How to reduce your interest payment on existing home loan

Normally home loans are large in size and consequently the interest payable on these is large for the person taking the loan. Therefore, to increase the monthly disposable income most people would want to reduce the interest rate on home loans taken from banks or housing finance companies (HFCs).

Pavan Gupta, CEO, Muthoot Housing Finance says that generally in the normal course, home loan rates are not reduced by banks/HFCs for existing home loan borrowers in proportion to what is offered to new borrowers. "However, you can switch your balance loan to another lender (bank or HFC) that is willing to offer a lower interest rate. To switch your balance loan to another lender you, will have to pay a nominal conversion fee to the existing lender. Hence, you need to keep in mind the transaction cost which will be incurred while making a balance transfer to other banks/HFCs," he said.
Here are four ways a home loan borrower can reduce interest payment on his/her home loan.

1. Switch home loan to MCLR (marginal cost of funds-based lending rate) regime
To reduce the interest rate on your home loan, you can opt for MCLR regime. Ratan Choudhary, Head of Home Loans, Paisabazaar.com, said that home loan borrowers should consider switching to MCLR regime, as it offers better transmission of the Reserve Bank of India's policy rate's benefits and a higher degree of transparency than the older regime. The presence of pre-fixed loan reset dates helps ensure that changes in lending rate (MCLR) during the loan tenure gets transmitted to the borrower once the loan's reset date arrives, depending on the existing rate on that date.

"Although you must know that HFCs currently do not come under the purview of MCLR regime, you can exercise the option to bring the interest rate to current lending rates (if lower) by transferring your home loan from HFC to bank by paying a conversion fee. This conversion fee can go up to 1 percent of the outstanding principal amount," Choudhary said

Gupta says, "If the interest rate differential is significant (say more than 1%), then it is advisable to do a balance transfer to a bank from HFCs offering lower interest rates."

2. Opting for home loan overdraft facility
You can opt for a home loan overdraft facility with your home loan account. This facility allows you to deposit any additional money that you may have at hand into the home loan account in addition to the normal EMI. This additional payment is treated as a pre-payment till the time it is withdrawn, if it is withdrawn. By depositing additional payment in the home loan account, your interest payments and loan tenure will get reduced.

At the same time, you have the option of withdrawing the surplus amount, which is deposited in your home loan account, from your bank anytime you need it. However, make sure that you only withdraw money in case of emergencies because making withdrawals from your home loan account will lead to a rise in the home loan outstanding balance, thereby increasing your loan interest payments on the outstanding loan amount.

3. Home loan prepayment
You should not lose an opportunity to make pre-payments from time to time for your home loan before the end of its tenure as doing so can reduce the overall interest payments. For instance, some employers give annual bonuses to their employees which can be used to make pre-payments to not only save interest but also repay the home loan faster.

Choudhary explains how this can be done with an example. Say you availed a home loan of Rs 30 lakh about 5 years ago at 10 percent per annum. for a tenure of 20 years. At the end of 5th year you made a partial prepayment of Rs 2 lakh. This would lead to overall interest saving of Rs 5,96,254 and reduction of loan tenure from 240 months (20 years) to 213 months, i.e., a reduction of 27 months.

Home loan borrowers have the option of prepaying their outstanding home loan balance in part or entirety. "If you have availed a home loan on floating-interest rate, no prepayment charges are levied by the lender. In case of fixed rate loans, make sure the overall savings in the interest component through prepayment outweighs the prepayment charges of loan, if any," Choudhary said.

4. Compare rates online regularly
Nowadays one of the best ways for home loan borrowers to check home loan offers is to go online. Existing home loan borrowers should also monitor interest rates being offered by other lenders regularly as he/she can try to switch if there is a large gap between what he/she is paying and what the market is charging. There are various websites, online portals which give summarised view of the rates of interest, fee and other charges of different lenders. Hence, before availing a home loan, do your research to ensure you get the best deal.