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Reducing the Interest Rate - the Effective Way!

Investing in real estate can be a wise financial decision for several reasons. And the most favoured way of investing is opting for a loan. If not calculated well, this might lead you to down path and fail to fetch you profit. In this article, we talk about how you can lower your interest rates effectively and be on the winning side.

Tenure Reduction:

The duration of your home loan, known as tenure, is a critical factor in determining the interest rate. A longer tenure may lead to higher interest rates on the principal amount. However, choosing a shorter tenure can result in lower interest rates on your monthly instalments. It's a good idea to calculate the interest rate before deciding on the tenure.

Down Payment & Repayments:

When buying a home, always aim to pay a significant amount as down payment for the property. This way you have to take a smaller amount of loan, which will automatically reduce the interest rate.

After the loan is sanctioned, timely repayment of the EMI plays a pivotal role and if possible, aim to close your loan earlier than the set tenure. Adjust your repayments based on your financial situation. This way you are not only increasing your credit score but also lessen your interest rate.

Collaterals:

If you have a previously owned property, it adds to your credibility. This means that you own a valuable asset that can be used as collateral for a home loan. Collateral is something of value that a lender can seize if a borrower defaults on their loan. By using your real estate investment as collateral, you're showing the lender that you're a low-risk borrower. This reduces the lender's risk, which can result in a lower interest rate.

Credit Score:

In addition to reducing the lender's risk, investing in real estate can also improve your credit score. Your credit score is a numerical representation of your creditworthiness. Lenders use your credit score to determine how likely you are to repay your debts. The higher your credit score, the more likely you are to be approved for a loan and receive favourable interest rates.

Loan-to-value Ratio:

Another way that investing in real estate can lower the rates of interest on home loans is by reducing the loan-to-value ratio. The loan-to-value ratio is a measure of how much money you're borrowing compared to the value of the property. The higher the loan-to-value ratio, the riskier the loan is for the lender.

Example:

By investing in real estate, you're increasing the value of your assets, which can reduce the loan-to-value ratio. For example, let's say you own a property worth INR 50,00,000 and you want to take out a home loan of INR 30,00,000. Your loan-to-value ratio would be 60%. However, if you invested in a second property worth INR 20,00,000, your loan-to-value ratio would drop to 43%. This makes the loan less risky for the lender, which can result in a lower interest rate.

Refinancing Your Home Loan:

If you feel like your current lender isn't giving you a good deal, you can talk to them about lowering your interest rate. Many lenders will try to keep their customers happy and may agree to reduce the interest rate or match a competitor's rate. If that doesn't work, you can look for a new lender who offers better interest rates and check their fees. Then you can apply for a loan transfer by getting the required documents from your current lender and completing KYC procedures with the new lender. They will then review your application before approving it for you.

However, it's important to remember that real estate investing comes with risks and should be approached with caution. It's always a good idea to consult with a financial advisor before making any investment decisions.