The current home loan interest rates vary between 7% and 11%. Most home loan borrowers assume that if they are applying for a home loan, they would automatically be offered the lowest interest rate. However, that’s almost never the case. Lenders are not cheating you but they will charge you home loan interest based on the risk you pose to them as a client or a borrower. Lenders charge a higher rate of interest from those borrowers who they feel are more likely to default on loan repayment.
On the other hand, borrowers who are quite unlikely to default on loan repayment are charged a low rate of interest. All lenders have strict home loan eligibility criteria which help them figure out which borrower might default on loan repayment and which borrower can be trusted with timely repayment of loan money. Loan applications from borrowers who fail to meet these home loan eligibility criteria are either rejected by lenders or lenders charge a very high rate of interest on these loans.
Borrowers are advised to negotiate for the lowest home loan interest rate possible as home loan interest rates have a direct impact on an individual’s EMIs as well as the total interest outgo on the loan. Low home loan interest rates help borrowers keep their EMIs within the affordable range. Low home loan interest rates also help borrowers reduce their total interest outgo on a loan and therefore, help reduce the total cost of borrowing the loan. High home loan interest rates, on the other hand, can easily push one’s EMIs, making them unaffordable. They can also increase a borrower’s cost of borrowing the loan and the total interest outgo.
This is the reason why borrowers are advised to negotiate for a low home loan interest rate. This article focuses on tips that borrowers can use to avail themselves of the lowest home loan interest rates possible.
Tips on What You Can Do to Score a Low Home Loan Interest Rate Deal
1. Maintain a Good CIBIL Score
An individual’s CIBIL score is a three-digit number between 300 and 900 that indicates their creditworthiness and repayment capacity. Anything above 750 is considered a good credit score and is the mark of a borrower who has never missed paying an EMI or credit card bill in the past, has never defaulted on loan repayment and therefore, can be trusted with timely repayment of loan money.
Borrowers with such a credit score pose no risk to lenders and therefore, lenders offer their best home loan interest rates to borrowers with a high credit score. If your credit score is below 750, do not worry. Start paying your credit card bills and EMIs on time, lower your credit utilization ratio, refrain from applying for any new credit cards or loans and your credit score will improve automatically over time.
2. Consider Paying a Higher Down Payment
In the case of home loans, home loan borrowers are required to pay a part of the total value of the home they are buying with the loan money as down payment. This down payment ensures that the home loan borrower has some equity in the home they are buying as this minimizes chances of loan default. The higher a borrower’s equity in the home, the lower are their chances of defaulting on the loan.
Lenders generally require borrowers to pay 20% of the home’s value as down payment. In the case of high-value loans, this number increases to 25% to 30% of the home’s value.
Borrowers can, however, choose to pay a higher down payment. When they increase the down payment, the risk involved for the lender decreases and therefore, in the case of high down payment home loans, lenders usually charge a low home loan interest rate. So, if you want to reduce the effective interest rate, increase the down payment.
3. Opt for a Home Loan Balance Transfer
Home loan balance transfer refers to the process of transfering one’s home loan from one’s current lender to another offering lower home loan interest rates. Home loan borrowers also opt for a home loan balance transfer not just to reduce the effective interest rate but sometimes also to change their loan tenor or the interest rate regime.
Further, some borrowers opt for a home loan balance transfer also to avail of a top-up loan. In any case, if you are not happy with your current home loan interest rates, you can opt for a home loan balance transfer. Switch to a lender willing to offer you a lower home loan rate of interest.
However, do keep in mind that a home loan balance transfer proves effective when there is at least a 50bps difference in the old and new home loan interest rates if the remaining loan tenor is 10 years and the difference in the home loan interest rates must at least be 25 bps if the remaining tenor is 15 years. Home loan balance transfers prove most useful when borrowers opt for them during the early years of their loan tenor when the interest component of the EMI is still too high.
Borrowers can use a home loan balance transfer calculator to understand if a home loan balance transfer would be the right choice for them.
Other than the tips mentioned above, borrowers can also consider applying for a lender with whom they already have a long-standing relationship. Most lenders offer their lowest home loan interest rates to their most loyal and oldest clients. They can also prepay their loan or increase the EMI value to match any hike in their income. This too will help them reduce the effective interest rate on their home loan.