Owning a home is a dream for many of us. But most people need a home loan with EMIs (equated monthly instalments) stretched over 15–25 years. In that time, a large part of what you pay goes towards interest. Small drops in your interest rate can save you lakhs of rupees and help you clear your loan faster. Here are four easy, practical steps you can take to reduce the interest rate on your ongoing home loan:
Table of Contents
1. Check Your Interest-Rate Regime and Switch to a Better One
Why It Matters
Since October 2019, the RBI has required all new home loans to link their rates to an external benchmark—usually the RBI’s repo rate or some other market rate. Older loans (from before October 2019) often still follow:
- Base Rate (an older, opaque bank-set rate)
- MCLR (Marginal Cost of Funds based Lending Rate)
- BPLR (Benchmark Prime Lending Rate—now mostly phased out)
These older systems can be slow to pass RBI rate cuts on to you. An External Benchmark Lending Rate (EBLR), by contrast, moves almost immediately when the RBI changes policy. That keeps your rate more transparent—and often lower—over time.
How to Switch
- Find out your current regime. Look at your loan statement or call your bank to see if you are on BPLR, MCLR, or an external benchmark.
- Compare to new loans. Visit your lender’s website (or call customer service) to see the current EBLR-linked rate offered to new borrowers.
- Calculate the gap. If new loans are 0.50%–1.00% cheaper, a switch can save you lakhs over the years.
- Ask your bank to convert. Most banks let you “repricing” or convert your existing loan to an EBLR rate for a small conversion fee (e.g., HDFC Bank charges around ₹5,900).
Example
- Old loan: 9.50% MCLR-linked
- New loan: 8.75% EBLR-linked
- Difference: 0.75%
Over a ₹50 lakh loan for 20 years, dropping 0.75% cuts your EMI from about ₹46,600 to ₹44,200, and saves over ₹5.8 lakh in total interest.
2. Reprice Your Loan with Your Current Lender
Why It Matters
Even within the same benchmark regime, banks add a spread (their profit margin) and a credit risk premium (based on your profile). New borrowers often get a lower spread than existing customers. That means you might be paying more than a fresh customer would for exactly the same loan.
How to Ask for a Better Rate
- Track market rates. Keep an eye on your lender’s latest home loan offers for new customers.
- Compare your spread. If you’re on EBLR + 0.50% spread but new customers get EBLR + 0.30%, that extra 0.20% is costing you money.
- Gather proof of good behaviour. Banks like to reward borrowers who:
- Have paid all EMIs on time
- Have a strong credit score (750 +)
- Have parked savings or investments with them
- Make the call. Reach out to your relationship manager or customer-care team. Explain:
- “I see new borrowers are getting a better rate of X%. Can I get the same rate?”
- Be ready to negotiate. If they won’t match the very best new-borrower rate, try for the second-best. Even a 0.10% cut on a large outstanding principal adds up.
Example
- Outstanding ₹40 lakh, 12 years left, current EMI at 9.00%.
- New-borrower rate at 8.75%.
- If you get repriced to 8.75%, your EMI falls by roughly ₹700 per month—saving you over ₹1 lakh in interest across the remaining years.
3. Transfer Your Loan to a Lower-Rate Lender
Why It Matters
If your current bank won’t drop their spread, another lender might. A home loan balance transfer lets you move your remaining loan to a new bank at a lower overall rate. This is also called refinancing.
What to Consider
- Eligibility: You usually need a good repayment record, a stable job, and a credit score above 700.
- Transfer Fees: Lenders charge a processing fee (0.25%–1% of the outstanding amount), plus legal and technical charges.
- Net Benefit: A good rule is that the new rate should be at least 0.50% lower than your current rate, after all fees, to make the move worthwhile.
How to Do It
- Compare offers. Use online loan-comparison tools or speak to banks to find the best transfer rate.
- Run the numbers.
- Calculate your “net saving”:
Gross saving = (Old rate – New rate) × Outstanding Principal × Years left Net saving = Gross saving – Transfer fees - Apply for the transfer. Fill out the new lender’s form and submit documents (no fresh property valuation is usually needed if your loan is in good standing).
- Sign and disburse. The new bank pays off your old loan, and you begin EMIs with the new, lower rate.
Example
- Outstanding: ₹30 lakh, 15 years left at 9.25%.
- You find 8.50% at another bank, with 0.5% fees = ₹15,000.
- Gross saving ≈ ₹2 lakh over 15 years.
- Net saving ≈ ₹1.85 lakh after fees.
That’s a clear win.
4. Make Regular Partial Prepayments
Why It Matters
Each EMI has an interest component (on your outstanding principal) and a principal component (the rest). Lower principal means lower interest in the following months. Partial prepayment lets you knock down the principal faster, saving both interest and EMI burden.
How to Prepay
- Check your loan terms. Under RBI rules, floating-rate home loans allow unlimited prepayments with no penalty. Fixed-rate loans may charge a small fee.
- Decide your amount. You do not need a huge lump sum. Even prepaying one extra EMI’s worth each year makes a big difference.
- Inform your bank. Clearly specify whether you want to:
- Reduce your EMI while keeping tenure the same, or
- Shorten your loan tenure while keeping EMI the same.
- Plan strategically. Use savings, bonuses, or tax refunds to make these extra payments.
Example
- Loan: ₹40 lakh at 9.5% for 20 years → EMI ≈ ₹37,285, total interest ≈ ₹49.5 lakh.
- Prepay one extra EMI each year (₹37,285).
- You save about ₹11.7 lakh in interest and cut your term to 16 years 1 month instead of 20.
Putting It All Together: A Practical Timeline
- Month 1–2: Check your rate regime (MCLR vs EBLR) and current spread.
- Month 2–3: Speak to your bank about repricing—have your latest statements and credit score ready.
- Month 4: Research other lenders for balance-transfer offers. Use a refinance calculator to check net benefit.
- Month 5: If balance transfer makes sense, apply, sign, and start EMIs at the new rate.
- Ongoing: Plan at least one partial prepayment every year using bonuses, tax refunds, or year-end savings.
By following these steps over the next 12 months, you can steadily chip away at your interest costs and clear your housing debt faster.
Final Tips & Reminders
- Keep an Eye on RBI Cuts: When the RBI lowers the repo rate, benchmark-linked rates should follow quickly if you’re on EBLR.
- Maintain a High Credit Score: Always pay EMIs on time and keep credit-card balances low—this strengthens your bargaining power.
- Compare Wisely: Don’t chase the lowest advertised rate; always factor in fees and your own eligibility.
- Talk to Your Relationship Manager: A good rapport with your banker often unlocks better deals.
- Stay Informed: Market rates and lender policies change—review your loan terms every 6–12 months to spot fresh savings.
Owning your home should bring comfort, not financial stress. By using these four simple, smart tactics, you can lower your effective interest rate, reduce your EMIs or tenure, and ultimately pay off your home loan well ahead of schedule. Happy saving—and happy homeownership!
