Four ways to reduce interest rate on your home loan

• Opt for sustainable projects which offer discounts on the interest rate.
• A woman co-borrower as the primary applicant can lead to savings on interest rate as well.
• A home loan overdraft scheme can also lead to savings on interest payments.

Buying a home is one of the biggest financial goals one has and since a home loan is a commitment for several years, a lower interest rate could lead to substantial savings. In other words, a difference of a few basis points can lead to savings of a few thousand every month.

We look at some ways to reduce your home loan interest.

Sustainable project option

Recently, Axis Bank tied up with real estate developer Mahindra Lifespaces to offer a 0.25% discount on the interest on green homes.

In June this year, SBI announced that it has plans to incentivise green home buyers by offering them a 10-25 basis points discount on prevailing home loan rates.

“Extending loans at concessional rates for green homes incentivizes home loan takers to buy and invest in sustainable residential buildings. It will have a long term and a positive domino effect to build, buy and sell environment-friendly buildings,” says Vimal Nadar, senior director, research head, Colliers India.

Green housing in India faces affordability and awareness challenges, especially in affordable and mid-range segments. Collaborations between housing finance and real estate firms can boost green home popularity among Indian buyers.

“Such a tie-up resulting in discounted interest rates for green homes could potentially kick-start a broader trend - especially if the interest rates are reduced enough to offset the 10-15% premium that green homes typically command to a significant extent,” says Santhosh Kumar, vice chairman, ANAROCK Group. This can attract more middle class customers to eco-friendly projects.

Women borrowers are offered lower interest rates

Most banks offer a concessional rate to women borrowers. The usual discount provided is 5bps or 0.05%. If a woman with a good credit score is the primary borrower, it can mean a discount in the interest rate.

Consider a home loan overdraft scheme

The home loan overdraft scheme works pretty much current accounts with an overdraft limit. “Under the scheme, you can deposit any surplus that you have into your home loan account. This surplus will be considered as prepayment against the principal,” says Adhil Shetty, CEO, BankBazaar, a financial marketplace.

The principal amount on which the loan interest is calculated is the outstanding principal minus the savings deposited in the home loan account over and above the monthly instalment or EMI. If you have been making regular deposits to the account, your outstanding principal would proportionally reduce. This brings down the overall loan liability.

A benefit of the home loan overdraft scheme is the savings on interest. “If you keep making regular repayments, your principal, and therefore the interest you pay on it, keep reducing. This translates into substantial cost savings,” says Shetty.

However, it is important to remember that the home loan overdraft scheme is typically suitable for double income families with regular surplus income or businesspersons who receive surplus funds regularly.

Also Shetty says that home loan overdrafts usually tend to be more expensive by approximately 25 basis points. Therefore, if you do not have a chance to generate a regular surplus amount, the home loan overdrafts may not be the right choice.

Refinance your home loan

In March 2020, the difference between the lowest home loan rates and the prevalent repo rate was 2.75, going up to 3.50 in many cases. This difference has fallen steadily. By March 2021, it had reduced to 2.65. A year later, it fell to 2.40.

“If you have an ongoing loan, you may want to consider refinancing your loan. This is because the spread on the loan has fallen,” says Shetty.

Currently, there are many lenders pricing themselves at 2.00 over the repo, with a few going as low as 1.95 with their special offers. So refinancing your loan may help you bring down the interest rate.

So, while taking a new home loan or if you already have an existing home loan, there are ways you can look to save on interest.