Things You Want to Know Before Taking a Home Loan

More and more people are buying their first homes these days on borrowed money. With easy financing options home ownership is within the reach of younger people than was traditionally possible. A home loan will be the biggest item on your expenses list and it may run for up to two decades so you want to make sure you get it done right.

In order to find the best possible deal, you need to get quotes from many different banks and mortgage brokers. Don't assume that broker is trying to find you the best possible deal, because they are often swayed by the commission lenders offer them, and so are not necessarily acting in your best interests. Your best bet is therefore to shop around and compare interest rates, fees, and other expenses between the different deals you are offered.

Home loan eligibility

Home loans are taken for constructing house on a plot, upgrading existing house or buying a house. These days it is possible to get a pre-approved loan up to 3 months before you actually even identify a property. The bank could however modify terms of such loans after sanctioning them.

To get a home loan you need to be an Indian citizen in the working age. You need to have a minimum annual income of Rs 1.5 lakhs. The threshold limit may vary among banks.

Overall lenders look at parameters such as income, liabilities and credit history. If you have paid past loans on time and have no credit card dues your chances for home loan approval goes up.

Fixed rate vs floating rate dilemma

While going for a home loan you will have the option of choosing a fixed interest rate or floating interest rate loan. A fixed rate loan as the name indicates has a fixed rate of interest that doesn't fluctuate with market situation and allows you to make repayments in fixed EMIs throughout the loan term. A floating rate loan's interest can move up or down depending on market conditions. This rate is linked to the bank's prime lending rate or the base rate and a spread of around 2% is charged. A floating rate implies that your payments can increase or decrease and this might reflect in the form of repayment for an extended period. Although banks should ideally pass on increase and decrease in rates to customers equally, most of the times they are more enthusiastic about passing on an increase in interest rate than a decrease.

The decision of settling for a floating rate or fixed rate must depend on the stage of interest rate cycle. If general interest rates are peaking and have been fluctuating in the past 6 months to 1 year, it will be wise to go for a floating rate because you expect the rates to go down sooner or later. If interest rates have been stable in the past 6 months to 1 year and are at the lower side compared to previous years one should take a fixed rate and lock in that interest for the entire loan period. In a growing economy like India's interest rates should hover around the growth rate when inflation is stable.

Charges on home loan

Besides the interest rate, a borrower pays other charges to the lender for services provided. The various fees you can expect are mentioned below.

  • Processing Fees: Typically related to the loan application process and is charged when a loan is processed. Note that processing fees maybe refundable and maybe charged even if the loan itself is not approved. Please check with the lender before filing a loan application. It can typically be between 0.5%-1% of the loan amount and could have certain minimum and maximum amount restrictions. For example, a lender could have a processing fee of 0.5 of loan amount with a minimum of Rs. 1000 and a maximum of Rs. 10000. Processing fees could also vary based on the actual loan amount also.
  • Administrative Fees: Some lenders have fees to maintain the loan which are charged periodically (such as quarterly or per annum).
  • Documentation Fees: Some lenders may charge fees for preparing documents etc.
  • Commitment Fees: Some lenders may charge a fee in case the approved loan is not availed by you within a certain stipulated time period.
  • Delayed Payment Fees: If your monthly payment gets delayed for any reason, some lenders may charge this fee.

To the delight of borrowers prepayment penalty on floating rate home loans has been done away with and we can expect they'll do away with the penalty on fixed rate home loans as well.

How to choose a home loan

Every bank worth its salt offers home loans. You can choose from scores of banks offering loans at competitive interest rates. The most important criterion that anyone must check is interest rate offered. The idea of 'best bank' for loans based on the interest rate criterion is a fallacy. Interest rate offered depends on the applicant's profile and loan requirement. If you have a few banks in mind that offer similar interest rates you can use the following considerations to make a decision:

1. Amount being sanctioned

Different lenders will offer you a loan of varying amount depending on their valuation of the property. Banks lend up to a certain percentage of the cost of the house which typically varies from 75 - 80%. The remaining amount called as margin will have to be funded by you.

How much amount is sanctioned also depends on your income and repayment capacity. Different lenders will offer different loan amounts based on your income. Verify if the bank is willing to lend the amount to need to borrow.

2. Speed of approval and disbursements

Sometimes the price a builder offers on a house is valid for a limited period. Enquire how much time the bank takes to sanction a loan after you have applied and how time is required to disburse the amount. Ask friends, colleagues and relatives who have experience for opinion and check if a lender has the reputation of sticking to its commitments.

3. Repayment terms

Choose a lender who offers repayment options that you can comfortably manage. Verify conditions laid down by the bank regarding foreclosure penalty, fee for switching lender, prepayment charges, etc. Ensure you understand this criterion before choosing a lender.

4. Convenience

At the end of the day you don't want the bank to give you headaches even if it has offered a low interest rate. You want a bank that offers good customer service, is responsive, treats you warmly and helps you with queries and in understanding relevant formalities and conditions.

Joint home loan

If you are married there is considerable merit in applying for a joint home loan with the spouse. First of all it raises the loan amount eligibility. The incomes of all joint applicants are added for considering the loan amount. Usually lenders are reluctant to lend more than the amount that would make the EMIs over 40-50% of the borrower's monthly income. The income criteria will be satisfied more easily when incomes are pooled. Secondly double the amount of permissible income tax exemptions can be availed by both applicants in a joint home loan. An individual can claim income tax exemption up to Rs 1 lakh under section 80 C of the IT Act on principal repayment of home loan and up to Rs 1.5 lakhs under section 24 for interest repayment of home loan.

Prepayment of home loan

Coming to the issue of prepayment of home loans, most people want to pay off their home loan because they're concerned of unfavourable financial situations in the future. You can end up losing job, getting disabled or seriously ill impeding their ability to pay EMIs and if they have surplus funds to pay off and get rid of it right now, why not do it, they ask. However the opportunity cost of money plays the decisive role in such situations. If you had surplus funds and invested them for the long term in high returns yielding (rate higher than the loan interest rate) avenues you would actually be paying off the loan from your investment yields. Therefore despite the fact that prepayment penalty has been banished we advise that if you can invest surplus funds in high yielding opportunities like mutual funds you do so and if at all the loan must be prepaid you can withdraw from the mutual fund. This way you will have a backup for the loan and also earn returns. However if you are nearing retirement or are retired you had better paid off the loan with surplus funds.                                  

Remember

In order to avoid 'hidden charges' read the Loan Agreement before you sign it. That's the last thing you want to read after going through the cumbersome process of getting the loan sanctioned but it's important to be informed before you agree. One the many things you will find in it is the clause restricting you from selling, mortgaging, leasing or disposing the property without the bank's consent. Stay acquainted with news about change in charges, terms and conditions that can affect you.


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