Here’s Your Key to Reduce the Interest Rate of Your Existing Home Loan

The Home Loan is the most common loan product in the lending sector. An overwhelming majority of people take Home Loans to purchase or build their homes. Naturally, the rate of interest is one of the significant areas of concern. A Home Loan is a long-term investment. Hence, the interest rates have a lot of significance. A difference or a percentage point in the interest rate can result in the savings of lakhs of rupees over the entire tenure of the loan. Here’s your key to reduce the interest rate on your existing Home Loan.

 

1.       Switch from the base rate concept to the MCLR concept

 

Until recently, banks were following the base rate concept for deciding the interest rate on loans. Today, they have migrated to the more dynamic Marginal Cost of Funds based Lending Rate (MCLR) concept. Banks cannot lend at rates below the MCLR. The linking of the MCLR with the repo rate mechanism makes it a dynamic rate concept. The Reserve Bank of India announces changes in the repo rate frequently. Hence, you can expect welcome changes in the MCLR as well. A downward repo rate can result in the lowering of your Home Loan Interest Rate. Therefore, it is better to switch over to the MCLR from the Base Rate concept. Banks allow you to do a one-time switch from the base rate to the MCLR.

 

2.       Pay a conversion fee and reduce the rate

 

The MCLR concept applies to banks alone. The Non-Banking Financial Companies (NBFCs) do not have this concept. They follow the Base rate or a Prime Lending Rate (PLR) concept. Such companies do not usually change the base rate or the PLR. They change the spread thereby resulting in an overall reduction in the rates (Base Rate +/- Spread). These companies allow a change in the spread on payment of a conversion fee. However, do a quick calculation and check out whether you benefit from the conversion. If the costs are higher than the overall benefit in the interest, it does not make sense to go for the conversion.

 

3.       Opt for a Home Loan Balance Transfer (HLBT)

 

The HLBT is the most common way to reduce the interest rate on your Home Loan. With Reserve Bank of India liberalizing the interest rate regime, the banks are free to fix up their interest rates on Home Loans. As a result, there is an extreme competition among banks to offer the best interest rates to their customers. It is beneficial because it has resulted in the lowering of rates thereby encouraging a new loan product, the Home Loan Balance Transfer. Home Loan borrowers can transfer their Home Loans from one bank to another and avail the benefit of reduced interest rates. Calculate your Home Loan Balance Transfer Eligibility and explore possibilities to lower your interest rate burden. Remember to do the Cost-Benefit analysis before you initiate the HLBT. It is beneficial if the residual tenure of your Home Loan is more than 7 to 10 years. The rate of interest should also be less by a minimum of 0.75% to 1%.

 

4.       Negotiate with your existing bank

 

Many people do not know that they can negotiate the interest rates with their banks. A good credit history and loan repayment record is necessary for you to initiate the negotiations. Having the in-principal HLBT approval can work in your favor. You can negotiate and get a comparable rate. You will not only end up saving on the interest component but also the expenses connected to the HLBT process.   

Also Read: Home Loan Top-up: What are the Benefits and How to Get It

 

5.       Pay an amount more than your regular EMI

 

Banks fix up the EMI (Equated Monthly Instalment) after considering various factors like repayment capacity, loan amount, tenure, and the interest rate. However, that does not mean you should not pay more than your EMI. You can pay more than your EMI amount every month and save a considerable amount of interest. The EMI on a loan of Rs. 25 Lakhs @ 9% for 20 years is Rs. 22,493. You end up paying Rs. 2,898,356 as interest over the entire tenure. If you pay Rs. 3,000 more per month, you will close your loan within 15 years. The total interest payment amounts to Rs. 2,064,200. Thus, you save more than Rs. 8 Lakhs by paying Rs. 3,000 more per month. It is as effective as reducing the interest rate.

 

6.       Make a lump sum loan prepayment

 

In case you receive a bonus or an incentive of a substantial amount, you can divert the money towards your loan account and make a lump sum payment. You can reduce your interest burden.

 

We have seen 6 simple ways to reduce the interest rate burden on your Home Loan.  

 

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