How to Reduce Home Loan Interest – 7 Proven Tips
Most Indians pay high interest on home loans because they don't know they have better options. However, a home loan allows you to pay off your loan amount in small chunks but it also puts an interest burden on you which significantly increases your repayment amount and sometimes even surpasses the principal.
But, with a good strategy, you can avoid paying high interest rates. As we know, there is no one-size-fits-all solution when choosing the right plan to finance your home loan. So, we have to talk about different aspects. Today, in this blog, we will talk about different ways that can help you to reduce or save on your interest payable.
How to get a lower interest rate on a home loan?
1. Pick the Right Type of Interest Rate
You have to analyse the risk factors involved in choosing the right interest plan. Home loan interest can be of three types:
1. Fixed: The interest is fixed at an agreed rate and remains stable throughout the duration of your home loan.
2. Floating: The interest rates fluctuate based on market conditions (inflation) and repo rates set by the RBI.
3. Hybrid: It is a combination of both fixed and floating. For the initial period, the interest rate stays fixed, then it becomes flexible.
Most home loans offer floating interest rates, and it is the most popular choice. These interest rates are lower than fixed interest rates. With inflation stabilising, it can be the better choice. There is an additional benefit: you can prepay your loan without any extra penalties if you choose a floating interest rate.
Although you have to be prepared for higher interest rates if market conditions change.
2. Change your lender
If you have an ongoing home loan with higher interest rates than other banks, you can consider refinancing it. You can shift your home loan to a lender who is offering better interest rates.
Although, if the differences in interest rates are nominal, you should carefully consider this decision, especially in the case of mortgages. Hidden fees like mortgage charges, processing fees, stamp duty, etc., may end up costing you more than what you were paying before.
3. Try to negotiate for a Better Interest Rate
If you have a good credit score (above 750) and a fixed income, it indicates that you are a low-risk borrower. Banks are therefore open to negotiating a better interest rate for you. But if you don't have a good credit score, you can get a co-applicant from your family with a good score to sign your home loan.
This significantly improves the EMI plans that the bank will offer. Women applicants and existing customers usually get better interest rates offered to them. So, couples can co-apply for the loan and get better rates of interest as well.
4. Try to opt for shorter tenure
If you can afford a higher EMI every month, you should consider applying for a shorter tenure, as you will be able to repay your loan quicker and ultimately save a huge amount on interest. For a longer tenure, your monthly EMI is lower, which might feel easier. But ultimately, in the long run, you’ll end up paying much more in interest.
For example, consider a tenure of 20 years and 10 years when you take a loan worth 10 lakhs at an interest rate of 8% p.a.,
• 20 years → You pay 20,07,360 in total
• 10 years → You pay 14,55,960 in total
In this case, it means choosing a 10-year plan would save you over 5.5 lakhs in interest! This indicates that the total interest payable at 10 years has reduced significantly compared to what you would have paid if you had taken a 20-year plan. Try using an EMI calculator available online to compare the home loan plans offered to you and choose based on that.
5. Higher Down Payment
Putting down a bigger down payment at the beginning of your home loan means that you are borrowing a lesser amount from the bank. This information will directly influence the interest rates and EMIs.
One smart way is to start prepaying at your convenience. If you can afford to make extra payments in addition to your monthly EMI using bonuses or incentives, the amount is directly deducted from your principal amount. This approach will also significantly reduce your loan burden and help you pay it off sooner.
6. Claim Tax Benefits
Under the old income tax regime, you had numerous benefits that could help you to reduce your home loan interest burden. For example, under the old tax regime, you could claim different deductions on interest payable under sections 80C and 24 of the Income Tax Act, such as:
• 1.5 lakh deduction on principal (Section 80C)
• 2 lakh deduction on interest (Section 24)
• 1.5 lakh extra deduction for first-time buyers (Section 80 EEA)
This means you can save up to 3.5 lakhs in a year. For joint home loans, each co-borrower paying can claim these benefits separately. But under the new tax regime, no such benefits can be claimed. Only loss can be claimed on let-out properties.
7. Look for Government Schemes and Subsidies
Affordable housing schemes such as the Pradhan Mantri Awas Yojana (PMAY) scheme offer subsidies and interest relief if you are eligible to apply. Additionally, it also allows women to avail interest subsidies of up to 2.67 lakh.
To summarise, lowering your home loan interest is possible with smart planning. Choose the right interest type, negotiate with your bank, prepay when you can, and take full advantage of tax and government benefits. Monitoring your loan closely can result in significant savings. Do your research, stay updated, and consult experts to find the best EMI plan for your needs.
Needless to say, if you have a lump sum of money that allows you to foreclose (end the loan early), that is the best way to save on interest payments.
FAQ
Is a lower interest rate better for loans?
Yes, but only if the EMI and tenure work for you.
When you opt for a low interest rate, the loan tenure (duration) also decreases. You need to consider your affordability first. A lower interest rate helps reduce total repayment, but if it forces you into high EMIs, it might not be worth it.
Disclaimer: The content written here is for informational purposes only. It may contain inaccuracies and outdated information. Commercial Noida does not endorse this content, so you are advised to verify this from your own credible sources.
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