Yours is a dream shared by millions of people — like millions of other Indians, all you want to do is be able to buy your dream home. Chances are you are contemplating taking a home loan to fulfil this dream. But with rising interest rates on home loans, what should you do?
Factors Affecting Home Loan Interest Rates
Several factors affect home loan interest rates. Before applying for a mortgage, learn what influences the interest rate and monthly payments. Developing an understanding of this will allow you to avail of a home loan at a low interest rate.
Interest rate type
In India, one can avail of a home loan at a fixed, floating, or combined interest rate. Unlike fixed rates, floating rates are impacted by changes in the RBI’s policy rate.
Reduced RBI repo rates lower home loan interest rates. Borrowers must choose the variable rate loan when market rates are lowering. Fixed rates, on the other hand, must be opted for when future interest rates are expected to rise.
The property’s location, condition, and amenities determine its resale value. Thus, properties in prime locations have higher resale values. This, in turn, acts as an incentive for financial institutions. Therefore, lenders sanction home loans at a lower home loan interest rate to borrowers with their property in a posh location.
The repayment duration of house loans as well as the interest rate charged on them is closely tied to the risk involved and the time value of money. The interest rate on a borrower’s mortgage is therefore adjusted to be higher for longer terms and lower for shorter terms.
The EMIs are inversely connected to the repayment period, making installments more expensive but keeping interest rates low. Longer tenors bring lower EMIs but larger interest accumulation.
Typical Lending Rate
Benchmark lending rates are MCLR or repo-linked lending rates (RLLR). The reset time for MCLR is 3 months, 6 months, 1 year, or 2 years over the tenor of the house loan. The RLLR is closely connected to the RBI’s repo rate and adjusts quickly to policy rate changes.
As a result, the RBI has chosen to phase down MCLR-based lending in order to create a more transparent and repo rate-responsive RLLR.
LTV (Loan to Value)
To calculate LTV, divide the property’s current market value by 100. A high LTV equates to a larger loan amount and more risk of lending, resulting in a higher interest rate. Borrowers must increase their down payment to lower their overall loan amount and interest rate.
The applicant’s financial profile reflects the risk they pose to the lender. Thus, due to the low risk involved, salaried borrowers with a good employment profile and a good credit score are eligible for a lower interest on home loan rates.
Less dependable income or work profiles frequently attract higher interest rates. Consider all of these things before applying for a house loan to get the best interest rate and EMI.
How to Reduce the Burden of Home Loan Interest?
Because house loan interest rates are determined by several factors, the amount borrowed will accrue interest and the load of this interest will depend on several factors. Here are a few techniques to reduce your home loan interest load for easy repayment.
Choose a Short Repayment Period for Your Loan
Home loans are long-term advances with payback terms up to 15 to 30 years. A prolonged tenor signifies more interest to be paid to the lender. A shorter tenor, on the other hand, means that interest is only charged for a limited period of time. Use a home loan EMI calculator to evaluate tenor alternatives and choose a payback time that reduces overall interest.
Go for Home Loan Balance Transfer
The home loan balance transfer facility permits you to move your loan balance to a lender offering you a home loan at a low-interest rate. One can use the refinancing facility for high-value top-up loans. Depending on the lender chosen, the balance transfer feature also gives up to 3 months of EMI break for easier payments and better financial management.
Annual EMI Revisions Should Be Requested
Higher EMIs reflect a faster decrease in the outstanding loan amount. Early principal repayment reduces loan terms as well as overall interest accumulation. Therefore, home loan debtors should aim to raise their EMIs by 5% for every 10% increase in income.
Prepay with Any Available Lump Sum
Prepayment is another effective tool to reduce the overall home loan interest load. Prepay your house loan in whole or in part before the tenor finishes. Part-paying reduces the outstanding loan principal and reduces interest accrual.
Borrowers might also choose to terminate the loan account completely if they have enough funds to pay off the outstanding amount. Making a larger down payment, haggling with the lender, and showing all sources of income will help you save on interest.
Because we are in an interest rate fluctuation phase, the interest rates offered by different lenders will fluctuate substantially. In such a scenario, it is best to compare prices regularly to ensure you are receiving the best interest rates. Further, keep the above tips in mind to get the best interest rate from your lender as well as lower your interest burden in the long run.