Picture this scenario—you’re a new employee at a firm in a new city. Imagine wanting to own a house, but you don’t have the needed funds. Even after saving for some months, you still can’t afford a decent home.
So, after researching many financial institutions like banks or Non-Banking Financial Companies (NBFCs), you finally obtain an amount at an agreed interest rate. Because you were desperate for a home, you readily agreed to the terms and conditions. Let’s say that in your haste to take a loan, you failed to consider the high interest being charged.
There are several ways to reduce the interest being charged on your existing loan. However, are you aware of them? In this article, you’ll learn how to reduce a housing loan interest rate.
The Meaning of a Home Loan Interest Rate?
The interest rate on a home loan refers to an amount charged by a financial institution for taking a loan. The interest rate often determines what you’ll repay in equated monthly instalments (EMIs).
All lenders charge different amounts as interest. Factors like loan tenor, credit score, and the loan amount are what a lender considers before charging borrowers interest.
Types of Home Loan Interest Rate
There are two major home loan interest rate types.
Fixed Interest Rate
This is the type of interest system whereby the amount charged for taking a loan remains unchanged throughout the repayment tenor. Any change in the market does not in any way affect it. However, you may transfer to a floating interest system but only after reaching a milestone in the tenor.
Since the EMIs do not change, you have a clear understanding of the amount needed to close the loan. This enables you to easily plan your repayment.
The fixed nature of the interest rate means that you cannot benefit from occasional repo rate cuts.
Floating Interest Rate
It is a system that depends on the repo rate, an external benchmark. By this, we mean that it increases or decreases in tandem with the repo rate. During a favourable market condition, a reduced rate will lessen the interest payable on a loan.
You can be charged interest based on the current market trends. If there’s a drop in the repo rate cuts, you get to pay less.
Because of this system’s nature, an unforeseen rise in the repo rates will mean that you will pay more towards your loan.
3 Ways to Reduce Your Current Housing Loan Interest Rate
If you have been paying more towards your home loan, below are three ways to reduce your current home loan interest rate:
Opt for a Home Loan Balance Transfer
If you come across a lender that offers an interest rate lower than your current lender’s rate, then you should consider transferring your home loan to a new lender. Doing this lets you plan your finances better and save money.
However, you should evaluate the fees associated with a balance transfer before initiating the process.
Choose a Short Tenor
A long tenor lowers your EMIs, making them easier to pay but opting for a short tenor can fetch you a low interest rate. It also enables you to pay your principal amount quickly, thereby reducing the interest.
Possess a High Credit Score
As we mentioned earlier, lenders consider your credit score and other factors before setting an interest rate. To be charged a low amount, you must have a high credit score. We advise you to have up to 725 to stand a chance of getting a low-interest housing loan. A high credit score convinces the lender that you are a low-risk borrower.