Buying a house is a very crucial decision for anyone and a big step ahead in one’s life. If you are opting for a home loan, you will obviously need to check out the best options that will help you to minimize your debt. Here are four important tips that will help you get a better deal on your mortgage.
1) Negotiate on the ‘spread’ factor of your interest rates
While scouting for home loans, different lenders will give you different indicative rates. What you need to understand is that there are two components of the interest rate- the base rate and the spread. So if you are taking a loan from a bank your final rate of interest will be the base rate + the spread. For example, if the base rate of X bank is 10% and it is offering you a spread of 0.65 %, your rate of interest works out to be 10.65%.
While the base rate is at the discretion of the bank and is also the rate below which a bank cannot lend, what you can negotiate on is the spread factor. Look for a lender who will help you minimize your risk by exposing you only to the base rate while keeping the ‘spread’ fixed. If a floating rate is what you want, you should ideally opt for a ‘fixed spread floating rate of interest’. This means that, though the bank will review its base rate every quarter, you spread will remain fixed throughout the tenure of the loan irrespective of the interest rate movement.
2) Call the shots on the EMI
Do not let the bank decide upon the EMI component of your loan. Decide the highest amount of EMI you can pay and keep it constant. Most banks will tell you that they will decrease your EMI when there is a decrease in the interest rates, but do not fall into this trap, as that effectively means that you are paying a higher rate of interest. Check with your lender if you have the liberty of either keeping your EMI constant despite a change in interest rates or increasing the EMI at your will.
3) Haggle on the processing fee
A lender will always tell you that you have to pay 1% or thereabouts of the sanctioned amount as the processing fee. If you are a smart negotiator, you can negotiate to your wits end and actually get waiver on this fee!
4) Get a clear idea on partial payments
Partial payments are the payments you can pay in a lump sum to reduce your outstanding loan. A partial payment is always deducted from your principal amount. Therefore, by making partial payments periodically, you can cut down on the interest component of your loan significantly. Needless to say, that does not please the lenders much and therefore most banks have a limit on the amount of part payments you can make in a year. While scouting for a loan, look for a lender who allows you the maximum number of part payments in a year.
These tips can help you negotiate better when you are scouting for loans. You are going to make home loan repayments for a considerably long period of time during which your responsibilities will increase, so choose wisely and well!