Buying a house Here are tips to reduce your home Loan Interest Rates

Factors That Influence Home Loan Interest Rates

1. Credit Scores

   Credit score reflects your borrowing history and your behavior towards repayment. It is a measure of how capable you are of repaying a loan and it’s verified by analyzing your credit history. A poor score can lead to a higher rate of interest, while a good score will bring down the rate. So, check your credit score before applying and improve it by clearing pending dues on credit cards or any other loans.  

2. Type of Property

   The location of your home and its type play a significant role in determining the interest rate. A home in an urban locality with high-quality amenities in the vicinity will cost more than a home with average amenities and connectivity. The resale value of the former will be greater than the latter. Similarly, the age of the property and the type (for example, a 4 BHK or studio apartment) are other factors that will establish the home loan rate. Newer properties in cities are considered more stable and thus, the home loan is given at a lower rate of interest

3. Home Price and Loan Amount

   The interest rate does not directly depend on the loan amount as with other parameters being constant, the interest rate will remain the same for both smaller and bigger home loans. However, the loan amount plays a role in increasing the tenure, deciding the down payment and principal amount of loan and EMIs, which in turn affect the rate.  

4. Down Payment

   The minimum down payment for a home loan in our country is set at around 20 percent of the property value. But don’t stick to the minimum as giving a larger down payment can have a positive effect on your interest rate.  

5. Tenure

   Though having a longer tenure, will lower the EMI but experts suggest repaying the loan as soon as possible is the best idea. The lesser the tenure, the lower the interest pay-out.  

6. Interest Rate Type

   Most home loans taken after April 2016 fall in the MCLR (Marginal Cost of Funds based Lending Rate) scheme. The RBI introduced the MCLR to bring more transparency to the interest rates and safeguard the customers from adverse policy changes. Therefore, switching to MCLR may lead to a lower interest. Also, interest rates depend on whether one has opted for fixed rates or floating rates.  Elements like SLR (Statutory Liquidity Rate), MSF (Marginal Standing Facility), and repo rate, decide the rates in a floating scheme.  

7. Changes by Regulatory Authorities

   Keep an eye on the changes in the monetary policies brought in by RBI. When RBI expands money supply or liquidity in the economy, interest rates tend to dip and vice-versa.  

8. Occupation Type

   You may be unaware, but your occupation has an impact on home loan approval and interest rate. If you are a well-known entrepreneur with a well-established business and a large number of employees, you have a good chance of getting a loan at a lower interest rate. However, if you are a salaried employee working for a start-up or small business, you may be unable to obtain a low-interest home loan.

Here Are a Few Tips That Can Help Reduce Your Home Loan Interest Rates

1. Have a Stable Source of Income

   Income stability is a key factor in deciding home loan rates as it signifies lower chances of default. If you’re employed, meet the minimum credit requirements and earn a decent salary, chances are that you will get a lower interest rate. You have to provide salary slips or bank statements for several months to prove your credentials. Similarly, a businessman must show a constant flow of funds.

2. Take a Loan for a Shorter Duration

   A shorter tenure increases the EMI, but it also ensures that the principal amount, on which interest is calculated, is repaid earlier and quick repayment of the principal amount leads to lower absolute interest pay-out. However, one must consider how much he/she can comfortably pay per month before deciding the tenure.

3. Set EMI Targets

   Ideally, your EMI should not be more than 40% of your monthly income as EMI. Paying a higher EMI means the loan will get repaid earlier. Also, the EMIs will subsequently keep reducing as the principal amount gets lower. One needs to do a thorough calculation of the expenses and other investments before deciding on an amount, which can be comfortably paid each month. Always try to pay one extra EMI every year given that there is no fine for prepayment. Also, instead of keeping surplus funds in a savings account, direct them towards payment of EMIs.

4. Increase Your Down Payment

   Well, simply put, larger down payment means a lower interest rate as it reduces the level of risk for the lender by lowering the LTV (loan-to-value) ratio. Higher down payment also shows the borrower's purchasing power.

5. Refinance Your Housing Loan

   If you come to know about a financial institution that is offering a home loan with an interest rate lower than the one being offered by your current bank, you can consider switching to the other lender. However, note that there are legal fees and prepayment penalties associated with this kind of move. So, calculate and compare the savings from a lower rate of interest with the amount spent during the refinancing process. Take it only if it proves to be beneficial. If there are only a few months left, stick to the current bank and don’t ruin your relationship with the lender that has largely served you well.

6. Enquire from Different Lenders

   Doing thorough market research will also help you a great deal. Contacting different lenders will help you get a better understanding of the difference in interest rates, processing fees, foreclosure charges, etc. which will help you reach a well-thought-out decision. 

7. Additional Source of Income

   Given the soaring rate of inflation, you cannot live a luxurious life on a single source of income. Having a secondary income has many advantages. One of which is being approved for funds at a low home loan interest rate.
   
   In case you have a rental income or make money from freelancing or another part-time business, always include this information in your loan application. Make sure you have proper documents to show the lender that prove your secondary income.

8. Add Co-Applicant

   If you believe your current income will only get you a home loan approval but not a lower interest rate, you can add a co-applicant to your application. Any of your direct relatives can be a co-applicant. They could be your spouse, a working child, or your parents. If you want to add another person as a co-applicant, check with your lender to see if they allow it.
    
   One thing to remember here is that a co-applicant has the same repayment obligation as the primary borrower. When introducing a co-applicant, ensure that they have a good credit profile and a high income; only then will you be able to secure a home loan at a reduced interest rate.
    
   Several financial institutions offer low-interest home loans if the primary borrower is a woman. As such, when applying for a home loan, you should keep this in mind as well.

9. Insurance

   When applying for a home loan, keep some money aside in addition to the down payment for home loan insurance. When you face EMI payment difficulties due to a temporary job loss, unexpected business loss, or partial disability, home loan insurance can help. Since the insurance assures the lender that their disbursed funds are secure and that a default situation is unlikely, they can approve you for a low-interest home loan.

What Is the Best Alternative to a Home Loan?

If you are unable to obtain a low-interest home loan for any reason, you have another option: a loan against property. A loan against property is another type of mortgage loan in which funds are approved based on the current market value of the property.
 
Financial institutions typically offer this loan with a maximum loan-to-value (LTV) of 75% or Rs 15 crores, whichever is less. This loan has a maximum repayment term of ten years (flexible).
 
You can use this loan for buying a new house, designing the interior, and buying modern furniture. The eligibility criteria for a loan against property are not severe due to the involvement of pricey real estate. 
 
Every borrower wants to be mortgage free as soon as possible and celebrate the joy of “owning a home” in every sense. Going for a home loan with the lowest interest rate is among the best ways to achieve that goal but you shouldn’t make a hasty decision seeing only the interest rates. Rather, take time and understand how all the above-mentioned factors are applicable to your case and how judiciously can you use the tips to get better interest rates.

Disclaimer: This post was first published on 7th August 2018 and has been updated for the latest information, freshness and accuracy.