Home loan

Borrowing: Tips for getting the most out of your home loan


With house prices rising and home loan interest rates still at multi-year lows, now may be the time for end users to buy a home. Since the repo rate is 4%, the lowest since April 2001, and low interest rates aren’t expected to last long, understand home loan features and options to get the best deal on funding.

In fact, home sales in the three months to March hit a record high since 2015, with 99,550 units sold across the seven major cities, according to Anarock data. The Mumbai metropolitan area and the national capital region accounted for more than 48% of total sales in the top seven cities.

As home loans are for a very long period, negotiate with the bank to get the best value for money and look for ways to reduce the long-term interest payment.

Credit score

A credit score of CIBIL 750 plus will not only help you negotiate a lower interest rate, but the bank will also process and disburse the loan amount quickly. So, check your credit score and try to settle any outstanding dues before applying for a home loan.

Fixed or variable rate?

Banks must link their retail lending to external benchmarks such as the repo rate or three- or six-month Indian treasury bills. Most banks have tied the interest rate on their home loans to the repo rate called the Repo Linked Lending Rate (RLLR). Thus, with the drop in the repo rate, interest rates on home loans have fallen sharply over the past two years. For example, the country’s largest lender, State Bank of India, offers home loans below Rs 30 lakh to salaried workers at 6.7-7%; and for loans above Rs 50 lakh, it is 6.7-6.9%.

Banks offer variable rate or fixed rate home loans. In a fixed rate, the interest is fixed either for the whole term of the loan or for a certain part of the term of the loan. In the case of a pure fixed loan, the EMI will remain constant. If the loan is fixed for a certain period, the rates will reset after a certain time. In the case of a variable rate, the interest rate will be determined by the market rates (repo rate) and the spread, which is an additional amount that the banker adds to cover credit risk, profit margin, etc. . The spread differs between lenders. and is determined based on factors such as credit rating, loan amount, income, loan term, employer details, etc.

If you plan to pay off the loan early and not run the full term of the original loan term, going with a variable rate is a better idea. For a fixed rate loan, take into account the interest rate differential which would be 150 to 200 basis points higher than a variable rate and keep in mind that you will not be able to make partial prepayments without penalty.

term of the loan

The term of a home loan is 15 to 30 years. Most borrowers choose to pay EMIs as low as possible so they have more cash flow to pay other expenses and maintain the tenure for a long time. But the longer the term of the loan, the greater the interest payment.
Also, in case of early payment, do not reduce the EMI as this will not help reduce the interest payment. Instead, keep the same EMI or even increase it if your cash flow permits and reduce the duration. Doing this within the first five years of the loan will significantly reduce the total interest expense over the entire period. Banks allow you to repay the loan earlier than expected by making lump sum payments, provided the borrower pays from their own sources. Also, try crediting more than your EMI amount to your loan account regularly to reduce the interest amount.

Monthly declining balance

Look for a loan that is fixed on a declining monthly balance instead of an annual basis. In the event of a monthly reset, interest is calculated on the outstanding principal balance for that month and the paid principal is deducted from the opening outstanding principal balance to arrive at the opening principal for the following month and interest is calculated on principal outstanding reduced. In annual reviews, the principal paid is adjusted at the end of the year and the borrower will continue to pay interest on a portion of the principal that has already been repaid to the lender. Thus, a monthly declining balance will lower overall long-term interest expense.

Getting in

  • Make sure your credit score is above 750 and pay off any outstanding dues before applying for a home loan.
  • If you plan to repay the loan early, opt for a variable rate.
  • Look for a loan that is fixed on a declining monthly balance instead of an annual basis.
  • The longer the term of the home loan, the higher the interest payment will be.

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