The most critical factor for most people taking a home loan is the interest rate. And understandably so, because home loan EMIs usually are the biggest monthly expenditure for a household and it lasts for at least a decade. Even the smallest of differences in the interest rates offered by various banks and financial institutions can amount to a significant amount in the long run. Choosing the right lender, and subsequently looking out for ways to reduce the burden of the home loan through lower interest rates, is crucial. Here are a few tips that may help you reducing your home loan interest payout.
Switch to MCLR if the bank is your lender
As all loans taken after April 1, 2016, are linked to the bank’s marginal cost of funds based lending rate (MCLR), you can switch from a base rate to MCLR. It is a more dynamic option as it is directly linked to repo rate and allows you to enjoy the change in interest rates faster.
But all this comes at a price. Banks usually charge a conversion fee of around 0.5 per cent on your outstanding loan amount, along with taxes. For instance, if your home loan outstanding is Rs 40 lakh, the conversion fee would be around Rs 20,000 plus taxes. As switching to MCLR is a one-time option, you cannot revert to the base rate again.
If NBFCs is your lender, go for a lower rate
If you have taken a loan from housing finance companies (HFCs) or non-banking financial companies (NBFCs), you can reset your interest rate by paying a conversion fee. NBFCs and HFCs do not change the base rate, they change the spread. For instance, a lender with a base rate of 15 percent and a spread of -5 percent, would allow you to change your spread to minus six percent. This would result in a reduced rate of nine per cent [15 + (-6)]. The conversion fee varies from lender to lender.
At the same time, you can go for a reduced interest rate or maintain the same EMI or lower the loan tenure.
If you find that the pact with your existing lender isn’t worthy enough, you have the option to refinance or balance transfer loan. It is a long-drawn process because it is like getting the home loan approved all over again. If there is a difference of 75bps or more on the interest rate offered by the new lender and the residual tenure of your loan of more than 10 years, only then it makes sense to refinance the loan.
In a nutshell, everything boils down to the outstanding amount and the remaining tenure.
Increase your EMI
Your monthly income is considered while fixing your monthly EMIs. Usually, lenders prefer your EMIs to be within 40% of your monthly income. You can reduce your overall interest payout by diverting a part of your increment towards home loan EMIs. In order to reassess your repayment capacity, banks/NBFCs may ask you to submit your salary slips and bank statements. However, while opting for increased EMI, do not sacrifice your long-term investment goals.