Learn how to manage Home Loan interest rate

A home loan is one of the most reliable financial tools for home buyers. It can make making a big purchase simpler and much more manageable. However, the home loan interest rate plays a significant role in this.

The housing loan interest rate is based on the loan amount, credit score, tenure, and property type. However, the repo rate in the country can also affect it. An interest rate increase directly impacts home buyers as the interest rate for their loans also increases.

There has been a 40 bps hike in repo rate worldwide in recent times, raising concern in buyers as the rising rates could indicate higher equated monthly instalments (EMIs). 

If you are among the many who wish to buy a home with the help of a home loan, here are some tips that may come in handy during these times. 

Lower loan-to-value ratio
 

A loan-to-value (LTV) ratio refers to the property's value that the lender can lend to the buyer. It is measured as a percentage of the loan amount. The more money you pay in the down payment, the lower would be the LTV ratio of the loan.

According to the Reserve Bank of India (RBI) regulations, lenders can finance up to 90% of the property's value. Home loan borrowers typically prefer to pick homes with a high LTV ratio, as they can immediately get a loan instead of saving for it for a long time. However, a high LTV results in higher EMIs and increases overall costs. On the other hand, picking a lower LTV ratio can lower the EMIs. In such a case, even the higher interest rates in the market would have a smaller impact on the buyer. 

Longer tenure
 

Another way to tackle the high interest rate regime is by selecting a longer home loan term. The longer the term, the lower the EMI, reducing the value of each instalment. However, long tenures increase the final cost of the loan as you pay more interest over time. This can seem like a tricky situation. So, make a call after carefully evaluating all outcomes. 

Compare loans
 

Apart from the interest rate increase, several other factors can impact the cost of the loan. Processing fees, prepayment fees, tenures, loan amounts, etc., all influence the final cost of the loan. Therefore, comparing different lenders and their offerings is imperative. 

For instance, the IDFC FIRST Bank Home Loan offers a digitised process for home loans of up to Rs 5 crores. The bank provides loans of up to 90% of the property's value, and you can also select tenures of up to 30 years. Other lenders may or may not offer these features. So, running a comparison study will help you analyse the differences and pick an option that is the best suited for your needs.

Make prepayments
 

Prepayment refers to clearing your loan prematurely before the tenure ends. Many lenders offer the option to prepay the loan if you have surplus funds. Prepayment can eliminate the long-term cost of the loan by reducing the housing loan interest. There are two ways to prepay a home loan. You can either choose EMI reduction or shorten the tenure of your loan. You can select any of these options based on your budget and preference. Ideally, picking a shorter term can offer higher interest savings. 

However, if you choose to prepay your loan, make sure you do so without neglecting your other financial goals. This option is only advisable if you have surplus money and not if you need to sacrifice other essential needs. 

Home saver option

A home saver or overdraft facility is a credit or overdraft provided by the lender. The facility allows the borrower to deposit money over the loan amount into an account. This money can be withdrawn whenever needed. You can keep depositing into the account to repay your loan. If you make additional deposits, the lender treats them as a prepayment. Moreover, if you withdraw from this account, you can pay it back along with interest. If you select the home saver option, you can quickly clear your loan with prepayments. 

Home loan balance transfer

Despite the rising interest rate in the market, there may always be differences in lenders' interest rates. Therefore, you can opt to shift your existing loan from one lender to another if you find a better interest rate. A home loan balance transfer can be a convenient way to lower the interest rate of your existing home loan. Ideally, if you've got a high interest rate due to a low credit score before but have improved your score now, you can use this option to get a better deal and lower the interest rates of your pending EMIs. 

Increase your EMI

Increasing your EMI lowers the interest cost, enabling you to clear your loan sooner. However, to do so, you may have to provide your bank statements to prove you can clear the loan over a shorter duration. Once the lender is confident of your repayment capacity, they can lower your repayment term and increase the EMI value. However, make sure to assess your income and other expenses before you select this option. Defaulting on loan payments only leads to penalties and a further rise in your overall dues. It also impacts your credit score. So, you must be careful when opting for this facility.

To sum it up

The home loan interest rate plays a crucial role in a home loan. Considering the long tenures of home loans, it can also impact your budget for a long time. Therefore, finding ways to lower it can benefit you in the long run.While the increasing repo rates across the globe may not be in your control, you can always use these tips to manage things on your level. The lender you select can also significantly impact your home loan experience. Therefore, try to pick a reliable loan provider, such as IDFC FIRST Bank and enjoy seamless and hassle-free services while enjoying the house of your dreams.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.