Buying a home is one of the important aims of many, some afford it easily while most don’t as it requires a huge financial investment. Property is known to be a rich asset that helps you get several financial benefits. No matter whether you are planning to purchase property for investment purposes or finding your new home.
What stopping you from purchasing a property? Is it a shortage of funds or something else, whatever the reason may be; A home loan can be a great way to secure funds.
This type of loan is mostly availed by individuals from banks, NBFCs, and other housing finance companies to fulfill the goal of owning a house. Based on your requirement, you can choose a flexible repayment tenure to make the EMIs even easier to pay.
There is no doubt that a home loan proves to be a simplified solution to make your dream of purchasing a home into a reality. In this article, let’s have a glimpse of key factors to consider while taking a housing loan to ease your home loan process and simply loan repayment.
The very first step you have to do is conduct in-depth research on the loan options available in the market before approaching any lender. Your research must include home loan interest rates as it plays an important role in deciding whether you will or not avail a loan and whom to approach.
Now, it has been cleared that you should do thorough research before finalising the lender. Apart from that, be aware of the different types of interest rates charged by banks, NBFCs, and other housing finance companies.
Fixed Interest Rate: As the term suggests, fixed interest rates are those rates of interest that remains the same throughout the repayment tenure. So, your EMIs do not change and remain constant. A fixed interest rate avoids the risk that a mortgage or loan payment can increase over time.
Floating Interest Rate: The floating interest rate is also known as the adjustable rate, and may change during the repayment period as it is subject to revision changed by RBI on base rates and the same may affect on your interest rate. With the current trend of decreasing home loan interest rates, it is recommended to opt for a floating interest rate.
Hybrid Interest Rate: Hybrid interest rates are the combination of fixed-rate and floating-rate, most commonly used for housing loans. In a hybrid loan, you start with a fixed interest rate for a specified period and then your rate will be adjustable following your loan terms.
In case interest rates fall, you’ll benefit from lower EMIs during the adjustable-rate period. This will be beneficial if you expect interest rates to drop or don’t plan to stay on a long-term loan.
Also Read: Compare which bank offers Best Interest Rates on Home Loan
Do you know? Your loan requirement impacts several things in your home loan application. If your loan need is under 75 lakh or above 75 lakh the interest rates are varied. Since, a home loan requires a huge investment and it’s a long-term commitment.
Instead of opting for a loan amount that you are eligible for, you should avail only what you can afford to repay without making any delay or default in repayment as it can negatively affect impact your credit score and future loan eligibility.
Hence, it is recommended to decide your loan amount before quoting a request to the lender. Make sure you are comfortable with the selected loan amount that you will pay on regular basis for a long time.
Loan tenure is another crucial factor to consider when opting for a home loan as the Equated Monthly Installment (EMIs) depends on it. The longer loan repayment may help you to pay smaller portions of the EMIs but ultimately make you pay double or triple the loan amount due to high-interest rates.
Whereas choosing a shorter loan tenure can create a burden of huge EMIs and might collapse your repayment schedule. Generally, EMIs associated with short-term loans are always high.
It doesn’t mean that shorter tenures are obviously bad as they help in reducing the burden of paying EMIs for long periods and lower your home loan total cost to a great extent.
If you have a stable and increasing income and plan a strict budget, then it is advisable to opt for a shorter repayment period with higher EMIs. Interest rates for such tenures are considerably lower to uplift faster repayment. Banks and NBFCs also offer the lowest interest rates for those borrowers who decide upon a shorter repayment cycle.
Therefore, make an informed decision on choosing the right type of loan tenure to make your monthly repayment convenient and save you from paying huge interest.
Let’s understand the term down payment with an example. Suppose you apply for a loan of Rs. 50 lakhs but the bank approves only Rs.35 lakhs based on your eligibility. In such a case, you need to pay the balance of Rs.15 lakh from your pocket to fulfill the need, and this amount paid on your own is called a down payment.
The lower the loan amount, the lower the interest rate you will pay. Because banks funds loan ranging from 65% to 90% property value as a maximum loan amount, based on your eligibility.
With a margin of 10% to 20% down payment to be made by the individuals. In order to avoid paying a higher interest rate, you should make as much down payment as you can without stressing your budget as it helps you in lowering the loan amount and other interest burdens.
Most banks charge a processing fee on home loans to process your loan application. It is a one-time fee that is paid upfront, you have to pay it out from your own pocket to the bank/NBFC instead of it being deducted from your loan amount.
The percentage of the processing fee depends on the selected loan amount and varies from bank to bank. Generally, the processing fee comes between 0.5% - 2% of the loan amount.
Since housing loans are usually high, even a small difference in the percentage can make a significant difference.
@contentImg
Preclosing a property loan means paying off your loan before the loan tenure expires. A loan can be closed in the form of foreclosure or pre-payment.
Pre-payment can either be part-payments where you make a lump sum payment towards the principal amount whereas foreclosure is made by repaying the entire loan amount in one shot before the loan tenure ends. By making a part payment whenever possible, you can able to save a considerable amount on interest and become debt-free at earliest period.
Most of the banks and housing finance companies do not charge for pre-payment and foreclosure. However, some lenders charge you a certain amount for making any kind of pre-payment or foreclosure and have limited the number of times you make pre-payment.
So, beware of those lenders who leverage charges and set limitations. You must be familiar with the term pre-payment charge so that you can choose the right lender that offers pre-payment at zero to minimum charges.
A pre-approved home loan is known as in-principal approval that is given by the lender based on your income, creditworthiness and other financial position. Pre-approved loans are availed before property selection. With such a facility, you can easily plan your finances and negotiate with developers.
Typically, lending institutions have tie-ups with several developers. This makes you easier to find the best properties in your preferred location just by asking for a list of approved developers with the lender.
In case you haven’t finalised your property, it is recommended to get your home loan pre-approved before finalising the property. A pre-approved housing loan proves to be beneficial in various ways such as negotiating interest rates with the lender, improving the loan process, better financial planning..etc.
It allows borrowers to get the loan sanctioned even before finalizing the property. Most of the lenders have tie-ups with various developers. Therefore, asking the lender to share a list of approved developers in your preferred area makes you find the best properties at better deals.
Go through the document’s checklist of multiple lenders to know who gives the relaxation or comfort of minimum documentation, as every financial institution will ask for certain documentation at the time of loan application.
Necessary documents are KYC documents, income documents, and property papers. However, before moving to the stage of documentation, the lender at the initial phase itself checks your credit score to determine that your profile matches the eligibility requirements as specified by the lender. By doing so, they would consider you as an eligible borrower and make additional efforts to process your loan application even faster.
KYC Documents: These documents include identity and address proof. KYC is the mandatory process of identifying and verifying the borrower's originality. So, the lender asks for your Aadhar Card, PAN Card, Driving License, Voter ID..etc.
Income Documents: Income documents required for salaried and self-employed are varied. In such case, the lender will ask for your last 3 months salary slip, bank statements, ITR with computation of income for the last 3 years, and other financial documents based on your occupation.
Property Documents: Property papers are an essential document required for a home loan such as a sale agreement, property map, property chain allotment letter from the builder, NOC from the builder, registration & stamp duty receipt..etc.
Credit Score is one of the key parameters considered by financial institutions when granting a loan, be it a home loan or any other loan product.
If your current credit score is below 700, then you must start work on it by paying off your existing loan EMIs on or before the due date, limit your credit card usage to maximum, avoid delaying any payment and make sure you check your credit score at least twice a year to get rectify if any misleading information found and ensure it is up to date.
Applicants with a CIBIL score of 750 or above are preferred by lenders. By having a good score, you can negotiate better interest rates and get a chance to faster your loan processing and disbursal.
Also Read: How to Improve Your CIBIL Credit Score
Pradhan Mantri Awas Yojana (PMAY) Scheme was launched by the government with an initiative to provide affordable housing. In other words, beneficiaries under the credit-linked subsidy scheme can avail of this interest subsidy on their housing loan but you should first check if you are eligible for this or not.
If you are eligible beneficiaries as per the government-listed norms, then you should look for a lender who is registered under PMAY the scheme so that you can get the benefits.
Also Read: Subsidy for home loan under Pradhan Mantri Awas Yojana PMAY
No doubt, buying a house is a big step in everyone’s life but at the same time, it’s one of the most satisfying experiences you will have in life.
With increasing property prices and the market’s high-interest rates, purchasing a home becomes hard decision-making for most of you. As a result, making the right choice, keeping the interest cost low, and considering the above-listed factors can avoid unpleasant disappointments later on. By considering the mentioned pointers, obtaining a housing loan becomes a lot easier.
Financeseva allows you to check your pre-approved home loan offers with a few clicks. Apart from checking a pre-approved offer, you can also compare different lender's interest rates, loan amount, loan tenure, processing fees and so on at a single platform.
CA Vikas Jain - Our Mentor
9863-02-02-02