By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com
(Published in Moneycontrol.com on 13 June 2016)
For most of us, buying a home of our own remains the most important financial goal of our life and home loan helps us realise this dream. However, shopping for a home loan may turn out to be a daunting task for most first time home loan buyers, especially after what they go through while selecting their units or plots in the first place.
Let’s go through some of the factors that you must keep in mind as first time home loan seekers. This may help simplify your task, as well as get you the best deal from the street:
Compare the options available: There are multiple banks, housing finance companies (HFCs) and other non-banking finance companies (NBFCs) to choose from for home loans. Therefore, it is imperative for you to conduct a thorough research and compare all terms and policies online before closing on any particular scheme. Random applications without proper research may either get you a sub-optimal home loan scheme or may lead to rejections. This may bring down your credit score. Online platforms offer multiple loan options at the click of a button.
Loan eligibility & EMI affordability: Your loan eligibility and EMI affordability will depend on your net monthly income, mandatory monthly expenses and credit score. As poor credit score may lead to increased interest rates or outright rejection of your home loan application, try to improve your credit score and rectify the errors in your credit report before applying for a home loan. Get your spouse or working children as co-applicants if your income level proves to be too low for loan approval.
Consider opting for higher EMI for reducing your interest payouts. However, don’t let it exceed 40–50% of your net monthly income. Also, don’t let your EMIs come in the way of investing for long term financial goals. Use online EMI calculators to find out your tentative EMIs based on your loan amount, interest rate and loan tenure.
Loan-to-Value Ratio: Loan-to-Value (LTV) ratio is the proportion of the property value that a lender can finance through a loan. According to RBI guidelines, LTV ratio in case of home loans of Rs.30 lakh or less can go up to 90% of the property value. A 90% LTV means that the borrower will have to shell out at least 10% of the property value out of his own pocket while the rest can be financed through loans. For loans between Rs.30 lakh and Rs.75 lakh, LTV ratio can go up to 80% while for loans above Rs.75 lakh, the required LTV ratio is 75%. Take into account the LTV ratio in order to find your minimum down payment.
Loan tenure: Usually, lenders offer home loan tenures ranging between 10 years to 30 years. Keep your cash flows in mind while deciding on EMI and tenure of loan.
Interest rate type: Home loans can be of three types — floating, fixed-rate and mixed variant of home loans. Fixed-rate home loans charge fixed interest rate throughout the entire loan tenure while the interest rates in floating-rate loans vary according to the MCLR fixed by the banks. In case of the mixed variety, the interest rate remains fixed for a predetermined period after which it becomes a floating interest loan. Go for fixed interest loans during the rising interest rate regime and opt for floating interest loans during the opposite regime. In the current regime, my advice is to opt for floating rate loans.
Processing fees and other charges: Lender charge processing fee to cover various expenses incurred during the assessment of your home loan eligibility and the value of your property. This fee can range anywhere between 0.5–1% and is non-refundable irrespective of the sanction of the loan (some banks have fixed processing fee).
Another major fee is the prepayment charges, which is levied when the entire outstanding loan balance or a part of it is paid-off before the due date. Lenders charge this penalty to recover a portion of the loss due to loan prepayment. However, this fee is only applicable on fixed rate home loans as the RBI has barred prepayment penalty on floating rate home loans. Some other major home loan charges include late payment fee, (Central Registry of Securitisation Asset Reconstruction and Security Interest) CERSAI charge and switching fee. Compare these charges across various lenders as they may form up to 4% of the loan amount.
This brief overview should help you to fill up some of the gaps in your home loan knowledge. Remember that the more you research on the home loan process beforehand, the higher the chances of getting the best deal. Carry out a thorough research on the options available in order to avoid the hassle of running between various banks.