Top Tips on How to Reduce Interest Rates on Home Loans
Feb 21, 2017 Home Loan
A major share of the monthly income of home loan borrowers goes into the payment of EMI. So whenever the Reserve Bank of India (RBI) cuts policy rates, it comes as a tiny ray of hope for loan borrowers as it results in the reduction of interest rates by lenders followed by reduced EMIs. However, this has not been the trend off late. Statistics show that since the beginning of 2015, RBI has cut policy rates by a massive 150 basis points. But lending rates have not been cut even half of that number. Since moving on to the Marginal Cost of Lending Rate i.e. MCLR from 1st April, home loan interest rate is around 9.5 percent.
So let us discuss some of the measures pre MCLR home loan borrowers can take to save interests on their loans.
Partial prepayment of loan:
Partially paying the amount of home loan borrowed can help to save a lot of interest amount one needs to pay. As it directly reduces the principal amount, the interest gets calculated only on the reduced principal, thereby saving a lot of money for the borrower. A systematic partial prepayment plan will help the borrower in saving money in a lot of ways. For starters, it will reduce the tenure of your loan repayment period as it will help to reduce the number of EMIs. Also, the interest will be calculated on the outstanding principal amount. So if you do a partial prepayment, your principal amount gets reduced, thereby reducing the interest amount on your loan.
Arranging funds for partial prepayment:
Although it is true that major share of the monthly income gets eaten up by the EMI, try to reduce your other expenditures and accumulate a certain extra amount monthly towards partial prepayment. Families with multiple people with monthly income may also pitch in a certain amount regularly towards partial prepayment.
Already have funds? Invest it in higher returns schemes:
In certain cases, borrowers already have funds for partial prepayment. Also, in these situations, you can look out for certain investments with higher returns. In such situations, always make sure that you make more money through investment than saving it by partially prepaying your home loan.
Option of Overdraft accounts:
There are several banks out there who provide the option of overdraft accounts to home loan borrowers. Overdraft account is similar to a saving account and any amount saved in it is treated as a partial prepayment of the loan by the bank. However, overdraft accounts have two major drawbacks: There is no Section 80C benefit for borrowers and the interest rate is also a bit high on such home loans.
Flexibility in prepayment amount:
The minimum amount of partial prepayment of loan is generally equal to the monthly EMI amount. So plan your savings in such a way that you prepay at least this amount every quarter or half year. Also, there is no fixed date for prepayment of home loans. You may pay whenever you wish to do so.
Prepayment charges:
As per the latest guidelines of RBI, banks are not allowed to charge any amount for foreclosure or partial prepayment of loans from their borrowers.
Important tip to consider before prepayment:
Always make sure that you have necessary emergency funds before prepaying. It is the best practice to keep certain funds untouched while planning to prepay your loan because these are the funds that may gain significance in case of emergencies.
So let us discuss some of the measures pre MCLR home loan borrowers can take to save interests on their loans.
Partial prepayment of loan:
Partially paying the amount of home loan borrowed can help to save a lot of interest amount one needs to pay. As it directly reduces the principal amount, the interest gets calculated only on the reduced principal, thereby saving a lot of money for the borrower. A systematic partial prepayment plan will help the borrower in saving money in a lot of ways. For starters, it will reduce the tenure of your loan repayment period as it will help to reduce the number of EMIs. Also, the interest will be calculated on the outstanding principal amount. So if you do a partial prepayment, your principal amount gets reduced, thereby reducing the interest amount on your loan.
Arranging funds for partial prepayment:
Although it is true that major share of the monthly income gets eaten up by the EMI, try to reduce your other expenditures and accumulate a certain extra amount monthly towards partial prepayment. Families with multiple people with monthly income may also pitch in a certain amount regularly towards partial prepayment.
Already have funds? Invest it in higher returns schemes:
In certain cases, borrowers already have funds for partial prepayment. Also, in these situations, you can look out for certain investments with higher returns. In such situations, always make sure that you make more money through investment than saving it by partially prepaying your home loan.
Option of Overdraft accounts:
There are several banks out there who provide the option of overdraft accounts to home loan borrowers. Overdraft account is similar to a saving account and any amount saved in it is treated as a partial prepayment of the loan by the bank. However, overdraft accounts have two major drawbacks: There is no Section 80C benefit for borrowers and the interest rate is also a bit high on such home loans.
Flexibility in prepayment amount:
The minimum amount of partial prepayment of loan is generally equal to the monthly EMI amount. So plan your savings in such a way that you prepay at least this amount every quarter or half year. Also, there is no fixed date for prepayment of home loans. You may pay whenever you wish to do so.
Prepayment charges:
As per the latest guidelines of RBI, banks are not allowed to charge any amount for foreclosure or partial prepayment of loans from their borrowers.
Important tip to consider before prepayment:
Always make sure that you have necessary emergency funds before prepaying. It is the best practice to keep certain funds untouched while planning to prepay your loan because these are the funds that may gain significance in case of emergencies.
Looking for property portal?
Related Articles
-
-
-
Home Loan! Smart Tips to Handle
Sep 01, 2016 -
Cut on Interest Rates Put on Hold by RBI
May 17, 2017
See comments (0)
Write a comment
