By way of consistent reductions, some lenders have brought down the home loan interest rate considerably. While repo rate cuts by the Reserve Bank of India have been mostly responsible for interest rate reduction, borrowers may adopt a few simple measures, which can further decrease the interest outgo –
- Prepayments
Amortisation schedule of home loan indicates the amount of principal and interest across periodic payments till the term-end when a loan is fully repaid. In the first few tranches of monthly instalments, a major component comprises interest. Later down the payment schedule, the ratio reverses. So, if borrowers make part prepayments in the initial phase, the principal component reduces. In effect, it lowers interest outgo as well.
- Shorter loan tenure
Home loan interest rates levied in a long-term credit facility escalate the interest outgo significantly. For instance, if the loan term is 20 years, then interest outgo will be much higher when compared to a loan of similar principal for tenure of 10 years.
Hence, borrowers may consider choosing a shorter tenure for a loan and the total interest due also comes down. If you already have a home loan running, consider prepaying EMIs, which would automatically reduce home loan tenure.
- Improving credit score
Among all the factors that go on to determine the rate of interest of a loan, a credit score can be considered to be the most important. One should assess the methods in which credit score can be improved. On improvement, borrowers would have a stronger ground to renegotiate interest rates with lenders.
To put things in perspective, home loan interest rate presently stands at a record 15-year low. It is more likely that the interest rate would go upward with the economy picking up steam. Thus, instead of waiting for rates to fall further, a borrower should focus on enhancing their eligibility factors. Doing so should enable them to avail housing credit under the most favourable terms.
