Buying a house is a significant financial milestone and a cherished dream for many. However, with real estate prices continuously on the rise, purchasing a home can be challenging, especially if you’re working with a limited income. Fortunately, home loans can make this dream more attainable by spreading the cost of the property over several years, allowing you to manage the payments gradually. However, repaying a home loan requires financial stability, as you need to ensure timely payments throughout the loan tenure.

Interest rates play a crucial role in determining the affordability of your home loan. Since May 2022, when the Reserve Bank of India (RBI) increased the repo rate by 250 basis points (bps) to 6.5%, banks have adjusted their lending rates accordingly. This hike has led to an increase in both the repo-linked external benchmark lending rates (EBLRs) and the marginal cost of funds-based lending rate (MCLR). As a result, borrowers with existing loans have experienced higher monthly EMIs, making it crucial for prospective borrowers to carefully consider the interest rates they are offered.

If you are planning to take out a home loan, understanding how to minimise your interest burden can make a significant difference in your financial health. Here are some practical strategies that can help you lower your debt burden and make your home loan more affordable.

1. Negotiate for a Lower Interest Rate

Interest rates are the cornerstone of any home loan, as they directly influence your monthly EMI and the total interest you pay over the loan's life. A lower interest rate translates to lower monthly payments, easing your financial burden. If you have a good credit score, don’t hesitate to negotiate with lenders for a lower interest rate. You can leverage your creditworthiness to secure a better deal.

Before finalising a loan, shop around and compare the rates offered by different banks and financial institutions. Online financial marketplaces can be particularly helpful in this regard, allowing you to quickly compare rates, terms, and any discounts offered by various lenders. If you have a long-standing relationship with a bank, they may be more willing to offer you a lower rate or favourable terms.

2. Improve Your Credit Score

Your credit score is one of the most important factors lenders consider when approving a home loan. A high credit score, typically 750 or above, indicates strong creditworthiness and can help you secure a lower interest rate. If your credit score isn’t where you’d like it to be, take steps to improve it before applying for a home loan.

To build a healthy credit score, make sure to pay your bills on time, maintain a low credit utilisation ratio, and avoid applying for too much credit in a short period. Regularly check your credit score and report any errors you find immediately, as these can negatively impact your score. A higher credit score not only increases your chances of getting a loan approved but also gives you the upper hand in negotiating better loan terms.

3. Choose a Loan with a Lower Rate

Home loan interest rates typically consist of two components: the benchmark rate and the spread. The benchmark rate is the base rate below which a bank cannot lend, while the spread is the additional interest charged by the lender based on factors such as the borrower’s credit score, income, and loan amount. The spread remains constant throughout the loan tenure but can vary between different lenders.

In recent years, home loan spreads have seen a significant reduction. For instance, spreads in 2024 have dropped significantly compared to early 2020 levels. Current interest rates range from 8.20% to 8.50%, with spreads as low as 170 to 200 basis points. Opting for a loan with a lower spread rate can reduce your overall interest rate, allowing you to benefit from future rate cuts.

4. Make a Higher Down Payment

Lenders typically finance 80-85% of the property’s purchase price, leaving the remaining amount to be covered by the borrower as a down payment. Making a higher down payment can reduce the loan amount you need to borrow, which in turn lowers your EMI and total interest payable over the loan tenure. Additionally, a higher down payment reduces the lender’s risk, which may increase your chances of securing a lower interest rate.

For example, if you are purchasing a home worth ₹50 lakh, making a 20% down payment (₹10 lakh) means you only need to borrow ₹40 lakh. This reduces your loan amount, and consequently, the interest you’ll pay over the loan tenure, which can result in substantial savings.

5. Opt for a Longer Loan Tenure

Choosing a longer repayment tenure can help you reduce your monthly EMI, as the loan amount is spread over a longer period. This can make the loan more affordable and free up some of your income for other financial goals. However, it’s important to note that while a longer tenure reduces your EMI, it also increases the total interest you’ll pay over the loan’s life.

Let’s say you take out a 20-year home loan of ₹50 lakh at an interest rate of 7.5% per annum. Your EMI would be approximately ₹40,280. If you extend the tenure to 25 years, your EMI reduces to ₹36,950, and further to ₹34,961 if the tenure is extended to 30 years. While this makes your monthly payments more manageable, the overall interest paid will be higher with a longer tenure. To mitigate this, consider prepaying part of your loan whenever you can afford it or increasing your EMIs as your income grows.

Let us understand this furthermore with an example-
Consider Ramesh, who plans to buy a house worth ₹60 lakh. He can make a down payment of ₹12 lakh, requiring a loan of ₹48 lakh. Ramesh has a credit score of 760, which allows him to negotiate a loan with an interest rate of 8.2% and a spread rate of 180 bps. He opts for a 20-year tenure, resulting in an EMI of approximately ₹41,066.

Ramesh decides to make prepayments whenever he receives a bonus or any extra income. After five years, he receives a substantial bonus and uses it to prepay ₹5 lakh. This reduces his outstanding loan amount and shortens his loan tenure by two years. By taking these proactive steps, Ramesh not only lowers his EMI burden but also saves a significant amount on interest, making his dream of homeownership more affordable.

In conclusion, understanding the factors that influence your home loan and taking strategic steps to manage them can significantly reduce your debt burden. By negotiating for lower rates, improving your credit score, choosing the right loan terms, making a higher down payment, and considering your loan tenure carefully, you can make your home loan more manageable and achieve financial stability.