What portion of your salary should you spend on loan EMIs?

Lending institutions are offering home loans starting at 6.65%. However, interest rates for home loans depend on the borrower’s loan amount, profession, tenure, etc. Leading lenders like SBI, LIC Housing Finance, ICICI Bank, HDFC Bank and Kotak Mahindra Bank have lined up offers for customers.

So, if you are planning to take a home loan or have an existing home loan, then the points mentioned below will help you in taking an informed decision.

For New Buyers:

Apply for a Shorter Tenure

A short loan tenure makes it easy for the individual to repay a home loan faster, thus enabling you to get a lower cost for the interest payable. When the loan tenure is short, the borrower can repay the principal amount faster. So, before you select a loan, choose the tenure carefully to avoid paying higher interest against your loan.

Comparison 

You should do proper research and compare the interest rates before opting for a home loan. Third-party portals do this work very efficiently by giving a clear picture of the rates and other charges levied by different lenders. Also, if you have a good credit history then you can get better interest rates. So, it’s best you compare the home loan interest rates for all banks first and then decide on a particular bank or home loan product. Also, buying during festivals can give you great deals.

Pay more as a down payment

Most lenders finance 80% of the total value of the property in India ad the buyer is required to pay just 20% of the total cost of the property. “But if the buyer pays 30% or 50% as a down payment then he can save more as the higher you pay initially, the lower will be the loan amount, which directly reduces the interest you have to pay,’’ guides Harshvardhan Roongta of Roongta Securities.

For Existing Buyers:

Make pre-payments whenever possible

This option is being preferred by smart investors as they save and prepay their home loans. It not only reduces the total payable amount but also reduces your interest rate. During the first few years of your loan, you pay more towards the interest than the payments made towards the principal amount. Making frequent prepayments will substantially bring down the principal amount, thereby reducing the total interest. Also, there are no extra charges in India for prepayment or early foreclosure.

Home loan balance transfer

Transferring the entire principal amount of an outstanding loan to a lower-interest bank is known as a balance transfer. You can opt for this option when your home loan interest is higher than other lenders even after prepayments. “For balance transfer, bank charges 0.5% in processing fees on the outstanding amount and depending on the states there are incidental charges like on loan agreement of 0.2% by banks. In short, you would be paying 0.25% to 0.75% on balance transfer hence you should opt for balance transfer when the difference amount is above 0.75% to 1%,” said Satyam Kumar, CEO and co-founder of LoanTap.

Increase your EMI when you get a salary hike:

Some lenders allow you to revise your installment annually. So, if you have switched your job with a higher salary, you can choose higher EMIs to reduce the tenure. And once the tenure is reduced, the overall interest that you have to pay against your loan will come down substantially. But first, check with your lender whether they provide such options.

Now, that you are aware of different ways to reduce your home loan interest rate before and after taking the home loan, you can take the necessary steps before or after availing of the loan to reduce the interest burden. Also, while buying carefully read the terms and conditions, especially relating to fees and other charges.