Advertisement

7 Surefire Tactics to Reduce Home Loan Interest Costs

7 Surefire Tactics to Reduce Home Loan Interest Costs

Home loans enable converting dreams of owning property into reality. But debt lasting 15-30 years also sticks borrowers with hefty interest payments that swell purchase costs.

Advertisement

This comprehensive guide details 7 verified methods to extract savings on interest expenses tied to your housing mortgage or refinancing existing loans.

Implementing even a few suggestions can create substantial lifecycle economy. Let’s review point-by-point:

1. Shop Aggressively for the Lowest Rates

Baseline mortgage rates fluctuate daily tracking housing markets and broader interest cycles shaped by central bank policies.

But individual lenders add risk premiums based on further loan attributes, creating variability even during same periods:

  • Credit score requirements
  • Loan size qualification limits
  • Mortgage types offered
  • Property valuation methods

This variability produces interest cost differences reaching 0.5% or higher between lenders.

On a Rs 75 lakh loan, that gap inflates overall outlays by over ₹3.5 lakhs extra across 20 years.

I advise soliciting competing rate quotes from multiple banks, NBFCs, credit unions and online lending marketplaces when shopping:

  • Align comparison factors like loan amounts, tenures and credit scores.
  • Verify rate types i.e fixed, floating or teaser interest advertised.
  • Submit copies of income statements to enable customized quotes from respective underwriting departments.

Spending extra hours generating multiple personalized quotes returns substantial economy.

Tip: Online mortgage marketplaces like BankBazaar allow instant customized comparative quotes across 50+ partnered housing finance companies to identify the true lowest rate lenders.

2. Improve Credit Scores Before Application

Beyond macro rate movements, your personalized credit score heavily influences the interest penalty lenders levy uniquely based on risk perceptions about future repayment abilities.

  • 720+ unlocks the very best rates, although some lenders go as low 650
  • Scores below 600 usher penal charges nearing 2% over benchmark rates

Improving credit health before finalizing mortgage applications makes major cost differences. I advise 3 strategies if your score sits below prime buckets currently:

  • Quickly pay down credit card balances inflating utilization percentages which drag scores
  • Correct errors on credit reports to benefit from easy fixes
  • Become an authorized user on a family member’s old, positive credit account to inherit good history

A bit of diligence amplifying scores before submitting home loan applications saves substantially on interest for years.

3. Raise Your Initial Down Payment

Lenders allow borrowers financing 80-90% of property values while mandating a down payment covering the remainder.

But larger down payments above 20-30% unlock preferential interest rates because:

  • More equity lowers default risks requiring the lender to foreclose and recover dues
  • Outsized skin-in-the-game displays conviction about financing the home securely

On a Rs 1 crore home, hiking down payment from 20% to 30% requires just another Rs 10 lakh but may slash interest rates by 0.5%. This outlay focus saves over ₹3 lakhs in interest over a 20 year tenure.

If possible, consider:

  • Dipping into equity investments
  • Partially liquidating fixed deposits
  • Drawing from retirement accounts

Bolstering down payment funds goes a long way to maximize savings via cheaper interest.

4. Wisely Target Shorter Tenures

Typically borrowers favor longest 30 year mortgage terms to minimize initial EMIs by spreading repayment over more years.

But extended periods translate into higher lifetime interest disbursals due to accumulating loan balance exposure.

Alternatively, choosing accelerated tenures of 10, 15 or 20 years pays off debt faster plus reduces total interest costs despite elevated EMIs.

Run provisional amortization calculations with lender tools highlighting tradeoffs between tenures before deciding optimum terms.

Ideally target the shortest reasonable tenure aligned to your monthly cash flows. Paying additional lump sums when possible also deleverages loans faster.

5. Remain Vigilant About ARM Resets

Teaser adjustable-rate mortgages (ARMs) lure buyers promising ultra low initial rates lasting 1-3 years before resetting significantly higher as underlying benchmarks catch up.

But massive future rate spikes on reset anniversaries create repayment shocks and extra interest charges.

While ARMs satisfy short term cash problems, fixed rate home loans make far more financial sense for typical home buying horizons to maintain stability.

If saddled with an ARM, monitor for upcoming resets. Quickly refinancing into fixed rate loans avoids surprises and keeps interest costs controlled.

6. Opt For Government Backed Loans

Specialized government-backed mortgage programs assist first-time home buyers and military veterans purchase property with reduced interest advantage:

FHA Loans

Federal Housing Administration mortgages require lower 3.5% down payments, accommodate credit scores starting 580 and localize lending through approved institutions.

VA Loans

Veteran Affair Loans waive down payment requirements altogether along with skipping private mortgage insurance for eligible ex-military personnel or their surviving spouses.

Both loan categories shave 1-2% from regular interest rates despite modest credit conditions. This subsidy makes home ownership more affordable if meeting selective qualification criteria.

7. Refinance Existing Mortgages

If current mortgage interest exceeds prevailing market rates, switching lenders through refinancing creates opportunities for substantial savings.

But don’t reflexively refinance old loans without carefully comparing costs versus gains:

When Refinancing Helps

  • If new interest rates drop >2% below current loans
  • Shortening outstanding tenure by 5+ years
  • Penalty gains outweigh refinancing charges

When Refinancing Hurts

  • Incremental interest savings fail to justify refinancing fees
  • Lengthening overall repayment duration
  • Struggling financially necessitating loan modifications

Run closing cost versus interest savings break-even analyses to decide if refinancing works favorably. Online refinancing calculators quickly estimate feasibility.

With diligent rate shopping and prudent tenure selections, homeowners realize significant mortgage interest reductions that compound into big long term savings.

Additional Ways to Supplement Savings

Beyond the core 7 tactics, consider a few other relevant strategies:

  • Make bi-weekly half payments instead of full monthly EMI to deleverage principal faster
  • Route bonuses, gifts or inheritance amounts directly into one-time loan principal pre-payments
  • Deduct home loan EMIs automatically on pay days before that cash enters personal accounts
  • Invest lump sum amounts earmarked for future pre-payments to earn interest meanwhile

Maximize forced automated savings habits that speed up becoming debt free.

What’s the Typical Home Loan Interest Rate Today?

In February 2024, prevailing home loan rates for salaried prime borrowers range between 8.5% to 9% fixed across top metro cities.

Exact rates depend on:

  • Loan amount needed
  • Opted tenure – higher for longer ones
  • Credit score – premium for 750+ customers
  • Income stability – salaried better than self-employed
  • Property type – Completed homes preferred

So expect to pay at least 8.5% as an acceptable credit customer. Rates below 8% require top-tier history.

FAQs

How Much Minimum Down Payment Is Expected?

20% of property’s market value is the classic standard with higher amounts preferred. First time home buyer schemes or affordable housing projects allow 15-20% payments too.

When Are Pre-EMI Interest Charges Applicable?

If loan disbursal and property possession completion happen months apart, lenders charge pre-EMI interest on released funds already for transparency. This ensures no payment shocks once EMIs formally begin post handover.

Can Interest Rates Ever Rise For Existing Borrowers?

Fixed rate loans lock in set interest for entire tenure. But floating rate loans see periodic recalibration tied to market benchmarks that could raise or lower prevailing rates.

Conclusion

Strategically minimizing interest costs sets up homeowners for achieving mortgage freedom years faster. Employ a multi-pronged approach encompassing rate shopping, credit score boosting, tenure targeting and refinancing opportunities.

Saving even 0.5-1% on interest compounds into huge relief over full loan terms. Be a savvy borrower and let me know if you have any other queries on economizing home loans!

Advertisement

Leave a Comment