A variety of financing options are available with leading banks; the category of a Home Loan means an affordable interest rate. Home Loan interest rate in India is comparatively less than other types of loans, say, personal loans. With Home Loans, you can get a significant sum, subject to 90% of the property’s market value. This is why these loans are considered a viable option to finance a residential property. But a large sum of money means high EMIs (Equated Monthly Instalments) with high-interest costs.
Interest rate is the primary loan cost that borrowers need to pay besides the borrowed amount. Borrowers can reduce their Home Loan interest rate in several ways, like applying with a co-borrower. Even borrowers can put efforts into making Home Loans interest-free know how.
Know MCLR vs. RLLR – Home Loan Interest Rate Variations
Know what is MCLR (Marginal Cost of Funds Based Lending Rate) and RLLR (Repo Linked Lending Rate) are two distinct systems used by banks to establish home loan interest rates. MCLR relies on factors like repo rates, operating costs, and deposit rates, recalibrating monthly to mirror the bank’s current funding costs. In contrast, RLLR is directly linked to the RBI’s repo rate, leading to frequent and rapid interest rate adjustments. Choosing between them hinges on your preference for transparency and rapid adjustments (RLLR) or predictability and reduced volatility (MCLR). Careful consideration is vital as these choices can significantly impact your home loan experience.
Is It Possible to Make Home Loan Interest Free?
Yes, there are ways to make the Home Loan interest-free and the same is explained below:
Option 1: Start SIP to recover the interest amount to be paid for the loan cost.
Borrowers can start investing in a mutual fund scheme through a Systematic Investment Plan (SIP) to recover the interest amount. If the borrower starts to invest just 20% of their Home Loan EMI amount in a mutual fund with an expected annual return of 12%, there is a high chance that they can recover the entire interest amount. Following this disciplined approach, they can get most of the spare amount over the loan period.
Generally, banks provide an online EMI calculator to know how much the borrower has to pay.
Enter the loan tenure, amount, and interest rate. The calculator will estimate how much interest they need to pay over the loan term and invest via monthly SIP to recover the Home Loan interest.
Here is a simple example. Suppose a borrower takes a Home Loan of Rs. 20 Lakh at an 8% interest rate and the loan tenure is 15 years. The monthly EMI is Rs.19,113.
During the tenure of 15 years for a loan of Rs. 20 Lakh, the borrower will pay Rs. 34,40,348 in total. In this, the interest amount is Rs. 14,40,348. It means the interest amount is 40% of the principal loan amount. This way, a Home Loan repayment works.
So the borrower should invest in SIPs to recover the Home Loan interest.
If borrowers’ cash flow does not allow them to invest in SIPs above the payments towards EMIs, they may opt for the following alternative.
Option 2: Extend the loan repayment tenure.
Alternatively, borrowers can ask their Home Loan providers to extend their loan tenure. Considering the illustration given above, where the Home Loan amount is Rs. 20 Lakh, the loan tenure is 15 years, and the borrower can request the loan for 20 years. It will reduce monthly payments from Rs. 19,113 to Rs. 16,729 per month.
Now borrowers can invest the saved amount of Rs. (19,113-16,729)= Rs. 2384 per month via SIP in mutual funds offering high returns in the 20 years. It will help them clear the loan over a long period.
Ways to Reduce Home Loan Interest Costs
- Take Advantage of Privileged Interest Rates: Banks may offer Home Loans in India to women applicants at a reduced interest rate. It can be decreased by 0.50%-1%. A slight decrease in the Home Loan interest rate can result in significant savings on loan costs in the long run. One can apply for a loan with the spouse as a co-owner to reduce the interest rate.
- Consider Loan Prepayments: prepayment of home loan can help borrowers to reduce their interest outgo considerably. Utilising the bonus amount or returns on investments to prepay a part of the loan is a smart move towards making debts cost-effective.
- Increase Loan Down Payment: Banks can finance a loan purchase up to 90% of the property’s value. If the borrower can increase the down payment, it would be wise to reduce the loan amount and thus interest outgo.
Thus, a Home Loan can be interest-free by making debt repayment smooth. Opt for a Home Loan at an affordable interest rate and own a dream home. Do proper financial planning to utilise available funds in hand. Strategise the loan repayment beforehand to repay it conveniently.
