Five ways to save money on your home loan

Housing is most often the single biggest investment and expenditure in our budget. According to data from the Housing Development & Finance Corporation (HDFC), a typical home costs around Rs 50 lakh in India currently. The amount would be closer to Rs 1 crore in the case of homebuyers in Mumbai. 

Given such a large sum involved, a small saving on the cost of the home or interest on a home loan would translate into big savings over the loan tenure. For example, on a home loan of Rs 50 lakh, every 10 basis points reduction in the mortgage interest will translate into annual savings of Rs 5000 on the loan EMI. 

Similarly, a discount of a few lakhs on the final price of the home will help you save a significant amount of money during the loan tenure.

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So if you are thinking of buying a new house and plan to fund it through a home loan then here are some simple ways to save money and lower your overall acquisition cost.

1. Improve your CIBIL score. Nowadays banks and housing finance companies use a borrower's CIBIL score to decide the loan eligibility and even the rate of interest. If your CIBIL score is less than 750, most lenders may not even consider your loan application. And if some small lender agrees to give you a loan they will charge a higher interest rate that will translate into higher monthly EMIs. 

At least six to nine months before you plan to apply for the home loan, purchase your CIBIL report and see whether your score is satisfactory. If the CIBIL score is less than 750, then improve it by paying your loan EMIs and credit card bills on time. 

In other words, if your card has a credit limit of Rs 1 lakh per cycle keep your spending to under Rs 30,000 every month.

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2. Do extensive research.  There has been a virtual explosion in the number of players in the home loan market with every lender trying to create its own niche. This translates into a wide variation in the rate of interest and lending terms in the home loan market. So before taking a loan, compare and contrast the home loan offers of various lenders right from big and small banks to old and new housing finance companies. Some banks and housing finance companies may be running attractive offers or teaser offers around the time you intend to take a loan, which may help you save money.

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3. Negotiate with the loan officer. A lender has several charges that it levies on borrowers but there is nothing sacrosanct about them. The loan officer enjoys full flexibility to reduce them or do away with them entirely. 

These administrative charges add up and raise the overall cost of the loan. So make sure you check and compare these charges levied by various lenders. You can strengthen your negotiating power by furnishing documentary proof of your financial assets and savings. These include bank FDs, equity or mutual fund portfolio, life insurance policies, provident fund balance, landholdings or investment in gold and jewellery if it is large. 

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Your financial asset will reassure the loan officer about your repayment capacity and give him an incentive to give you the best possible interest rate and also waive off various fees and charges.

4. Don’t just look at interest rates but also actual EMIs. While comparing various options don’t just look at the interest rate but the actual difference in monthly EMIs and prepayment terms and the flexibility in adjusting interest rate in future as per changes in the market. 

It could be the case that a particular bank may charge your lower EMIs even if the interest rate is higher due to the difference in the way they calculate the interest rate on the principal amount. 

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5. Apply for a joint home loan. If you are planning to take a home loan, check from the loan officer if you can take it jointly with your spouse. If you are unmarried and have just started your job, then see if one of your parents can become a co-borrower. Applying for a joint loan not only decreases your EMI burden, but you also become eligible for a higher amount of loan and can save money by claiming double benefits on tax exemptions.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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