While growing up, one of the significant milestones most people achieve is owning a house. In a diverse and dynamic country like India, this dream often makes homeownership necessary. Though some people are economically well-positioned to purchase it at once, for many, buying a home requires external financial support.
Well, it’s not just about taking a loan; it’s about that sense of ownership of your place. In such cases, even the securing process can also become financially burdening. Therefore, we present to you a go-to guide to navigate through this dilemma and help you save on a home loan.
Getting to Know Different Types of Home Loans
While saving some money on loans, understanding the type of home loan you are going to take is the first necessary thing. Generally, there are six types of home loans that are discussed below.
- Fixed Rate Loans
The interest rate remains the same throughout the loan tenure. The advantage here is that you remain safe from market fluctuations.
- Adjustable-Rate Loans
The interest rate varies according to market dynamics. This type can be beneficial if market rates decrease as you pay less.
- Home Saver Loan
This type of loan combines your home loan account with your savings account. The amount you have in your savings account reduces the interest on your home loan. It is a potential method to save money in the long run.
- Smart Loan for Home
A smart home loan is a type of floating-rate loan that combines your income and savings to calculate the interest payable. It can result in reduced interest costs over the tenure of the loan.
- Balance Transfer Home Loan
This type of home loan allows you to transfer your existing loan to another lender who offers comparatively lower interest rates or better terms. It may help save money over the course of the loan.
Once there is clarity on the type of home loan, let’s find out where you can save next.
Avoiding Common Mistakes in Home Loan Management
Awareness is one of the best tools when navigating a home loan. Here are some of the pitfalls to watch out for:
- Not comparing offers from different lenders.
- Ignoring the total cost over the focus on EMI.
- Overlooking processing fees and other charges.
- Not reading the terms and conditions.
Understanding Interest Rate Levied on Homeownership Loans
One of the most essential parts that a home constitutes is the cost of borrowing money. It is basically the percentage of the principal loan amount that you are required to pay to the lender. What’s even more important is understanding how different interest rates influence the overall cost of your loan. A slight difference in these rates can lead to significant changes in the amount you repay over the duration of the loan. Many times, factors like market fluctuations can influence these interest rates and may even change the entire repayment amount.
Factors Affecting Home Loan Interest Rates
Several factors influence the interest rates provided by lenders. The key ones include:
1. Policies by Reserve Bank of India
The RBI plays a major role in influencing interest rates in the financial market. It determines the repo rate, which is the rate at which it lends money to commercial banks. When the RBI lowers the repo rate, it becomes cheaper for banks to borrow money. As a result, it leads to a potential reduction in interest rates on loans, including home loans.
2. Inflation Rates
Inflation refers to the rate at which the general level of prices for goods and services rises, eroding purchasing power. Once inflation tends to settle after rising, the value of money over time comes to normal levels. While making use of increased purchasing power, lenders may decrease interest rates. Therefore, inflationary trends in the economy can impact the interest rates offered on home loans.
3. Demand and Supply Dynamics in the Lending Market
The demand for loans and the availability of funds in the lending market are two of the major determinants of interest rates. When there is a surplus of funds available for lending, competition among lenders can lead to lower interest rates.
4. Credit Score and the Borrower’s History
The creditworthiness of a borrower is a significant factor influencing the interest rate they offered. Lenders assess the associated financial risk with lending to a particular individual based on their credit score and credit history. A higher credit score indicates a lower perceived risk, which can lead to a lower interest rate.
5. Loan Duration
The duration or tenure of the loan also affects the interest rate. Generally, shorter-term loans tend to have lower interest rates compared to long-term loans.
6. Type of Property
The nature of the property being financed can impact the interest rate. New properties are often considered less risky for lenders, as they are generally in better condition and come with warranties. Therefore, loans for new properties may have lower interest rates compared to loans for resale properties.
Understanding these factors can empower borrowers to make informed decisions when seeking a home loan. By considering these elements, borrowers can work towards improving their creditworthiness, monitor economic trends, and strategically stretch their loan tenure to secure favorable interest rates.
Practical Tips for Home Loan Repayment
- Utilising Government Schemes and Incentives
The Indian government offers numerous schemes like the PMAY (Pradhan Mantri Awas Yojana), which can reduce home loan costs.
- Managing Your Finances Effectively
Maintaining a good credit score, having a stable income source, and a consistent repayment history are factors that lead to better interest rates and terms.
Tips for Efficiently Repaying Your Home Loan
- Opt for shorter loan tenure if you can afford higher EMIs.
- Make periodic pre-payments when possible.
- Choose lenders with zero or low pre-payment and foreclosure charges.
Learn More, Save More
Owning a house is a dream, but the financial journey with home loans can be intricate. With knowledge and awareness, you can navigate this path efficiently, saving money and ensuring peace of mind.
Always remember, when connecting with an NBFC like Tata Capital, it can be important to understand how to save on a home loan. It’s more than just owning a piece of property; it’s about creating a haven and saving you some extra money.
