Planning to get a loan to purchase your first or second home in 2022? Considering that you may be paying the EMIs (estimated monthly installments) for the next 25-30 years, naturally, you’re looking for the lowest possible interest rate so that cumulatively you need to pay back as low an amount as possible.
What are interest rates and EMI?
When banks and financial institutions lend you money, they charge interest for the money that they lend you. This is kind of an expense that you incur for being able to use a huge amount of cash despite not having it. It is also a means for the bank or other financial institution to make money using its capital to provide you an opportunity that was not available to you before.
Every institution levies its own interest rate based on the facilities and the services you are availing, the amount of cash available with the institution, and your creditworthiness.
The interest rate is calculated per annum. For example, if a bank says that it is going to charge 6.5% per annum interest on the loan that you are taking, it means for every Rs. 100,000 you owe to the bank, every year you will be paying 6500 extra. So, if the principal amount is Rs. 100,000, by the end of the year, you will be paying back Rs. 106,500.
Depending on how much money you are taking (around 50-80% of the total value of the property) and how many years it would take for you to pay the amount plus interest back, the bank or the institution calculates an EMI, which is also called your loan’s amortization schedule.
How much you pay every month depends on how much interest rate you have agreed to pay on the amount you have loaned. The lower your interest rate, the lower EMI you pay for the same period. How do you get the lowest home loan interest rate, especially in 2022?
1. Do proper research before settling with a particular bank or company
An unprecedented amount of information is available on the Internet. Use it.
Every bank and every creditor these days has an online presence. All their interest rates are listed on their websites. They have real-time calculators that allow you to easily calculate how much interest you may have to pay for different amounts you plan to take and for the number of years you need to pay everything back.
You can maintain a spreadsheet to compare interest rates in various columns. The moot point is, don’t make your decision in a hurry.
2. Maintain a healthy credit score
A healthy credit score means you have a history of returning what you owe, on time. Now, this is something that you cannot do immediately when you need a home loan, hence, it is always better to pay attention to your credit score from the beginning itself.
Have you taken another loan? Have you taken a car loan, and have you been paying the EMIs on time? What about your credit card? Are you regular with your payments? Delaying your credit card payments may seem harmless but over a period, it begins to negatively reflect on your creditworthiness.
Many banks and companies use your credit score to gauge how much interest you ought to be paying. If you have had no problem with your other loan payments, banks and companies will happily provide you a home loan at a lower interest rate.
You can find out your credit score in the Home Finance section of HomeCapital. If you think that your credit score is lower than what it should be, you can contest your current rating and get it rectified, if there is scope for it.
3. Make a bigger down payment
Just because you are getting a loan from a bank or a home finance company it doesn’t mean you should take the maximum amount you can get. Remember that the bigger the home loan is, the more interest you will be paying.
Normally you can get 75% to 80% of the total value of the property and you can contribute the remaining on your own. If you can contribute more, then definitely do so. For example, instead of getting 80% of the money from the bank, just get 70% depending on your actual requirement. This way, you will be paying your interest on a reduced amount, and hence, lower interest.
HomeCapital can help you in this regard. You can get down payment assistance from HomeCapital for a significant down payment at a competitive rate and then you can use it as leverage to lower your main EMI.
4. Use the option of prepayment
After a certain period, many banks and creditors allow you to prepay a bigger chunk of the amount. For example, if you owe a bank 50 lakhs and somehow after a few years you can make a prepayment of 10 lakhs then this can bring down your interest rate for the remaining EMIs. Carefully read the terms and conditions to check the prepayment option with your bank or the creditor.
If you get a better interest bargain from another bank, you can loan them money from there and then use it to make the prepayment to your current creditor.
5. Explore the option of a shorter tenure
If you stretch your tenure then naturally you will be paying a lower EMI, but then, you will also pay a higher interest rate because you are going to keep the bank’s money with you for a longer period.
If you can manage, agree to pay back the money in 15 to 20 years instead of 25 to 30 years. Since the money won’t be tied to you for these many years, your interest rate will be lower.
6. Opt for fixed rate of interest
In a fixed interest rate, the rate of interest remains the same throughout the tenure of the home loan. Currently, due to the repo rate, home loan rates are at a decade low. These rates may increase from here as they are rock bottom. Hence home buyers should opt for a fixed rate and secure this rate of interest such that they are effectively paying lower interest.
Keep a close watch on the economy and decide accordingly.
Conclusion
Information is power when it comes to opting for the best home loan and in the 21st century, the information is at your fingertips. Allocate at least a few weeks to compile all possible information. Talk to friends, relatives, and colleagues who have already taken loans and may have some experience. The more informed you are, the greater there is the possibility that you will pay a lower home loan interest rate.