By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com
(Published in Financial Express.com on 09 Nov 2016)
CHOOSING a wrong home loan can have massive financial implications. All necessary steps should be taken to choose the best lender for your dream home.
The interest rates on home loans depend on your loan amount, credit score and loan tenure, and rates can range from 9.40% to 12% per annum. As a small difference in home loan rates can lead to a sizeable difference in home loans, opt for a lender offering home loan at lowest rates. Also keep in mind that banks follow the MCLR regime for interest rate. This rate-setting mechanism is much better placed to pass on interest rates reductions to you than the Retail Prime Lending Rate (RPLR) system followed by NBFCs.
Loan to value (LTV) ratio
LTV is the proportion of your property value that lenders will finance through your home loan. The remainder, popularly known as down payment, has to be financed out of your own pocket. As per RBI guidelines, banks can finance up to 90% of the property value for home loans of R30 lakh or less. For loans in the R30–75 lakh range and above R75 lakh, LTV ratio can go up to 80% and 75% respectively.
A low credit score may reduce your chances of securing a home loan from a public sector bank or may lead to higher rates. However, housing finance companies take a more relaxed position on your credit score. The flip side is that they may offer you lower LTV ratio and charge higher rates.
Generally, most banks and NBFCs offer loan tenure of up to 30 years. However, some like LIC Housing Finance have lower tenures for self-employed people (only 20 years) while others like ICICI Housing Finance has a maximum tenure of 20 years for all customer segments. Choose a lender offering longest loan tenure if reduced EMI payouts increases your loan eligibility.
Loan processing time
The time taken for approval and disbursal of home loans varies across lenders. Choose a lender on the basis of the urgency of your home loan funds. Opt for one that has faster loan processing system in case you have an immediate loan requirement.
Lenders charge processing fee to cover various expenses incurred while assessing your home loan application. While many lenders charge a fixed processing fee, most charge 0.50–1.50% of the total loan amount. As this is a non-refundable charge irrespective of final sanction of the loan, opt for a lender that charges the lowest. The other major charges that need to be considered include prepayment penalty (only applicable in case of fixed interest loans), late payment fee, CERSAI charge and switching fee. Compare these charges across lenders as these may add up to 4% of your loan amount.