Owing to the current market scenario, over the last few months, the price of real estate in India reduced significantly. The following data was gathered from a Knight Frank report –
- Between July and December 2020, residential property prices in top 8 cities in India, including Delhi, Mumbai, have reduced by almost 1% to 9%.
Along with that, after consecutive rate cuts of 2020,
- The current repo rate now stands at 4%, which is at its 15 years lowest.
Clearly, it is a great opportunity for aspiring home buyers to realise their dream of purchasing a property. The reduced price of home units coupled with affordable home loan interest encouraged most home buyers to finance their purchase without straining their budget.
However, to reap the benefits of such favourable terms, they need to consider a few factors, starting with the interest rate types that determine the overall borrowing cost.
Types of home loan interest rate
Choosing the right home loan interest type is a crucial decision as it governs the interest accrual. Primarily, there are two types of interest rates, as discussed below.
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Fixed interest rate
As the name suggests, in this type, the interest rate remains the same for the entire tenor. Since this rate does not change with any market scenario and other factors, borrowers need to pay a fixed amount as monthly instalment.
Individuals can also use a home loan EMI calculator to estimate their monthly instalment and total interest payable beforehand. Doing so will allow them to plan their finances better and facilitate ease of repayment when opting for a home loan.
Being unchanged for the tenor, fixed interest rates are generally higher than floating interest rates. It means individuals may have to pay additional interest on credit availed while choosing this type.
However, individuals should opt for this option if the market scenario indicates a rise in interest rate in the future.
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Floating interest rate
On the other hand, with this type, home loan interest rate depends on the external benchmark mentioned by RBI. Hence, even a minor change in economy affects the interest rate.
However, any reduction in repo rate reduces the interest outgo significantly. It allows individuals to save on interest payable. If there is any possibility of rate cuts in near future, this interest type can be a viable option.
Since it fluctuates with time, a floating interest rate hinders the financial planning one needs while opting for a long-term home loan.
Therefore, before applying for this credit, individuals need to choose between these two interest types judiciously to ensure greater savings.
However, besides interest types, there are several other factors, following which can help save on interest payable.
Ways to lower home loan interest outgo in 2021
Following are some simple factors that determine the interest payable of a housing loan.
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Meet eligibility
The home loan interest rate depends on the eligibility of borrowers to a great extent. Based on this factor, they can negotiate for a competitive interest rate. The home loan EMI goes down accordingly. For instance, lenders require borrowers to maintain a credit score of 750 and above before sanctioning this credit.
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Prepay frequently
You should also consider making part-prepayment as and when you have additional funds in hand. This amount directly goes towards principal payment. Therefore, with regular part-payment, you can lower the EMI keeping the tenor same. Otherwise, you can also curtail the tenor, keeping the EMI same.
Select HFCs also allow borrowers to make part-prepayment with nominal charges.
Such lenders also extend pre-approved offers that simplify the loan application process. Besides home loans, such offers are also available on a range of financial products like loans against property and many more. All you need to do is fill-in your name and contact number to confirm your pre-approved offer immediately.
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Go for a higher down payment
The home loan LTV depends on the lender and the cap set by the RBI. It means if your lender offers you an LTV of 80%, you have to make a downpayment of the rest 20%.
RBI has rationalised the risk weightage of home loans by connecting them only to LTV on all new loans sanctioned till March 31st, 2022.
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Choose shorter tenor
Although choosing a shorter tenor translates to higher EMI outgo, it reduces the overall home loan interest payable in the long run.
For instance, you have availed a loan of Rs.20 lakh with an interest rate of 7% for 20 years. In that case, your EMI payable would be Rs.15,506, and interest would be Rs.17,21,433.
If you reduce the tenor to 15 years, EMI becomes Rs.17,977, but interest payable would be Rs.12,35,725.
Finally, individuals can also opt for a balance transfer to reduce their home loan interest and save substantially. This can also help avail better services from a new lender.
Also Read: https://pakgreeneagles.com/6-trends-in-indias-home-loans-market/
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