As an adult, it must be your dream to own a house of your own. But purchasing a home requires a lot of planning and investment. The solution to investment is a home loan.
You can cover the purchase price of a house with a good housing loan policy. However, you have to pay a hefty amount of interest on a housing loan. With different schemes and policies, now there are different ways to reduce this interest burden on your pocket.
Here are a few ways through which you can reduce the home loan rates effectively:
- Higher Down-payment
Banks generally sanctions 80% of the purchase price of the house property while sanctioning a home loan. This is called the loan to value ratio. Loan to value ratio is the ratio of the loan amount to the total purchase price of the house. This means that you need to pay the remaining 20% of the purchase price. This margin money is known as down-payment. Higher the down-payment, lower will be the loan amount. Lower loan amount means lower interest and EMI. A higher down-payment might give you a pinch on your pocket initially but it will be beneficial in the long run with lower interest burden.
- Prepayment of Home Loan
If you have some additional funds, you can use it to repay your home loan. When you prepay a part of the loan, the principal amount of your loan decreases resulting in a lower interest payment in the future years. In a home loan, the interest payments are higher at the beginning of the loan schedule. As and when you make the principal payment, the interest on your loan reduces. So, if you want to reduce your interest burden, one of the best ways is to prepay your loan.
- Increased EMI Payment
You can reduce the impact of high interest rates on your home loan by increasing the amount of your monthly EMI payments. An EMI should usually not be more than 50% of your monthly income. If the EMI is less than 50% of your monthly income, you can request the bank to increase it at any point of time during the loan tenor. If the higher EMIs are getting heavy on your pocket initially, then you can also opt for a step-up EMI option. In this method, you have the option to pay a lower EMI initially and then you can get the EMI increase gradually over the outstanding tenor of the loan.
- Shorter Loan Tenor
Another way to reduce the home loan interest is to increase your EMI. Maintaining your stability of EMI to income ratio, you can increase your EMI payment. This will help you to repay off the loan quickly and reduces the interest payments. When the home loan rates in the market are falling, it is advisable to go for a shorter loan tenor to take advantage of the falling interest rates and reduce your interest burden.
- Home LoanBalance Transfer
One of the best ways to reduce your housing loan interest is to transfer or switch your home loan from one bank to another. If your lending bank or financial institution is charging you a higher rate of interest, you can transfer the home loan to a bank which is offering a lower rate of interest. You can also negotiate with the existing loan provider for a lower interest rate. This might help as the banks always want to retain their customers who have a good credit history and make timely repayments. While making a balance transfer, make sure that your savings are more than the documentation charges for switching the house loan.
The Bottom Line
There are several ways to reduce the home loan interest, but it is important that you choose the one that suits your repayment capacity.