How To Save Interest On Your Home Loan: 6 Easy Ways to Lower Your Monthly Payment

Home loan EMIs (equated monthly installments) can put severe stress on your monthly budget if you don’t have a proper plan chalked out. Remember that your loan amount, the interest rate on your loan, and the loan tenure are the primary determinants of your monthly installment. At times, due to poor planning, you may end up paying more against your loan.

So, if you’re planning to take a home loan or already have taken one, then consider these 6 essential tips to reduce the interest payable.

The Basics of Interest and Loan EMI

Most people ignore the simplest fact of taking a home loan. Home loans are fixed EMIs, which means that your principal amount remains fixed while the interest paid on it is determined by your lender’s discretion. This means, your lender does not get into the nitty-gritty of how much interest to charge on your loan.

Your lender would rather get the loan approved and pay your interest out of the cash flows generated. If your loan amount is large, the lender is better off granting a loan at a lower interest rate. On the other hand, if your loan amount is small, your lender is better off granting you a larger loan at a higher interest rate, so that he can make a large profit and thus, passes your loan on to his moneylender at a high-interest rate.

Understand the Basics of a Home Loan

Before you plan a home loan, you need to know all the basics of a home loan and how it works. Before you start repaying your loan, you need to understand how it works and how much of the principal and interest you are supposed to pay every month.

How much of the principal and interest you are supposed to pay every month depends on a number of factors, including the loan amount, the interest rate and the tenure. It is important to understand these factors as they will determine how much interest you pay every month. If you pay a lower rate of interest, then you would end up paying less principal, which translates into lower interest payments.

Your loan tenure is another key factor to consider while planning your home loan.

Calculate Your EMI and Check Your Payment Options

This is one of the most basic steps one needs to take. Make sure you calculate your EMI and do a calculation of your monthly repayment and the total amount of interest you are going to pay on your home loan. You’ll have to determine your monthly EMI first and then pay that in full.

This step involves calculating the monthly payment that you can afford based on the amount of loan you plan to take. Calculate this amount in advance so that you don’t find yourself in an uncomfortable situation where you are paying more than you can afford.

Always check your bank’s interest rates before applying for a home loan and get it preapproved so that you are ready before you take any loan.

Lower Your Home Loan Interest Rate

If your home loan interest rate is a bit too high, then you can try negotiating a lower rate with your lender. Some lenders are open to offers that are within their comfort zone. In fact, Axis Bank has recently launched a unique platform where you can transfer your loan to a government-backed loan program to get a lower interest rate. The Finance Ministry’s Pradhan Mantri Awas Yojana (PMAY) is currently offering interest rates as low as 8.5%.

You can also try getting a higher loan tenure, or adding an extra facility to your home loan that would enable you to make extra payments, for instance, to pay off your loan in a fixed time period.

Make Extra Repayments Towards Your Home Loan

Often, people find it difficult to make minimum monthly repayments towards their home loan as they don’t have enough income to keep up with the existing loan amount. In case your income is too low, you can opt to keep an extra payment in the previous month or even in the next month towards paying down the principal. The principal will be reduced and this will further help you reduce the interest amount that you have to pay. If your loan is in the form of a term loan then you should consider making the last 10% or even the first 10% of the principal as a lower instalment.

Maintain Your Loan Repayment Frequency

It’s easy to miss a payment or two which leads to financial disaster for your home loan.

Choose a Low-Interest Home Loan Scheme

When you look at home loans, one of the most important considerations is your monthly loan repayment. That’s why, before choosing the best home loan scheme, you should find out the interest rate that you can afford. Also, compare it with other offers in the market and see if you can get a lower interest rate.

For example, let’s say you took a home loan for a property worth ₹3 crores with a 30% interest rate. Now let’s say that the government decided to announce a 40% interest rate for tax benefits to the first home buyers. Now, you can consider a home loan with a lower interest rate of 30%.

Also, don’t think of a home loan as just a loan. A home loan is a cost, so you need to compare its real cost with other factors and see if the scheme fits you.

Reduce the Tenure of Your Home loan

Every lender takes into consideration the tenure of your loan when you are applying for it. In case you’ve taken a home loan to buy a house and that house hasn’t been built yet, the tenure of your loan may increase, depending on how much longer the construction period of the house is going to be.

If you don’t have a lot of time left before the construction period of your house ends, then you can cut down the tenure of your home loan by raising the down payment on your loan. This will essentially lower your monthly instalment due to the interest savings.

Also, consider using the interest-based LTV (loan-to-value) ratio while deciding your loan amount. LTV is used to determine the loan tenure and the interest rate for the loan.

Conclusion

The aforementioned tips are convenient ways to lower your home loan interest. From buying a home loan early to developing a good credit score, these tips help you in reducing the instalment amount you need to pay and save money in the process.