Your very own dream home, a goal every middle-class family has its heart set on. Accompanying this is every cautious step you have taken to get there. The word “budget” is always on your mind and finally, when you do find a home, you need finance for it.
Home loan lenders provide the loan amount to you for the purchase of a home. They are profit-making organizations to recover the loan amount and interest. Therefore, they will evaluate your ability to repay the loan and determine your financial credibility. And then, they will accordingly provide different lending options. It can be strenuous given the interest rate calculation, documentation requirement, the turnaround time and so on.
You need to assess the credibility of the lender, the prevailing interest rates, eligibility criteria, processing fee and other factors to choose the right home lender. The Reserve Bank of India (RBI) is the statutory authority entrusted with the task of regulating the players in this field and protecting home loan borrowers’ interests. This article is a simple guide to help you choose the right home loan lender for your dream house.
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Factors affecting the selection of home loan lender
Rate of Interest:
The first and foremost thing you need to consider while choosing a home loan lender is the rate of interest charged on the principal loan amount. You need to go for the lowest interest and you would do well to compare the lending options and schemes provided by lenders to determine the lowest rates and favourable loan term for you. It is the interest rates also that determine your EMI and your interest outflows.
An interest rate variation of 0.5 % could burn a hole in your pocket when considering the quantum of the principal loan amount. For example, in simple interest terms, the principal loan amount is Rs. 10,00,000 taken for 10 years-the interest rate is 7%. Therefore, the total interest amount is 70,000 p.a. multiplied by 10 years which takes the figure to Rs. 7,00,000 for 10 years. However, if the rate of interest is bumped up to 7.5%, for 10 years, the total interest amount is Rs. 7,50,000.
Your pocket is lighter by an extra Rs. 50,000 just because the interest rate varies by 0.5%. It would also be useful to decide which type of interest rate you want to opt for a fixed rate or a floating rate. Hence, look around and compare lending options and schemes provided by different lenders to arrive at the right option for financing your purchase.
Loan eligibility and value:
The amount of loan sanctioned in your favour is dependent on your monthly income and the value of the property. One of the factors a lender assesses is the quantum of your monthly income for determining the loan amount to be sanctioned. Another factor is the Loan to Value ratio (LTV). LTV ratio is the proportion of the residential property value which the lender’s approved loan will finance. A lender may finance 75 to 90 % of the property value.
For instance, in 2017, the RBI issued a circular in June stating that for a loan value above 75 lakh, the LTV ratio would be 75%, which means that if the property value is Rs 80 lakh, for instance, the lender will risk financing 75 % of the value, i.e. to the extent of Rs. 60 lakh. You need to consider these factors and ensure that you get a loan amount sanctioned in your favour that covers the property value to the greatest possible extent and with the lowest interest rates payable.
Processing fee and other charges:
Home loan lenders charge you a fee when you apply for a home loan and this is for processing your loan application. Usually, the rate of processing fee is around 0.25 to 2% of the loan amount. Some lenders may charge even a fee called legal fees to verify your documents. It is not only important that you choose the lowest rate of the processing fee, but it is also important that you get a bank employee to walk you through the details of the bank processing of your application to get a better understanding of the process and charges involved.
Revision in interest rates:
When it comes to interest rates, they are susceptible to changes during the tenure of the loan sanctioned to you. The RBI keeps revising home loan interest rates accordingly, keeping the demand and supply situation in terms of real estate in mind. This is done to keep pace with the fluctuations in the economy. In case, you have selected a floating rate of interest on your loan amount, your interest rates will revise or will be revised in response to the prevailing market conditions and the RBI’s policy.
However, if your choice is the fixed rate of interest, it remains fixed for a long time. However, if the loan tenure is long, there are reset clauses set by banks for a fixed interest rate. A floating rate of interest is beneficial if the prevailing interest rates are low or are likely to be reduced. Also, for a shorter-duration loan, floating rates are more beneficial. Likewise, if the interest rates are high or are likely to rise, it is advantageous to go for the stable fixed rate of interest. It is also beneficial for long-duration loans.
Another factor to be kept in mind when engaging a home loan lender is the documentation required by them for determining your credit-worthiness and the sanction of your loan amount. Where all lenders usually require the same set of documents, certain lenders may require less documentation to process your application.
Where lenders are profit-driven organizations in the business to make money, they are in it for the long run. The recovery of the loan amount is subject to time and may take several years of repayment. Hence, they are bound to ensure their recovery by scrutinizing your application to the last detail. For this reason, a stipulated time is set for application processing. You should try to ensure the choice of a lender who takes minimal time to process your application and sanction your loan. A lender with a track record in this respect is what you need.
Terms regarding Prepayment and Preclosure:
Many a time, lenders have strict terms and clauses regarding the prepayment or advance payment of a loan amount. They may also have terms towards the pre-closing of loans. In such cases, consider this when applying for a loan for there may be charges or additional amounts levied to pre-close a loan or there may be terms restricting the pre-payment of a portion of the loan amount.
Your decision of purchasing your own home or house is one of the most financially trying decisions you have taken. A home loan with favourable terms goes a long way in making your dream come true. For this, you have to bear in mind that you cannot rush into availing a loan that will cause you to regret the action later. Interest rates, processing fees and other miscellaneous charges are levied by lenders to increase their earnings.
You have to carefully ascertain and gather information on all these charges before considering the option. Also, at the time you decide on purchasing a house, ensure that you get a good idea of the prevailing interest rates in the market and take your decisions accordingly. You should also take your present income and any potential future expenses and financial outlays while taking your decision.
Last but not the least, a comparison of the lending options and schemes provided by the different lenders can go a long way to reduce present and future expenditure on interest and ensure the fulfilment of your dream within your budget.