There are various lucrative deals and offers for first-time home-buyers or home loan borrowers. While the internet is already flooding with multiple guides and instructions to assist you in home loan processes, intended applicants need to have an in-depth understanding of the aspects before applying for a loan application.
Since home loans are long term credit, it is essential to determine the interest rate to determine the overall interest liability towards the loan. The applicable home loan interest rate comprises two components: mark-up rate and the base rate. The combination of these two rates is what a borrower would be paying on a loan.
Also, the home loan interest rate affects the cost of borrowing. This is why it is crucial to check and compare the interest rates offered by various financial institutions in the market.
Effective methods to compare interest rates
Borrowers can calculate and compare the loan interest rates using the following methods and determine their affordability accordingly.
- EMI calculation
Borrowers can also use the mathematical formula to calculate loan EMI and get a fair idea of repayment affordability.
EMI= [P x R x (1+r) ^n] / [(1+r) ^n-1]
Here, P represents principal, r is the rate of interest, and n is loan tenor. Note that interest rates are usually linked with repo rates and can differ from one lender to another. However, manual calculations are prone to errors.
Hence, to effectively compare and select the lowest home loan interest rate, borrowers can always take help from a home loan EMI calculator.
- Through an online EMI calculator
Individuals can calculate the interest liability on their loan by using a home loan EMI calculator. First, one needs to fill up certain factors such as repayment tenor, interest rate, and loan amount. Once these details are fed in, applicants will click on the ‘Calculate’ button to determine the detailed breakup of their loan along with the payable interest.
They can use the financial tool to determine how much different housing loan options with varying interest will impact their affordability. Based on the result, they can pick a suitable loan option.
Tips to lower housing loan interest burden
At times, due to poor financial planning, borrowers end up paying more towards their loans. So, if you are planning to take a home loan, consider the following tips to reduce the payable interest.
- Make higher down payments
Most financial institutions provide 75-90% of a property’s value as a loan. Accordingly, borrowers are required to pay the remaining percentage of amount. However, instead of paying the least amount as a down payment, it is better to contribute as much as possible. In other words, paying a higher down payment lowers the loan amount requirement, which in turn attracts a low home loan interest rate.
- Opt for a shorter tenor
A shorter tenor helps to avail a loan at a low-interest rate from lenders. They also help lower the overall interest liability as it is charged on the outstanding loan amount. Hence, by picking a shorter tenor, one can lower the debt burden significantly. However, a shorter tenor leads to a high EMI.
- Loan refinancing
Borrowers can only opt for a home loan balance transfer when they have already started paying EMIs. Suppose a borrower feels that the interest rate levied by his/her current lender is on the higher side. In that case, one can refinance the principal amount to some other financial institution that offers a lower home loan interest rate.
Apart from these, borrowers can also reduce interest rates by claiming housing loan tax benefits. As per Income Tax Act, 1961, under Section 24 (b), the interest portion of the EMI paid in a year can be claimed as a reduction from a borrower’s total income. The upper claim limit under this section is up to a maximum of Rs.2 lakh.
Above all, borrowers need to fulfil the home loan eligibility criteria to avail benefits associated with a home loan. Existing home loan borrowers can also enjoy pre-approved offers extended by reputed HFCs. These offers further simplify and accelerate the loan application process.
Hence, borrowers must practice the factors mentioned above before signing up for a home loan and minimise the interest burden. Also, one needs to make sure about the associated fees and charges extended by financial lenders before taking up a loan.
