Points to remember before taking a Home Loan

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Ensuring shelter above your head is one of the daunting tasks for any individual. It takes a significant amount of your income to ensure that. Hence, people tend to look for home loan to fulfil their basic requirements.

  • In India, the salaried professionals constitute around 88% of the Indian home loan market share. They are in demand from the salaried segment as they have limited spending capacity.
  • Banks and housing companies are the primary choices for home loans. Among these two, Banks hold a significant share of lending because they follow MCLR (Marginal cost of funds-based lending rate) that offers attractive interest rates compared to housing finance companies. RBI mandated banks to link their floating rate loans to an external benchmark instead of MCLR to make sure that banks were to cut loan rates in tandem with the central bank’s cut in policy rates.

What is the maximum loan amount you are eligible for?

  • Loan eligibility depends on repayment capacity.
  • Lenders consider several factors such as
    • Total monthly income/surplus less monthly expenses
    • Spouse’s income
    • Assets
    • Liabilities
    • Income stability, etc.
  • The lending agency wants to ensure whether you can repay the loan timely. The loan amount depends upon your monthly disposable income. Usually, about 50% of your monthly disposable income is assumed to be available for repayment. 
  • The tenure and interest rate also determines the loan amount.
  • Lending banks fix an upper age limit for applicants impacting eligibility.
  • Most of the lenders require 10-20% of the home’s purchase price to be paid by the borrower as down payment (One’s own contribution). The lending agency finances the rest of the amount (80-90%) of the price including registration, transfer and stamp duty charges.
  • Although the amount calculated by the lender is relatively high, it is not necessary to borrow ultimately. We suggest you arrange a maximum down payment to keep the interest cost at minimal

Is a co-applicant mandatory?

A co-applicant is not mandatory for a home loan, but lenders stress on it in case of multiple owners of the property. Also, having a co-applicant will increase home loan eligibility. 

Compare the interest rates online

Compare the interest rates online to get an idea on the different rates offered by other lenders. It will help you in choosing the interest rate of your convenience.

Maintain the CIBIL Score

CIBIL score reflects your creditworthiness. Maintain your credit score by paying your dues on time. A CIBIL score above 650 is considered suitable for maximizing your chances of securing the loan. Higher is the score, higher your chance of securing the loan.

What are the interest rate options?

  • Fixed: The rate of interest is fixed for the entire loan tenor. Interest remains constant irrespective of changing market conditions. These rates are suitable for those who want a fixed monthly payment schedule. It gives a sense of security
  • Flexible: The rates do not remain fixed. You avail the benefit of reduced interest rate due to changing market conditions. Even if the rates go higher it won’t go for the entire tenure. So, in the long run interest rates will surely fall, thus, saving more money for you. Floating rates are usually lower than Fixed

Usually, the borrowers go for floating rates. In the end, it’s the borrower’s choice which loan suits best. According to economic experts, if the economic conditions suggest a rise in future interest rates, then choosing fixed rates will be wise. 

If security and certainty are the primary concerns, then a fixed rate is the right option for you, but it will come with extra cost.

What are the costs involved in the loan process?

During the process, you usually pay

  • The loan EMI. 
  • A processing fee (0.5-1% of the loan amount). 
  • In case of some high-value properties, two evaluations are done, and the lower of the two is considered for loan sanctioning. It is called a technical evaluation fee. 
  • The firms hired by the lenders do the scrutiny of the borrower’s legal documents. Usually, banks include the cost in the processing fee.

Can you do the prepayment of the loan and close it ahead of schedule?

Yes, you can do the prepayment of the loan and close it before the schedule.

  • In case of a floating interest rate, there will be no prepayment charges no charge will be applicable. 
  • In case of a fixed rate, there may be a charge applicable.
  • You can also opt for the partial prepayment in addition to the regular EMIs. It reduces the outstanding principal, and the interest is calculated on the reduced principal.

Should you take insurance to cover your liability?

  • Insurance is always about the worst-case scenario; hence, it is better to cover your liability in case of your absence.
    • Take a pure term or a mortgage insurance plan for an amount equal to the loan amount for a specific tenure. 
    • Pay a single premium or regular premiums for such plans.
  • It is, however, not compulsory to buy such an insurance plan.

Do you want a second loan or a home improvement loan?

  • Lenders usually provide a second loan for the improvement of a self-owned property. 
  • Some banks offer top-up loans based on property value. 
  • Some banks also provide a transfer of home loans. The principal is credited to your old bank, and you start paying off your loan at better interest rates.

Are there any tax benefits?

  • Of the total annual EMIs, the principal component gets tax benefit under Section 80C of the Income Tax Act. Partial prepayment too qualifies for the same but within the overall limit of ₹1.5 lakh under Section 80C. 
  • For a self-occupied property, the annual interest paid is deductible up to ₹ 2 lakh.

What are the best banks for home loans?

Bank Interest Rate Benchmark type Processing Fee
SBI 6.95% RLLR 0.20% , Min ₹ 4,000, Max ₹ 17,400
HDFC 6.95% PLR 0.25%, Min ₹ 3,000, Max ₹ 10,000
Citibank 7.20% TBLR NIL
Bank of Baroda 7.0% RLLR Min ₹ 7,500
ICICI Bank 6.95 RLLR Min 1%

The list is not exhaustive, for more home loan interest rates, click here.

What to do in grievance’s case?

 

  • Lodge a complaint with the concerned bank in writing. The banks are obligated to respond within 30 days. 
  • If the bank fails to respond, reach the Banking Ombudsman to complain. The list of Banking Ombudsman is available on the RBI website.
  • Any authorized representative (except a lawyer) can also complain on your behalf.
  • Appeal further to the Appellate Authority in the RBI if not satisfied with the decision of the Ombudsman.

Important points to consider

  • Choose a lender offering lowest EMIs, in that way you pay significantly less in repayments than others.
  • Opting for long tenures such as 30 years is not necessarily always a good thing. Opt for it only there are no prepayment charges.
  • Check whether the lender includes the furnishing cost of the house in the project cost.
  • Choose the lenders that offer daily or monthly reducing balance instead of annual reducing balance method.

Conclusion: Securing a home loan is a complicated and lengthy process. Borrowers are required to produce several documents and take care of points for scrutiny of their application. This is where MyLoanCare comes to picture, applying through us will get you the home loan options at the most competitive interest rates. MyLoanCare’s processing team screens your application according to the parameters established by different lenders and offers you the best available option without affecting your cibil score through multiple enquiries.

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