How to negotiate a better mortgage rate?April 11, 2022 . Home buyer's education series . 10 min read
Your mortgage rate is the interest rate that you agree to pay when you take a home loan. It is called loan interest rate; these days the term mortgage rate is also catching up.
You may have the impression that since the home loan rate or the mortgage rate is decided by the bank or the lender you may not have enough say in deciding what rate you pay or whether you can negotiate or not. This is not the case. In many ways you can negotiate a better mortgage rate.
Why should you negotiate your mortgage rate?
Once you take the mortgage you will be paying EMIs for years to come. The EMI includes your principal amount and your interest rates. This is calculated based on the home loan amount you have taken, the tenure you have chosen to pay back the entire amount along with the interest, and your mortgage rate.
By the time you have paid the entire loan amount along with the interest, you will be paying two times more of what you have taken, or even more. For example, if you have taken Rs. 30 lakhs, there is a possibility you will be all in all paying back almost Rs 60 lakhs in the coming 20-25 years. How much total you pay back depends a lot on your mortgage rate.
Most of the homebuyers don’t look beyond the current lender they are negotiating with because they are not aware that they are in a position to negotiate their mortgage rate.
By negotiating your mortgage rate, you can potentially save thousands or even lakhs of rupees in the long run.
What to do to be able to negotiate a better mortgage rate?
To be able to negotiate a better mortgage rate you need to be in a position to do so. Negotiating doesn’t mean offering to pay your own interest rate while your lender offers its own. It simply means creating an environment that makes you an attractive proposition for the lender where you may get a lower mortgage rate. Here are a few things you can do.
Talk to multiple lenders
When you are in a hurry to buy a property and may even be worried whether you will get the loan you are looking for or not, you want to grab the first opportunity that comes your way.
Remember that just as you are eager to get the mortgage, the lender is also eager to give you the mortgage. You will be a newly acquired customer for them who will be giving them back lots of money for their investment. There are scores of lenders over there who may offer you better mortgage rates.
Even a difference of a few hundred rupees can mean a lot. For example, if a lender gives you a saving of Rs. 500 every month, over the period of 30 years, you will be saving Rs. 1,80,000 (a hypothetical example).
Hence, don’t rush. Negotiate with multiple lenders.
Maintain a good credit score
Of course, this is a long-term solution, and it may take years of using credit and then paying it back on time to build a good credit score. But a good credit score gives you bargaining power. In fact, many people take credit (or use credit cards) and make sure that they make all the payments on time so that by the time they need to take the mortgage, they have a great credit score. Lenders want to know if you take money, you return it with regularity. This makes you a good customer. As a good customer with a good credit score, you have the bargaining power that the others don’t.
Negotiate with the lender you’re talking to
The mortgage rate of a lender isn’t written in stone. On many occasions they are open to negotiations. As mentioned above, just like you need a mortgage, the lender needs a customer like you. They may accommodate you if you negotiate with them convincingly and present a good reason to give you a discount or move the decimal value of your mortgage rate a notch down.
Prepay a big chunk of your mortgage
The more money you owe the higher interest you pay. The inverse is also true. Suppose you have taken a Rs. 50 lakh mortgage. After a few years you come across spare cash of Rs. 10 lakh and you use this amount to make a big payment against your mortgage. This can considerably reduce your EMI burden. This is also advantageous in case you plan to transfer your home loan to another lender midway who is offering you better terms towards your mortgage.
Increase your EMI
What is the mortgage rate? It is the interest that you pay for keeping the mortgage rate with you for a specific number of years. You are paying the lender interest for all the months and years you are using the money. The lower is your EMI, the longer is your tenure, and the higher is your mortgage rate. This also works inversely. The higher is your EMI, the shorter is your tenure, and consequently, the lower is your mortgage rate.
You can negotiate your mortgage rate during various stages of your home loan period. You can negotiate when you are getting a new mortgage – with the same lender or by talking to multiple lenders. You can transfer your loan to another lender midway if the other lender gives you a better mortgage rate. You can use your good credit score as leverage. There are multiple proactive steps you can take to negotiate a better mortgage rate.
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