As most banks are offering the same interest rate for a home loan, one must look at multiple options before finalising the deal
At the start of 2021, the lowest home loan interest rates were in the 6.75% range, with around a dozen other lenders offering 6.95% or less. Home loans had never been this cheap in India. It seemed the rates had bottomed out. But surprisingly, rates have fallen further.
Now, several lenders are grouped in the 6.50 to 6.75% range, with at least 20 lenders priced below 6.95%. All of these options look attractive for borrowers. If you are looking for your first home loan or want to refinance an existing loan, how do you differentiate between these options? Let’s look at some ways.
What’s your actual rate?
There may be multiple lenders offering you 6.75%. But are you eligible for this rate? Or would you pay a higher rate? Every lender has a loan interest rate spread. For example, a government bank sells home loans starting from 6.70 going up to 7.50%. Only eligible borrowers get the lowest rate. Several parameters shape your interest rate: some are gender, source of income, credit score, size of the loan, loan-to-value ratio, and whether it’s a new loan or a refinancing case.
So if you were, for example, a salaried woman with a credit score of 810 taking a home loan under Rs 30 lakh with a loan-to-value of 70%, you perhaps tick all the requirements for some lender’s eligibility and can thus receive a loan at their lowest rate. If your parameters differ, your final rate will be calibrated upwards. For example, add 10 basis points if you were self-employed, 10 more if your loan was above Rs 75 lakh, and 10 more if your credit score was under 750. In a nutshell, the higher the risks of lending to you, the higher your interest rate.
What’s the benchmark?
A benchmark rate is the lowest rate at which a lender can sell a loan. From October 2019, most bank home loans have been benchmarked to the repo rate. As the repo rate crashed—from 6.50 in 2019 to 4% in 2020—so did home loan rates. Banks must benchmark to an externally set rate such as the repo rate. But NBFCs and home finance companies can set internal benchmarks. In this scenario, bank home loan rates were seen falling faster than the others, which worked to customers’ advantage. Therefore, repo-linked loans have become the flavour of the season. Do note that once the repo rate starts rising, home loan rates will see an equal and immediate increase. The benefit though is full transparency in rate movements.
What does it cost to operate?
The interest isn’t the only cost attached to the loan. You can also compare options for processing fees, legal fees, various charges for operating the account, and even the pre-payment costs. Floating rate home loans do not attract pre-payment charges. However, pre-payment rules may work to the borrower’s disadvantage. For example, two lenders charge 6.80, but one needs you to pre-pay a minimum of one EMI and another requires a minimum pre-payment of two EMIs. Therefore, the second loan may become costlier in the long run by being harder to pre-pay.
How are the services?
As home loan is a long-term relationship with your lender, pick a lender whose services you like. In a pandemic, digitisation of services is a necessity, and you wouldn’t want a lender bent on calling you to a crowded branch for paperwork. You would rather they collect your documents digitally or from your home. You’d want them to have functional internet services with good uptime, robust customer support, and fast responses to queries and problems. Given these services, you would have a much easier time managing your loan account.
How far is the branch?
Having your lender’s branch office close by can make a difference to your life. While large banks have branches all over the countries, smaller lenders, NBFCs, and home finance companies have limited brick-and-mortar presence, and you’ll have to commute to wherever they are located.
The writer is CEO, Bankbazaar.com