Monday, January 30, 2023

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What Should Borrowers Do to Bottom out Home Loan Interest Rate?

Nothing compares to joy individuals experience when their months-long patience leads to their dream of owning home becoming reality. For most, the house-buying process usually involves a home loan application with the final choice governed by the home loan interest rate on offer.

Lending institutions typically have a host of pre-requisites and provisions that need to be followed. To better understand home loan eligibility criteria, look at the factors that determine a borrower’s home loan eligibility.

 #1 Income 

A borrower’s annual income justifies the loan amount that can be sanctioned.

#2 Employment Status

Like income, an individual’s employment status plays an essential role in deciding the loan amount. An applicant stands a higher chance of getting faster loan approval if they are employed by an MNC or a public/private sector company.

#3 Credit Score

The credit score has a direct impact on the home loan interest rate. A credit score of 750+ is likely to increase one’s chances of getting approval for a housing loan in India.  

#4 Age

Age plays a crucial role as lenders calculate the home loan repayment structure based on the active years remaining for a professional or salaried individual.

#5 Existing Debt Commitments 

Having more than one loan and credit card payment dues does not create as many problems as missing loan EMIs, late repayments, and fluctuations in payment of credit card bills. These are some of the key factors that ascertain housing loan eligibility. 

An integral part of a housing loan in India, however, is the property the applicant desires to buy. Lenders scrutinize the property as it serves as collateral. Besides, the property value also determines the home loan amount. Once all the property details are ready, the borrower must chalk out the down payment percentage and apply for a housing loan in India.  

Tips to Reduce Home Loan Interest Rate 

While the current home loan interest rate have seen a significant reduction, even minor differences between rates offered by the lender can bring about a difference. The borrower may feel like they have managed to strike gold with the home loan interest rate they have received from the lender, but here are some tips they can still follow to bottom out the interest rate even further. 

Opt for a Shorter Home Loan Tenor

While shorter home loan tenor increases home loan EMIs, it ensures housing loan principal amount gets pay off earlier. The rate of interest is calculated on the principal. The absolute interest marginally decreases once a lender recovers the principal.

Increase the Home Loan EMI Annually

With annual salary appraisal, borrower must try to start increasing home loan EMI annually by at least 5%. This will allow the borrower to repay the principal amount faster and in a hassle-free manner. In return, this will reduce the home loan interest rate.

Refinance Housing Loan in India

If an applicant comes across financial institution offers an interest rate lower than current lender is offering. They should consider switching to this lender. The borrower’s home loan interest repayment burden can be reduce significantly by refinancing the housing loan at a considerably lower interest rate. 

However, before taking the plunge, one needs to check the legal fees and prepayment penalties that may be part of the process. It would be a clever idea to do a cost analysis to ensure that savings from a lower rate of interest are higher than the amount spent during the refinancing process.

Shift to Marginal Cost of Funds Based Lending Rate 

From April 2016, all financial institutions move from base rate to MCLR, it allows borrowers to take advantage interest rate.

If borrower have took loan before April 2016, they can ask their bank to switch loan to MCLR. Banks levy taxes and a conversion fee of about 0.5% on the outstanding home loan amount that must be repaid. Hence, doing a prior cost analysis would be beneficial.

The Final Word

Though every borrower tries to avail of the lowest possible home loan interest rate while availing of a home loan, they must ensure that the option they settle for fits comfortably with their monthly budget. While the aim should ideally be the repayment of the principal amount at the earliest, they must also remember to not set an EMI amount that might turn into a burden in the long run. We recommend borrowers use a home loan eligibility calculator to check their eligibility and approximate EMI amount. This will help them plan their finances better.

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