Let’s take a look at five critical factors about a home loan you might not be aware of as a borrower.
A home loan is a popular borrowing tool and a key enabler for countless homebuyers. If you’re looking to apply for a home loan, chances are you’ll mainly focus on factors like the loan interest rate, processing fee among other eligibility requirements. However, there might be a few other crucial things you overlook or not be aware of that are equally important — not just for prospective borrowers but also for the existing ones.
Let’s take a look at 5 such critical factors about a home loan you might not be aware of as a borrower.
1. Your lender might revise the interest rate spreads if your credit score changes during the loan tenure
Some home loan borrowers have the misconception that the credit score is crucial only at the time of getting the loan to fulfil the eligibility criteria and not after taking the loan, but here they go wrong. Ever since the Reserve Bank of India directed lenders to link the rates of their floating rate loans to an external benchmark like the repo rate, many banks have linked their credit risk premium to the credit score of the loan borrower. This means if you’re servicing an external benchmark-linked floating rate home loan, and your bank sees a fall in your credit score during the loan period, the lender can increase your applicable loan rate until your credit score improves.
Lenders usually have their norms in place to determine the risk premium based on the credit score band. Most banks offer loans at zero to minimum risk premium if the credit score of the borrower is higher than 750 points. With the change in the credit score, the risk premium also changes. So, if you have taken a home loan, a little financial indiscipline like missing a credit card payment may result in additional home loan EMI burden. You’ll be well-advised to ensure you pay all your existing and revolving dues on time to ensure your credit score doesn’t take a hit. Also, try to check your credit score at least once every quarter to have complete clarity.
2. Not all loans come with zero prepayment charges
According to the RBI’s guideline, banks are not allowed to charge for home loan prepayments, but this guideline only applies to floating-rate home loans and not fixed-rate loans. So, if you have a fixed-rate home loan, your lender may charge anywhere between 0.5% and 2% of the outstanding loan amount if you prepay. As such, if you’re planning to take a home loan, make an informed decision about fixed and floating-rate home loans after evaluating the pros and cons of both the financing facilities.
3. Buying a home loan insurance product is not mandatory
Your bank might ask you to purchase a home loan insurance product bundled with the home loan during the loan approval process. However, buying such an insurance product might be a costly affair. There is no doubt that while taking a home loan, the applicant must get his life covered adequately to protect his dependents from any financial hardship if something untoward happens to him during the loan tenure apart from minimising the lending risk. But the applicant can get adequate life cover by purchasing a term plan as well which will be a lot cheaper than a bundled home insurance plan. So, if you’re applying for a home loan, you may always choose to go for a term insurance plan instead of a home loan insurance product and save a lot in the long term.
4. You can’t claim tax benefit as a co-borrower if you are not the owner or co-owner of the property
A home loan is one of the biggest tax-saving instruments out there, and even home loan co-borrowers can avail the associated tax benefits. However, many are unaware of the fact that in order to do so, the co-borrower must be an owner or co-owner of the property. As such, ownership of the property is an important criterion to get tax benefits against the home loan. If you are not one of the owners of the property, as a co-borrower, you could only enhance the borrowing eligibility in a home loan and cannot enjoy any of the tax benefits.
5. Low-interest offers by banks are subject to several conditions
Prospective home loan applicants cheer whenever there’s a fall in the lending rates of the bank. However, there are many other crucial factors apart from the interest rate that must be considered while choosing a loan product. As a prospective home loan applicant, you also need to factor in the associated charges under the loan and if there are any tie-ups between the lender and the builder which can reduce or waive off some of the associated charges. You also need to get complete clarity on the lender’s eligibility requirements and all the loan features besides how flexible it will be to switch lenders. The applicable loan interest rate is ascertained based on several factors like the applicant’s age, income, gender, credit score, occupation, loan tenure, amount, so on and so forth. You’ll be well-advised to check for all these critical things before signing on the dotted line and not focus only on the advertised low-interest rates.
I hope these pointers will help you to make informed decisions. Wish you all the very best!
(The author is CEO, BankBazaar.com)