Homebuyers might find this the perfect time for investment due to the reduced interest rates. Following the recession due to the coronavirus pandemic, the RBI cut repo rates down to 4% to boost commercial activity. Keeping up with the same, most financial institutions have reduced their base rates to the sub 7% range. While this makes for a great borrowing opportunity for loan seekers, several factors can affect these rates. Before proceeding to avail a home loan, consider the following tips to enjoy a lower interest rate.
Make a higher down payment
Most financial institutions mandate at least a 20-25% down payment when sanctioning a housing loan. Making a higher down payment will reduce your total loan requirement and eventually help you avail lower interest rates. Additionally, a high down payment signifies a borrower’s greater financial stability, thus facilitating easier approval.
Opt for a shorter tenor
Creditors offer a significantly long tenor against home loans, sometimes ranging up to 30 years. While opting for a longer repayment tenor may result in smaller EMIs, it will entail an overall higher interest outgo. Shorter loan tenors, on the other hand, reduce the number of months for which you pay interest, hence facilitating greater savings on home loan interest rates in the long run. Individuals can use a home loan calculator to observe this difference and avail a home loan with suitable tenor.
Maintain a high credit score
CIBIL score is a primary determinant of an applicant’s creditworthiness. Lending institutions are more likely to approve applications of individuals with a 750+ credit score. A prominent way to boost your score is by keeping up with timely repayments of previous or existing debts. Sporting a high CIBIL score also provides borrowers with the liberty to negotiate for a more affordable home loan interest rate.
Include all sources of income
Home loan providers gauge an applicant’s borrowing capacity from his/her net income, and they are more likely to offer lower interest rates to applicants with a high income. To enhance your eligibility for the same, include all additional earning sources, if any, besides your primary employment. Also, inspect your current liabilities to decide and apply for a loan amount whose EMI payments do not exceed 40% of your disposable income. Applicants can lower their debt-to-income ratio by clearing their existing loan dues. This will aid in faster approval and help you avail a home loan at lower interest.
Borrowers can channelize any bonus or extra income towards making part pre-payments whenever possible. Your initial EMIs will comprise a larger interest component, which decreases with the progress of loan tenor. Making pre-payments during the early stages of borrowing can significantly bring down your principal amount and reduce the number of monthly instalments. This, in turn, will help you save remarkably on interest payments.
If you are stuck paying higher fixed interest rates, this can be a good time to avail a home loan transfer. However, this option might not be beneficial for every borrower. The EMI interest component decreases with the progress of a loan tenor. Therefore, individuals nearing their tenor end will not enjoy significant savings from a balance transfer since they have already paid most of their interest. Plus, refinancing involves several additional charges, including closing costs. Existing borrowers should only opt for a loan transfer if their possible interest savings are greater than the total refinancing cost.
Additionally, make sure to provide all property-related documents required for home loan. This, along with high eligibility, will ensure speedy approval and give you the chance to bargain for lower rates. Also, do not forget to compare the interest rates offered by different lenders before choosing the most suitable one. Check for offers on floating and fixed interest rates and the flexibility of switching between the two. Also, note all available tax benefits under the Income Tax Act to enhance interest savings.