After the tiring process of buying a home, you would have thought of enjoying and living peacefully in your new abode. But in that excitement, many forget about what’s coming ahead. An endless (almost) series of EMIs, which will last at least a decade, if not more. But you already knew this before making the investment, didn’t you? Here are a few tips to reduce the excruciating interest rate on your home loan:
- INCREASE EMI PAY
EMI is calculated basis the monthly income of the payee. So, if your EMI is coming around 40% of your income and you have means to increase it, then try repaying an increased EMI every year. Your bonus amount, incentives, increment, gifts, savings etc. can be used in repaying that extra EMI. Paying just an extra EMI yearly will impact your interest rate significantly in the long run. If not an extra EMI, then try and increase your EMI amount by 5% every year.
- SWITCH TO MCLR
Marginal Cost of funds-based Lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. After April 1, 2016, all the loans taken can be switched to it. The advantage of MCLR is that it is directly linked to the repo rate (the rate at which RBI lends to its clients generally against government securities), which allows you to enjoy the change in interest rate faster.
Banks usually charge a conversion fee of 0.5%on the outstanding loan amount when you switch from your regular interest rate. It is a one-time option and once chosen, you can’t step back from it. But it is profitable in the long run as you save lots through the new interest rate.
Saving on interest rate is a challenging task and one needs to be careful about it. You always have the option of switching to a different lender, if you are not satisfied with your current one. But the process is tiring, and it will feel like taking the loan all over again. Still, if the difference in interest rate is more than 75bps between both the lenders then only you should make that switch. Ultimately, it’s all about the outstanding amount and the remaining tenure of your loan that will help in reducing the interest.
- HFCS/NBFCS PROVIDE BETTER INTEREST RATE
If you have taken a loan from any HFCs (Housing Finance Companies) or NBFCs (Non-Banking Financial Companies) then you can switch to a lower interest rate with a conversion fee. Your interest rate won’t change but the spread of your loan will get changed.
NBFCs/HFCs do not change the base interest rate but by changing the spread, they reduce the overall rate for the payee (actual interest rate = base rate +/- spread).
Base rate of your loan = 16%
Spread = -6%,
Interest rate = 10% [16% + (-6%)]
The spread rate will be changed to let’s say -7%.
Reduced rate = 9% [16% + (-7%)]
The conversion fee would depend from lender to lender. Also, with NBFCs/HFCs, you can change the interest rate any number of times.
While investing in a residential property in Mumbai, be sure to check your options of switching or refinancing beforehand only. This will help your investment be more satisfactory in terms of the hassle you will go through otherwise. Hiranandani properties in Mumbai and Navi Mumbai has tie-ups with top leading financial institutes of the country, so before investing in any residential/township projects be sure to check properties by Hiranandani Communities for a comfortable post-investment period.