From loan tenure to processing fee to whether your bank is offering a floating or a fixed interest rate, check each of these factors before finalising the deal
Most people take a home loan to buy a house. Here are the factors that one must keep in mind to get the best home loan deal.
Compare loan options
Most home loan borrowers compare various loan options by applying directly with multiple lenders. However, making multiple loan applications in a short span reduces your credit score as credit bureaus and lenders consider it as a sign of credit hungriness. This in turn may reduce the chances of your loan approval.
Your home loan eligibility will primarily depend on your credit score, net monthly income and existing loan obligations. As a poor credit score reduces the chances of your loan approval, get your credit report and fix the errors, if any, before making any loan applications. As lenders do not prefer to lend to borrowers paying more than 40–50% of their monthly income as EMIs, try to prepay your outstanding loans or a part of it to improve your loan eligibility. Include your children or spouse, who are earning independently, as co-applicants if your income proves insufficient for loan approval.
Loan tenure & EMI affordability
Lenders offer home loan tenures of up to 30 years. Try opting for a shorter tenure as a longer tenure increases your interest cost. However, as a shorter tenure will lead to higher EMIs, try to factor in your expected cash flows and contributions towards various financial goals while selecting the loan tenure.
This is the ratio of the property value that you can finance through a loan and the amount that has to be arranged out of your own pocket. Currently, the RBI has capped this ratio at 90% for home loans of up to Rs 30 lakh; 80% for loans between Rs 30lakh and Rs 75 lakh; and 75% for loans above Rs 75 lakh. However, your final LTV ratio may vary across various lenders depending on their risk-assessment procedures. Thus, do compare the LTV ratios as lower LTV ratio would mean higher downpayment and vice versa.
Interest rate type
Home loans come in three varieties— fixed rates, floating rates and mixed rates. While fixed home loan rate keeps your EMI amount constant throughout the loan tenure, with floating rates your EMIs could fluctuate with interest rates increasing or decreasing, according to market dynamics. Rates of mixed-rate loans stay fixed for a pre-determined period after which they become floating rates. Prefer floating-rate home loans as they do not attract pre-payments charges.
Loan reset frequency
Bank home loans sanctioned since April 2016 have to follow MCLR-based interest rate regime. This regime requires banks to reset the interest rates of each borrower (at least once in a year) on pre-specified date(s). The interest rate applicable on the reset date stays in force till the next reset date. Thus, opt for a loan with the highest reset frequency during falling interest rate regime as this will lead to faster reduction of your interest rate. Similarly, opt for a loan with an annual reset date if you are expecting the interest rates to rise in future.
Check for interest subsidy
The government introduced Credit Linked Subsidy Scheme, as a part of Pradhan Mantri Awas Yojana. It provides home loan interest subsidy of up to Rs 2.67 lakh to low income households with an annual income of up to Rs 6 lakh. Middle income households with annual income of up to Rs 12 lakh and Rs 18 lakh can claim interest subsidies of up to Rs 2.35 lakh and Rs 2.30 lakh, respectively. This subsidy is available on home loans from banks and NBFCs which have signed MoUs with National Housing Bank. Check with the lenders on whether their home loans qualify for interest subsidy.
Processing fees & other charges
Processing fee can range from 0.5% to 1% of your loan amount, irrespective of the sanction of your loan. Borrowers of fixed rate home loans have to additionally consider prepayment fee as it can go up to as high as 3% of the loan amount. Other major charges include switching, administrative and late-payment fees. Compare these charges while evaluating your loan options as these can vary widely across various lenders.
The author is vice-president & business head, Secured Loans, Paisabazaar.com