Want to reduce the interest in home loan? Read how
Are high EMIs on your home loan burning a deep hole in your pocket? Is your bank passing the benefit of rate cuts to new borrowers only leaving you high and dry? If you feel that your debt burden is taking a heavy toll on you, it is high time you made efforts to bring down the interest rate on your home loan.
For this, you can either get your interest rate lowered by negotiating with your existing lender for a fee or you can opt for balance transfer by switching your loan account to a new lender offering a lower rate of interest.
Go for rate reset
If you are being charged higher interest rate as compared to the new customers, you can ask your bank to reset your home loan rate. Some lenders charge 25-50 bps for the facility while others decide the fee after calculating the difference between the existing rate and the one being offered to new customers.
Norms for fixing lower interest differ from lender to lender. For example, HDFC calculates the difference between the existing rate and market rate and charges its half. Suppose your existing rate of interest is 11.50 per cent and the market rate is 10.50 per cent, HDFC will charge 0.5 per cent of the outstanding amount as one-time payment.
This option can save you more money if your remaining repayment tenure is long.
For example, if you have an outstanding of Rs 15 lakh and your remaining repayment tenure is 12 years, your bank will charge a one-time payment (say Rs 10,000) and will reduce your interest rate by 1 per cent. In this way you will get the benefit of lower interest rate for the next 12 years by paying a fee of Rs 833 per year (Rs 10,000/12).
But you must opt for rate reset only if the difference between the new and the old interest rate is one per cent or above.
Balance transfer
In case your existing bank is not ready to lower the interest rate or is offering you a raw deal, you may transfer your outstanding loan amount to a new lender which can offer a lower rate of interest. This is known as balance transfer.
Most of the banks do not charge prepayment fee and you can easily shift your loan account to a new lender. However, your new bank may charge a processing fee which could be 0.5 per cent of the outstanding amount or a fixed fee of Rs 5,000 or above.
Before taking a final decision on balance transfer, you should calculate the total cost involved and the projected savings so that you do not have to repent later.
How can I save?
When you get your interest rate reduced in your existing bank, your EMI remains the same and the loan tenure gets reduced. A shorter tenure helps you to save on the interest outgo.
Suppose you have taken a loan of Rs 50 lakh at 12.5 per cent interest rate and your tenure is of 20 years.
If your bank lowers the interest rate by 0.5-1 per cent, your loan tenure will go down by 2-4 years. Similarly, if the rate cut is around 1.5-2 per cent, you will be able to save 5-6 years of your loan tenure which will result in considerable saving on interest.
