How to Keep the Home Loan Interest Rate Burden in Check

Most people feel overwhelmed, financially and otherwise, when it comes to managing home loans. The very nature of a housing loan entails large sums of money and a long repayment tenor. Along with the total interest paid by the end of the loan tenor, this works out to be a sizeable amount. And, if you are unable to avail the right kind of interest rate on your home loans, it can further add to your money woes. Which is why, home loan borrowers usually try to look for different ways in which they can keep their interest burden in check so that it does not strain their finances. 

Ways to Reduce Your Housing Loan Interest Burden

Here are a few tips that can help to reduce your housing loan interest:

Higher Down Payment

One can extend a higher down payment on a home loan to lower the loan principal. A modest loan amount translates into smaller payable interest and EMIs.

Shorter Loan Tenors

Generally, home loan borrowers prefer shorter loan tenors as it implies that the loan amount can be repaid much faster, resulting in a lower interest outgo. Since the interest is calculated on the outstanding principal, quick repayment of loans can lead to lower interest pay-outs. 

Individuals may consider a longer repayment period while trying to secure a lower home loan interest rate and EMI. But this could have a reverse compounding effect where the borrower might end up paying more on the total payable interest. A higher interest outgo does not necessarily mean higher effective interest rates. With a longer loan tenor, the monthly instalments go up, which can make your housing loan much costlier. 

Low Interest Rates

Availing of lower housing loan interest rates is always the preferred choice of all home loan borrowers. This ensures reduced interest amounts and brings down your debt burden. But before applying for a home loan, one must exercise due diligence. Shop around for suitable home loan offers and lenders, and then choose the one that offers you the best rates of interest. 

Also, take up EMI amounts that you can comfortably repay. Affordability should be the primary factor when choosing the terms of your housing loan.

Home Loan Refinancing

If you are already paying off an existing home loan, one can opt for housing loan refinancing. This facility offers the convenience of selecting another bank or finance company that is willing to tender home loans at reduced interest rates. This way, a housing loan balance transfer can bring down your overall loan cost. But, at the same time, factor in the charges associated with housing loan refinancing such as processing fees, legal fees, etc. before proceeding with the formalities. You can also use an online housing loan EMI calculator to work out the viability of a home loan balance transfer. 

Pre-Pay Your Housing Loan   

One can make extra payments over and above the regular EMIs if their finances permit. This excess amount will not only reduce your principal outstanding, but your interest burden as well. You can even pay one extra EMI, more than the usual number of instalments, every year to this end. 

Repaying your loan before the stipulated tenor, through full pre-payment or part pre-payment, enables you to bring down the principal sum and the resultant interest amount to be paid. As interest is calculated on the outstanding principal, making higher EMI payments can help repay loans faster, thereby saving on the interest.

Increase the EMI Outgo

Hiking your instalment amount by 5% each year can reduce the interest burden. One can align this increase with a raise in salary or when they receive other annual bonuses. Further, if you can combine both – paying one additional EMI every year, along with increasing your EMI amount annually by 5%; the interest component can ease to a great extent. Accessing a housing loan EMI calculator to compute these figures can help you plan these repayments better.

MCLR-Based Loans

After April 2016, all home loans follow the marginal cost of funds based lending rate (MCLR), which lets borrowers benefit from a change in interest rates. Home loans secured before this period can also be switched to MCLR, subject to a conversion fee. This fee is basically a percentage of the outstanding loan amount that is yet to be repaid. However, it is essential to perform a cost analysis to know if switching one’s home loan to MCLR can be really beneficial. 

Moreover, those servicing a fixed rate housing loan can also consider switching to a floating rate loan. The interest obligation on the former is usually higher than that on a variable rate loan.  

Low Debt-to-Income Ratio

If the housing loan EMI exceeds 50% of one’s income, s/he may not be left with sufficient money to pay their regular expenses like monthly bills, other commitments or investments. Which is why, it is advisable to maintain a low debt-to-income ratio wherein the EMI is less than 50% of your earnings. 

Summing Up

A financial investment such as a housing loan can be a huge convenience in availing housing finance. But one needs to understand how the loan repayment is structured so as to keep the home loan in check. Doing so will make it easier to pay off the debt without feeling the pressure of monthly pay-outs throughout one’s loan tenor.