Many people wish to own their own homes. It is also considered a priority for many Indians. However, increasing home loan interest rates pushes people to think twice before heading out to get their own home on a home loan. Borrowers need to understand all aspects of the home loan process to lower their EMI burden.
The concept of home loan spread is gaining popularity in India. It has the potential to significantly lower your EMI (equated monthly installment). Home loan spread refers to the difference between the rate at which the bank borrows money and the rate at which it lends money to you.
Two crucial elements of a retail loan are the loan spread and the benchmark rate. The loan spread is determined by factors such as the borrower’s credit score, source of income, and the size of the loan, whereas the benchmark rate is the lowest rate at which a loan is offered. The spread fluctuates depending on the borrower and is determined by the loan amount, source of income, and credit score. As per the RBI’s order from 2019, majority of banks now base their house loan rates on the repo rate, which is currently 6.50 percent.
Floating interest rates on house loans are determined by lender policy, inflation rates, and changes in repo rates. A rise in the repo rate will almost certainly lead home loan EMIs to rise. However, because of the falling spread rate, banks are not raising lending rates in tandem with the rising repo rate. The spread at which a loan is obtained remains consistent during the entire loan tenure. The spread rate was approximately 3.50 in March 2020, but it dropped to 1.95 in March 2023.
Borrowers with a high credit score and a consistent income are more likely to receive the lowest spread rate, which remains constant throughout the loan term. As a result, while the rate may fluctuate, the spread rate remains constant. The current low spread rate is advantageous for new borrowers, who can begin their loan at a lower rate than pre-pandemic borrowers, who may have been paying a higher amount above market rates. Existing customers may consider refinancing their loan at a reduced spread in this case.
When you take out a home loan, the bank charges you an interest rate that includes a spread. This spread is essentially the bank’s profit margin. However, if you negotiate with the bank, you may be able to reduce this spread, thereby lowering your EMI.
By reducing your home loan spread, you can save considerable amount of money throughout your loan repayment. It can make a significant difference, particularly if you have long loan tenure or have borrowed a large amount.
To negotiate a lower home loan spread, you can start by researching the current market rates and comparing them with the rate being offered by your bank because not all banks offer the same spread on home loans. You can also speak to a financial advisor or consultant who can help you understand the home loan spread and how you can negotiate a better deal. Additionally, if you have a good credit score and a stable income, you may be able to negotiate a lower spread and interest rate with your bank.
Overall, understanding the home loan spread and its impact on your EMI can help you make informed decisions when selecting a home loan.
How can you reduce your loan burden?
Request that your current lender refinance your debt at the lowest rate available. Check the applicable processing fee in this scenario, as it may affect your ultimate refinancing cost.
Another way to save money on interest is to refinance with another lender, which may require documentation. Check the other costs that may be involved, such as the processing fee, legal fee, and MOD charges, before proceeding.
Consider increasing your EMI amount, if you want to reduce your debt burden faster. Examine your resources before proceeding, as the additional EMI may put a strain on your budget.
If your funds allow, try paying an extra EMI at the beginning of each year. In the face of rising interest rates, this will help you reduce the length of your loan.
Consider prepaying 5% of your outstanding loan once a year if your income has improved over time. This technique can assist you in reducing your loan burden more quickly.
Consider entirely prepaying your outstanding loan if you have sufficient savings that will not interfere with your financial goals. While it is a drastic move that must considered carefully, it can help you be financially stress-free.
In conclusion, home loan spread is a significant concept to understand when taking out a home loan in India. By negotiating a lower spread, you can lower your EMI and potentially save significant amount of money throughout your loan repayment.
Borrowers need to understand that home loan rates are likely to rise further in the first half of 2023. Making only EMI payments may be insufficient. They may be able to save money on their loan payments if they use the tactics suggested above.
