Minimising payout on home loan: Boost credit score, prepay, cut tenure

Housing prices have risen 18 per cent on average over the past two years across major Indian cities. Average rates now range from ₹7,989 to ₹34,026 per square foot, according to a recent report by PropEquity. Alongside efforts to lower purchase costs, buyers must focus on reducing the cost of financing the home. 

Check credit score  

Before applying, review your credit score. “Home loan rates are linked to credit scores. A higher credit score means you end up getting the best possible rates,” says Adhil Shetty, chief executive officer, Bankb­azaar.com. A score above 750 is considered good. If your score is lower, defer taking the loan and improve your credit profile. 

Banks may not lend to you if your score is lower than 700. “You may have to approach a non-banking financial company or a housing finance company, which could charge a higher rate,” says Rishi Mehra, chief executive officer (CEO), Wishfin. 

Add a co-borrower  

Adding a co-borrower enhances eligibility. For example, if you qualify for ₹40 lakh and your co-borrower qualifies for another ₹40 lakh, your combined eligibility rises to ₹80 lakh. A lower loan amount relative to eligibility improves your chances of getting a better rate. A woman co-borrower may get a discount on interest rate of 5–10 basis points. 

Make a higher down payment 

Avoid taking the maximum loan-to-value (LTV) ratio available. “Suppose you buy a house worth ₹1 crore and you can borrow ₹75 lakh. If you opt for a loan of ₹60 lakh, that can also help you get a slightly better rate,” says Shetty. 

Compare lenders  

Shop around for the best interest rate you can get. “If your credit score is good, you can negotiate with the lender for a better rate,” says Mehra. 

While processing fees, legal, and documentation charges are broadly similar, comparing them is still advisable. 

Deepesh Raghaw, a Securities and Exchange Board of India-registered investment advisor (RIA) suggests that defence personnel should check for discounts available to them. 

Opt for shorter tenure  

Choosing a shorter tenure loan can also help minimise the total interest outgo. “If a person can afford the higher EMI and goes for a loan of 15 years instead of 20, his interest outgo will reduce,” says Mehra. 

Consider loan overdraft facility  

In an overdraft-linked home loan, surplus funds parked in the loan account reduce interest cost. Withdr­a­wals are allowed when needed. “While these loans come at a slightly higher cost, they reduce interest cost and also offer flexibility,” says Raghaw. 

Flexible prepayment options  

Prepayment can significantly lower interest outgo. “If you have a tenure of 20 years and you prepay 5 per cent of the outstanding at the end of every year, that will reduce your tenure from 20 years to a little more than 12 years,” says Shetty. 

Prepayment terms differ across lenders and products. Understand these to avoid obstacles later. Choose what suits your temperament — using your surplus to prepay or to invest. “Since the post-tax cost of a home loan is very low, some borrowers may also invest in an asset class that can give them a higher return over the long term,” says Raghaw.

 

Points to heed regarding switching home loan

 

- A home loan balance transfer can help move to a lower interest rate

  - The difference between the current and new loan rate should be at least 50 basis points

  - Balance transfer is more beneficial in earlier part of tenure, when principal outstanding is higher

  - Borrowers moving from MCLR-based loans to repo-linked loans, and those whose credit profile has improved are likely to benefit from a transfer

  - Factor in processing fees and other costs of making the switch

  - Avoid extending loan tenure as it could negate any advantage from the switch