Home loans aren’t like a personal loan or any other loan for that matter in respect to the tenor. As home loans are for a very long period, borrowers have the power to negotiate with the bank to get the best value for their money and to further explore ways to reduce the interest payout in the long run. Here are a few of the ways you can get the best out of your home loan deal:
Credit score:
A credit score of CIBIL with 750 plus will not only help you negotiate a lower interest rate but will ensure the bank process the loan amount quickly and disburses it into your account. So, before applying for a home loan, clear all your credit dues on your credit card and check your credit score. Or, you can visit the lender’s website and check how much your interest outgo will be using PNB Home Loan Calculator and Bank of Baroda Home Loan EMI Calculator tools.
Check whether the interest rate is fixed or floating:
You should know that banks have to link their retail loans to external benchmarks such as repo rate. Most banks linked the interest rate on their home loans to the repo rate, which is called the repo-linked lending rate (RLLR). So, when the repo rate declines, its effect will be on the home loans as well, and the same is what we are seeing currently, with SBI offering home loans below 30 lakh at 6.7%. Banks offer home loans either on fixed(interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan, and whenever the rates change, it will be reset after some time) or floating interest rate (the interest rate will be determined by market rates that are, repo rate and spread. If you plan to pre-pay the loan and not run the full course of the original tenor of the loan, opt for a floating rate but do check the Bank of Baroda EMI Calculator to finalize an option before choosing.
Loan tenure:
Usually, the tenure of a home loan is 15-30 years. There are two sets of borrowers, one that chooses to pay EMIs as low as possible as they think they will have a greater cash flow to pay for other expenses, but this option keeps the tenure long, which results in more interest outgo. You should ideally increase the EMI outgo if your cash flow permits which will help you lower the tenure. If your cash flow permits, you should increase the EMI within the first five years of the loan, as this will significantly lower the total interest outgo over the entire period. Even crediting more than your EMI amount into your loan account regularly helps to bring down the interest amount. You can use the Bank of Baroda EMI Calculator or PNB Home Loan EMI Calculator to understand how your EMI will be affected. Some lenders allow you to repay if you make lump sum payments from your sources
Choose a loan that is set on a monthly reducing balance:
While some loans are set on an annual basis, others are set on a monthly reducing balance. In the latter case, the interest is calculated on the outstanding principal balance for that month, and for the next month, the principal paid by you this month is deducted from the opening principal outstanding balance. However, in another case that is in annual resets, the principle paid by you is adjusted at the end of the year, and the borrower will continue to pay interest on that portion of the principle that has already been paid back to the lender. Hence, it is advised to choose a monthly reducing balance as that will bring down the overall interest outgo in the long run.
If it requires, co-borrow with a spouse:
Do you know the lowest interest rates are often reserved for female borrowers? That is why you will see it is very common for home-buyers to co borrow with their wives to avail of the lowest rate. If you want to get the best deal out of your home loan, take a loan with your wife as this will include special concessions, you will be able to increase your loan amount eligibility able to claim tax benefits. If you can, you can calculate the same via the Bank of Baroda EMI Calculator and see how adding your wife will affect your EMI outgo.
Bargain hard:
As you must know, home loan rates are at historic lows, and if you compare well with other lenders using the Bank of Baroda EMI Calculator or PNB Home Loan Calculator or other lender’s websites, you will be able to get the best offer on your home loan.
If possible, declare your additional sources of income:
if by using PNB Home Loan Calculator, your EMI outgo is higher than you expected, then you can show your additional source of income to your bank. Do you know your home loan eligibility increases when you declare your additional sources of income? If you are a salaried class individual, and if in case you have other sources of income such as rental income, part-time business, etc., show it to your lender. It can help in improving your financial health and help in securing a higher loan amount.
Arrange for a higher down payment:
Do you know banks give more importance to those who keep the loan to value ratio low? You can do so by making a higher down payment. Hence, if you can arrange to make a down payment of above 20-25%, you can get the lowest rate offered by the lender. So, making a higher down payment not only reduces your EMI by ensuring the outstanding amount is low, but it can also get you a lower interest rate on a loan.
The repo rate is at 4%(the lowest since April 2001), and with real estate prices inching up, low-interest rates on home loans are unlikely to continue for long. Hence, this is the best time as per experts to take a home loan. Owing to this, housing sales across the top 7 cities in the early months were at an all-time high. However, before you jump on the bandwagon, do your research and consider the above-mentioned points. And not in any circumstances, get biased with what your friends, relatives, and colleagues say. This is finance, a pure mathematical product, and hence, do your maths and decide accordingly.