Everybody worries about taking a home loan because of the interest rate, but can you negotiate your interest rate? Let’s find out how?
Public and private sector banks offer home loans to salaried and self-employed people for the purchase of a plot of land, house construction, the purchase of a built residence, and the renovation of an existing one at a specific rate of interest (ROI) on equated monthly instalments (EMI), either after down payment or full financing.
Additional interest rates on the lump-sum advance of funds are essential to assess whether you can afford a home loan.
A loan is likely the biggest financial hardship a person will ever face, and a home loan has the longest repayment duration. Because of this, most homeowners taking out home loans are always looking for strategies to reduce their equivalent monthly instalments (EMIs). Imagine paying a certain percentage of your monthly salary for such a lengthy period.
Therefore, a hefty house loan EMI could greatly impact your financial stability and mental health if you don’t prepare in advance. So let’s get some tips on how to reduce interest rate on home loans.
Can a Person Negotiate a Home Loan Interest Rate?
Yes, a person can negotiate the interest rate on their loan. If they don’t ask for anything better, they probably won’t get it, much like when negotiating their wage. Most lenders won’t immediately offer you a higher rate on the spot; you’ll need to ask for it.
Naturally, requesting a reduced rate does not ensure a person will receive one. For instance, a lender might be less inclined to reward a person with a lower interest rate if that person has a history of making irregular mortgage payments.
Ways to Reduce Home Loan Interest Rates
So to reduce the interest on your home loan, keep in mind these 10 crucial suggestions if you have plans to take a home loan or currently have one.
Keep Your Credit Score High
How you handle borrowed money is reflected in your credit score, and a score above 750 is considered good because it indicates financial stability. You would be viewed favourably by lenders as a reliable borrower, and they would provide you with better loan terms.
Missed or late payments may be the cause of your low credit score. Keep track of your payment history, the amount you owe, the age of your credit history, any new credit, and the categories of credit you now have to raise your credit score.
Reduce the Loan Amount by Increasing the Down Payment
Taking a systematic approach to house hunting will be advantageous. You can strive to put down more money to later profit from a loan with a smaller balance and a much cheaper interest rate.
Depending on the borrower’s eligibility, most banks and financial institutions finance between 75% and 90% of the property’s value. Make appropriate plans and make sure you borrow less money so that you may pay less interest.
Decrease the Loan Term
One of the main determinants of the interest you will pay is the loan’s term. Longer terms may result in a lower EMI, but you will pay more interest.
But even though your EMI can be slightly higher if you choose shorter terms, your total amount of interest paid will drop significantly, so before applying for a home loan, consider your tenure options carefully.
Compare the Interest Rates Online
Before choosing a loan, work in-depth research and compare rates. You may find comparisons on various third-party websites, giving you a clearer idea of all the fees that will be assessed.
Select a Floating Interest Rate for Your Loan
A floating interest rate increases and falls with the rest of the market or other benchmark interest rates, as opposed to fixed interest rates. It is typically 1 or 2% lower than the fixed rates provided by the same lender because it is used only on the market.
Some borrowers find it enticing because a lower interest rate translates into more monthly savings. The borrower should not worry even if there are instances where the floating rate is higher than the fixed rate because these conditions are transient and won’t affect the loan’s duration overall.
Make Payments Regularly
One of the good strategies to guarantee a reduction in the overall interest rate is to make prepayments regularly. The interest components of EMI and principal are split in half, and the interest is paid on the amount borrowed.
During the first few months of your loan’s term, you pay more in interest and less in principal. You may use a raise, bonus, or income increase to make a prepayment. Due to this, both the principal and interest will be decreased.
Revise EMI Every Year
With some lenders, you can change your EMI once a year. You may increase your EMI if you receive a pay raise or if your income continues to rise. At first, as your EMI increases and your tenure shortens, your interest rate will drop significantly.
Refinancing Your Home Loan
The first step is asking your current lender to lower your rate if you feel they are not providing you with good terms. Most lenders will try to retain their loyal clients and may comply. You might request that the bank match the interest rate offered by a rival institution or that they reduce it in light of your credit history.
Afterwards, you might move the loan to a different lender. All you need to look for is a different lender with interest rates that meet your needs and ask about any additional fees they may charge. The next step is to apply to your existing lender, get the required paperwork, and go to your new lender to complete KYC. After that, the new lender will put their policies into practice.
Take a Long-Term Loan and Begin a SIP
Make systematic investment payments (SIP) in mutual funds equivalent to 10% of the monthly instalment amount to take the wise route and recover the full cost of your loan.
Make Timely Payments
Lenders may consider you a defaulter and take action against you if you miss three EMI payments in a row. The lender will issue you a letter informing you that failure to pay your debts by a specific date could result in you losing custody of your collateral.
One default is sufficient to lower your credit score by at least 50 to 70 points. If your income is interrupted, you can ask the lender for an EMI-free period. If you are between jobs or your business activities have been delayed, banks often waive your EMI payments for three to six months.
Everyone wants to own a house; therefore, home loans have become a necessary and inescapable aspect of our lives. On the list of lifelong commitments is paying off a mortgage. Everything you need to know on how to reduce interest rate on home loans has been covered in the points mentioned above.
In addition to this, keeping a steady and lengthy work history is another crucial factor. Lenders are more inclined to favour borrowers with long employment history and a consistent or increasing income.
In contrast, lenders will hesitate to approve your home loan if your employment history is unpredictable. A loan officer will confirm your work status before finalising your loan. Your likelihood of getting a home loan will undoubtedly impact if you resign or change jobs during the closing process. The best way to live stress-free is to apply for and repay a home loan methodically organised manner.
How can I lower the interest rate on my loan?
Choose a loan with a shorter term, keep your credit score high, pay more toward the down payment, make regular prepayments, and negotiate properly with the lenders. Moreover, choose a loan with a flexible interest rate.
Can I negotiate the interest rate on my loan?
Yes, you can and should negotiate the interest rate on your loan. If borrowers make all their payments on time, they will often be eligible for lower interest rates.
How do I request that my bank reduce my interest rate?
Send an official email or letter to your bank outlining the loan’s specifics and emphasising your continuous history of transactions and the fact that you have been a bank customer for several years. You can also explain that other banks have provided the same loan at a cheaper interest rate.
Why is the interest rate on my home loan so high?
The length of the loan determines the interest rate. While a shorter term, such as 10 to 15 years, will lower the overall interest amount, a longer duration of 25 to 30 years will lower the monthly instalment amount.
How much is EMI considered excessive?
Your loan EMIs are too high for you if they exceed 40–50% of your net salary. Even financial institutions like banks ensure that your loan EMIs don’t exceed 40% or 50% of your net pay.