The interest rate on a home loan is a major determinant in choosing the best home loan. As the maximum repayment period on a home loan is 30 years, the outgo on the interest amount alone could be double the principal amount, and it can be a huge burden to the borrower. For example, if you plan to take a home loan worth Rs. 50 Lakhs at an interest rate of 8.75%, you will be paying the following amount in total. 

 

 Loan Amount

 Rs. 50,00,000

 Loan Tenure

 30 years

 Interest Rate

 8.75%

 EMI

 Rs. 46,336

 Interest Amount to Be Paid

 Rs. 1,16,81,003

 Total Amount Payable with Interest  

 Rs. 1,66,81,003

 

For a home loan of Rs. 50 Lakhs, you will have to pay more than double the principal amount as interest amount over a period of 30 years. It’s certainly a debt burden as a significant amount is paid out as EMI. So, after having taken a home loan with such specifications, how can one reduce the interest burden over the years?

#1. Higher Down Payment

Down payment can determine your loan burden. If you are making higher down payment, you can reduce the outgo towards interest payment considerably as you will be paying interest only for less amount. Following are the details of the down payment that are mandatory to be paid while taking a certain quantum of loan. 

 Loan Amount

 Minimum Down Payment 

 Up to Rs. 30 Lakhs

 10% of the property cost

 Above Rs. 30 Lakhs and Rs. 75 lakhs

 20% of the property cost

 Above Rs. 75 Lakhs

 25% of the property cost

 

The above down payment range may vary from lender to lender based on the applicant’s credit history and relationship with the lender. Apart from the minimum down payment requirement, you can choose to pay more which can decrease the interest burden on your home loan purchase. 

#2. Lower Tenure

The maximum repayment period on a home loan is 30 years. In order to pay less on your home loan EMI, you may tend to choose a longer tenure for repaying the loan. Though it might give you a temporary relief, you will be paying a lot on the interest in the long run. Choose a tenure that will enable you to make less payment towards interest and more on the principal amount. For a lower loan amount, it’s ideal to opt for a tenure within 10 years to enjoy reduced interest payment. 

#3. Using Credit Score to Get Lower Interest Rate

The lenders check your credit score when you apply for a home loan to evaluate your creditworthiness. The interest rate is determined based on your credit score. Credit score of 750 and above is considered a good score. When you have a good credit score, you have the advantage of securing low interest rate home loans. You can negotiate with the lender for a low interest rate and reduce the home loan burden. 

#4. Prepayment and Part prepayment

Most banks let you make prepayment and part prepayment on your home loan after you have completed the lock-in period, which could be up to a year. As you move up in your career, you may get a lumpsum as bonus or a decent increment due to promotion. Using the extra amount towards the repayment of the home loan can reduce the interest burden. 

Prepayment or part-prepayment on your home loan does not incur any fee only if you have opted for a floating rate of interest. There is a certain percentage of fee charged on prepayment on loans with a fixed rate of interest. It can be up to 4% of the outstanding principal amount. 

#5. Choose the Maximum EMI Amount You Can

Paying off your home loan early not only gives you a relief from the debt burden, but also helps you reduce the outgo on the interest amount. Allocate a major portion of your salary toward repayment so that it cuts down the tenure and interest amount as well. 

#6. Transfer Your Home Loan to Another Bank

If you have taken your home loan at a higher interest rate and a large sum of money is being paid for interest alone, you can look out for a lender who can offer you the same loan at lower interest rate. This is called home loan balance transfer. Most banks offer you this option to increase their customer base. However, going for a switch is beneficial only if you transfer the loan at the initial stages of the repayment period. At the later stage, you would have already paid a large sum of money toward interest which would not be any beneficial after the switch. Moreover, there is a certain percentage of fee involved in transferring the loan and repayment charges with the existing lender. 

#7. Switch to MCLR Rates

As per RBI’s mandate, home loans taken after April 2016 follow MCLR rates. Individuals who have taken a home loan before April 2016 can switch to MCLR rates wherein the interest rates may be lesser. This can help the borrower to reduce the interest burden subject to tax and conversion fee. 

#8. Step Up Repayment Facility

Most lenders offer this facility, wherein you can increase your EMI year-on-year based on your income. This option can help you pay off the loan sooner and reduce the interest payment subsequently. In such cases, there is no moratorium period available and the EMI payment begins from the first month of taking the home loan. 

Bottomline

A home loan is a long-term financial responsibility that requires a great amount of dedication and good credit behaviour. You can follow the tips given above to reduce the interest burden on your home loan. Meanwhile, make sure that your daily expenses for your family don’t get affected with your efforts to close the home loan earlier.