How to Reduce Your Home Loan Interest? Here Are 7 Proven Strategies

A home loan is an essential tool for many individuals to make their dream of owning a home come true. However, the interest payments on these loans can become quite substantial over the years, putting strain on your finances. Fortunately, there are several ways you can reduce the amount of interest you pay on your home loan, making your monthly payments more manageable and freeing up some of your hard-earned money. This article enumerates 7 effective tips and strategies to help you lower your home loan interest and achieve financial stability.

1. Shop around for the best interest rate:

The interest rate on your home loan has a significant impact on your total interest outgo over the loan tenure. That's why it is crucial to shop around and compare interest rates from different lenders. You may be surprised to find that the interest rate offered by one lender is significantly lower than that offered by another. By comparing interest rates, you can ensure that you are getting the best possible deal and reducing the amount of interest you pay over the loan tenure.

The interest rate you are offered will depend on several factors, including your credit score, loan-to-value ratio, debt-to-income ratio, and employment history. Lenders also take into account the current economic climate and their lending policies when determining interest rates.

To find the best interest rate, you can start by checking different financial websites for comparison and reaching out to multiple lenders directly. It is important to have a good understanding of your financial situation before you start shopping around so that you can accurately compare the offers you receive. If you are unsure of making the comparison on your own, you can consider hiring a mortgage broker who can help you compare different offers and find the best interest rate for your specific situation.

2. Make a larger down payment:

The size of your down payment can have a significant impact on the interest rate you are offered. Lenders typically offer lower rates to borrowers who make a larger down payment, as this reduces the amount they need to lend and the risk they are taking on.

Making a larger down payment can result in a lower interest rate, which means you will pay less interest over the loan tenure. It can also help you build equity in your home more quickly and reduce your monthly repayments.

Click here to learn how you can save for a larger down payment with the help of PersonalFN's SMART Fund Explorer. Your goal should be to save as much as possible so that you can make a larger down payment and enjoy the benefits of lower interest rates and overall reduced interest outgo.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

3. Choose a shorter loan tenure:

The loan tenure is the length of time you have to repay your home loan. A longer loan tenure will result in lower monthly repayments, but you will pay more interest overall. A shorter loan tenure, on the other hand, will result in higher monthly repayments, but your overall interest outgo will be reduced.

By choosing a shorter loan term, you can reduce the amount of interest you pay over the loan tenure. This can result in significant savings, especially if you have a high-interest rate. A shorter loan term can also help you build equity in your home more quickly and become debt-free sooner.

When choosing a loan tenure, it is important to consider your financial situation and long-term goals. If you have a stable income and a good credit score, a shorter loan term may be a good option. However, if you have limited income or a high debt-to-income ratio, a longer loan term with lower monthly repayments may be more manageable. You should also consider your long-term financial goals and how a shorter loan term will affect your overall financial stability. Choosing a loan term that works for you and fits your financial goals and budget is important.

4. Improve your credit score and negotiate with the lender:

If you have a low credit score, lenders may see you as a high-risk borrower and may be less likely to offer you a competitive interest rate. This can result in higher monthly repayments and a higher overall cost of the loans.

Improving your credit score can give you more bargaining power when negotiating with lenders for a better interest rate on your home loan. A high credit score is a sign to lenders that you are a responsible borrower who is likely to repay your loan on time.

5. Consider home loan transfer:

Home Loan Balance Transfer allows you to transfer your existing home loan to a new lender at a lower interest rate. This can result in lower monthly repayments and a reduced overall cost of the loan. By taking advantage of the lower interest rates, you can save on interest charges over the loan tenure and potentially pay off your loan faster.

However, before deciding, it is important to carefully consider the costs and benefits of a home loan balance transfer, including any fees associated with the transfer. You should also compare offers from multiple lenders to find the best deal and consider the long-term impact of a balance transfer on your overall financial situation and goals.

6. Make regular payments:

By making regular, on-time payments, you can pay down your loan balance faster and reduce the amount of interest you owe. This also helps in avoiding any late payment charges and accumulation of debt.

Additionally, by paying more than the minimum required monthly payment, you can make a significant impact on the total interest charges of your loan. Paying extra towards the principal of your loan will reduce the overall balance of the loan, thus reducing the total interest outgo. However, before opting for home loan prepayment, check the prepayment charges with your lender.

7. Opt for a floating interest rate:

A floating interest rate is tied to a benchmark rate, such as the Reserve Bank of India's repo rate, and can change over time in response to changes in the benchmark rate. This means that if the benchmark rate decreases, your interest rate will also come down, and your monthly payments may become lower. Floating interest rates are usually 1% to 2% lower than fixed interest rates from the same lenders. However, there may be an instance when the floating rate rises above the fixed interest rate, but such circumstances are usually temporary, and the floating interest rate comes down again eventually.

In conclusion:

Reducing your home loan interest can help you save money and pay off your loan faster. As discussed, you can consider several strategies, such as choosing a loan with a lower interest rate, making extra payments, refinancing your loan, and taking advantage of balance transfer options. By carefully considering your financial situation and goals and doing your research, you can find the best-suited option for you and reduce your home loan interest burden.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.