On 6th June 2018, the Reserve Bank of India increased the repo rate by 25 basis points. It is a vital factor that directly affects the interest rates offered to borrowers by financial institutions in India.
Repo rate is the rate of interest at which commercial banks borrow funds from the RBI. Also, a rise of 1 basis point equals an increase of 0.01 percent. An increase in repo rate thus directly affects the lending rates at which commercial banks lend to customers. This means that you will have to pay more interest if you avail a home loan or any other loan.
When taking a home loan, it thus becomes essential that you calculate the interest payable on the principal amount. Use a calculator to determine to compute the home loan interest amount. It will give you a reasonable idea of interest amount that will form a part of your monthly outflow by way of EMIs.
Once you get this idea, the next step is planning on how to minimize the interest payable. Read on to know how you can reduce your interest burden on a home loan.
Take These Steps To Minimise The Burden of Home Loan Interest
1. Opt For Financial Institutions That Offer The Best Interest Rates
Despite this hike in lending rates, not all financial institutions lend at the same rate. Hence, the best option is to go for one that offers the best home loan interest.
2. Increase EMI Instead of Repayment Tenor
Borrowers often tend to opt for a long repayment tenor while availing a housing loan because it reduces monthly outflow in the form of EMIs and cuts down on monthly expenses. However, the reality remains entirely different. Long tenor and a reduced EMI increase the total interest payable. As a result, you end up paying more interest in the long run. It is best to go for a shorter tenor and increase the EMI to eliminate this effect.
When using the home loan interest calculator, analyse the change in total interest payable as you change the tenor. Opt for a tenor that translates into a reasonable amount of total interest payable as per your financial capacity and choose its subsequent EMI.
3. Choose To Part-Prepay Your Loan Amount
Part-prepayment is a unique feature that enables you to prepay the home loan amount any time during the tenor against zero or minimal charges. These charges depend on the type of interest you choose to pay- fixed or floating. You have to know how to choose between fixed or floating interest rates as per the market scenario. The right choice will help you reduce the total interest payable.
Some lenders also offer a foreclosure facility apart from part-prepayment. So, if you have excess funds available with you, foreclose or part prepay your housing loan before the tenor ends. It will help you either reduce the loan tenor or the EMI.
4. Switch To A Lender Offering A Low Rate of Interest On Balance Transfer
If you have already availed a loan, you may also choose to transfer the balance amount to another lender offering a reduced rate of interest on home loan balance transfer. It will not only minimise the total interest payable but will also reduce EMIs. Besides, it also gives you an option to avail a top-up loan over and above the loan amount to meet other financial needs.
Utilize a home loan interest calculator to assess the loan amount, interest payable and EMI to plan your finances accordingly. Apply for the loan with a lender offering the best interest rates.