribution of about 10% to 25% of the property cost. It is generally considered as a better option to make a greater contribution as a down payment instead of paying less. This is because paying a greater amount initially causes a reduction in the loan amount, which in turn causes a direct reduction in the interest payable.
- Choosing to increase the EMIs
There are numerous financial institutions that allow a borrower to revise instalments annually. Therefore, in order to lower loan tenor, one can opt for paying higher EMIs. A reduction in loan repayment period would, in turn, lead to a substantial decrease in the overall interest payable against the loan. A favourable instance to opt for increasing home loan EMI is when one experiences a hike in salary.
- Home loan balance transfer
This option comes into consideration when the borrower has already initiated the process of making prepayments against the home loan. Borrowers can opt for this option if they find a new lender offering a lower interest rate than the present lender. In such a case, they can transfer the principal amount, which is remaining to be paid to the new lender.
However, this should be the last resort as in balance transfer-based loans, any missed payments lead to high penalties.
Given the present scenario, it is pretty evident that the current times are the best to opt for a home loan at the lowest rate of interest. In addition to this, opting for anything mentioned in the above points would further help to reduce the home loan interest rate.