Home Load Debt Reducing Tips: Everyone dreams of having their own house. But it is not easy to fulfill this dream. For this, one has to work hard and save a lot of money. Only then can a person buy a house. Many times people are not able to save enough to buy a house. But such people can also fulfill their dream of buying a house with the help of a home loan.Now most people in India are buying a house by taking a home loan. But the decision to take a home loan is not easy.
You take a financial responsibility on yourself for a lifetime. If you do not manage the home loan properly, then instead of fulfilling your dream, your financial condition may deteriorate. From May 2022 to February 2023, the Reserve Bank of India increased the repo rate by 250 basis points. Due to which the repo rate increased from 4% to 6.50%. However, the repo rate has remained the same since February 2023. There has been no increase in it. But this has affected the interest rate of home a lot. If you want to reduce the burden of your home loan. So apart from the repo rate, pay special attention to these four things.
What is repo rate?
When a common man wants to buy a house, he probably does not know much about the repo rate. So let us tell you that the repo rate is the rate at which the Reserve Bank of India gives funds to other commercial banks. And on the basis of this repo rate, banks give loans to customers. In simple words, if the repo rate is high, then it will become expensive for commercial banks to take funds from the Reserve Bank of India. Due to which banks will charge more interest from their customers. So you will get a loan at a higher price. And if the repo rate is low, banks will get funds at a lower rate. So in this case you will also get a cheaper loan.
Check benchmarks
Almost 90% of home loans in India are based on floating rates. These are linked to a benchmark rate which is the final rate. Since October 2019, the repo rate is the benchmark for home loans. Which is currently 6.50 percent. But the home loans sanctioned from April 2016 to October 2019 were given on the benchmark of Marginal Cost of Funds Based Landing (MCLR) i.e. minimum interest rate. That old benchmark remained stable even when inflation was high. And the cuts made by RBI do not apply to it.
Marginal Cost of Funds Based Landing (MCL) home loans generally reset in 6 months to 1 year. Its duration varies from bank to bank. That is, if your bank resets the duration after 3 months, then your interest rate will be reduced after 3 months. That is, you will have to pay more interest until your home loan rate resets. But the repo rate linked loans change immediately after the RBI’s announcement. This benefits you, your EMI reduces and you have to pay less interest.
Switch to lower spreads
BankBazaar Communications Manager Malvika Singhal said that the spread on repo rate linked loans is an important factor. And especially for home loans. The spread is determined on your credit score, your source of income and the amount of loan you are taking. The spread remains stable during your loan tenure. Let us tell you that home loan spread is the additional cost that you pay apart from RBI’s repo rate while taking a loan from the bank. There has been a significant reduction in home loan spread in the year 2024.
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Whereas in the beginning of 2020 it was 275 to 360 basis points higher than the repo rate. Currently, the lowest interest rate on home loans is between 8.20% to 8.50%. Due to which the spread has reduced by 170 to 200 basis points. If you want to take a new loan, then keep a target of low spread to take advantage of the reduction in interest rates in future. If you have already taken a loan, then you can get it financed again to take advantage of the low spread.
Get your loan refinanced
If you are paying a loan at a high interest rate, you can switch it to a lower interest rate. If you talk to your current bank or loan giving company for a lower interest rate, you will have to pay a small processing fee and some paper work. But if you look for options from other banks or non-banking financial companies, you will have to start the process from the beginning where you will have to pay processing fees, legal fees and other charges. Do all the calculations before refinancing. Your interest expenses will be reduced and you will benefit or not.
Prepay can prove to be a better option
If you want to reduce the burden of your home loan, then prepayment can prove to be a better option for you. If you have financial stability, then you can prepay 5% of your total loan dues annually. If you get an extra bonus or your source of income increases, then you can also pay an extra EMI in a year, which will reduce your loan tenure. But if the interest on your home loan is high.
Then you can evaluate your situation. If you feel that you can repay the entire loan, then try to repay the entire loan. Because in the last few years, interest rates have increased a lot. Due to which people have faced a lot of problems. People adopt various methods to reduce the burden of EMI. If you want to reduce the burden of your home loan. Then you can definitely follow the methods mentioned.
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