While applying for floating interest rate home loans, borrowers hope that the Reserve Bank of India (RBI) will cut the repo rate soon enough. Now, it is true that the RBI’s repo rate cuts may lower your cost of borrowing. However, when the RBI cuts the repo rate, home loan borrowers may not benefit immediately. Your banker must lower the base lending rate (now called the Marginal Cost Fund Based Lending Rate- MCLR) for your home loan Equated Monthly Instalments (EMIs) to fall.
There is no need to lose hope because this is not the only way to manage your interest rate burden.
- Lower your home loan tenure
As a general rule of thumb, every borrower must try to pay-off the debt as soon as possible. If you spend more time repaying the debt, you will end up paying more as interest. As a home loan borrower, you must try to lower the tenure period, so that the interest rate charged by the bank is kept as low as possible.
The process of lowering the home loan tenure is simple. Inform your lender that you would like to lower your home loan tenure. Banks are usually in favour of lowering the home loan tenure because this aligns with the interests of the bank too. A short home loan tenure lowers the risk associated with extending credit.
If the bank accepts your request to lower your home loan tenure, your home loan account will be updated. You will also be expected to make necessary changes in your payment pattern to meet the deadline.
- Pay more than you do
After you get your home loan tenure lowered, this is what you should do next. Make sure that you have saved enough so that you can afford to pay more every month (When your home loan tenure is shortened, your monthly burden rises). If you add a few bucks to your floating interest rate home loan installment every month, you will save thousands in interest.
- Make partial/additional payments
Whenever you get extra money through tax rebates, bonus or pay increment, use it to lower your home loan burden by making partial payments. If you are wondering how this helps, keep in mind that every time you make an additional payment, your mortgage term declines. The interest payment declines too, over the course of time.
You can always use online calculators to measure how much you have saved by making an additional payment, and how much you need to pay on the outstanding loan amount.
However, if you find an investment option where the rate of return is greater than your home loan interest rate, you must choose it over loan repayment.
- Shop around and get a home loan ‘Balance Transfer (BT)’
If your lender raises your home loan interest rate, what would you do? You can lower your monthly burden by increasing your home loan tenure. However, if you do this, the principle portion will not decline despite many years of repayment.
Do not be disheartened. ‘Balance Transfer’ (BT) is a tool tailored to the needs of home loan borrowers who find themselves in such a situation.
Balance Transfer will shift your running home loan from an existing lender to a new lender under certain conditions.
Your EMI will decline if you go for BT if interest rates had fallen substantially since you took the home loan. You can also avail of the additional loan amount at lower rates called Top-up if you apply for BT.
- Consolidate your debt
While purchasing a new home loan, or during refinancing, take a hard look at your overall debt position. If you have unsecured debt (like personal loans and credit cards) to be paid off along with the home loan, this may be the right time for you to consolidate all your liabilities/loans into one single home loan debt. This will definitely save you on interest every month.
- Avoid the temptations of rates and gifts
Some lenders offer low introductory interest rates/ gifts to home loan borrowers. Do not fall for such illusory gifts. Such offers usually come with hidden costs. If you want to exit the deal, you may have to pay a higher interest rate and handle multiple exit costs.
Do good research and consult a few customers who have their advances running with the lender you wish to approach.