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Property Advisor

Jan

27

6 Points that You Should Remember While Applying for Home Loan

Buying a house is one of the most important decisions that one makes life, and given the scale of investments, most people choose to finance the purchase through home loans. However, careful planning is needed to ensure that a bank clears your home loan, and the terms of the loan agreement work in your favor. Following six factors need to be considered carefully before applying for a home loan:


KNOW YOUR LOAN ELIGIBILITY BEFORE SUBMITTING LOAN APPLICATION

 

It is important to understand your loan eligibility before submitting your application of the bank. The easiest way to assess your loan eligibility is to estimate the maximum equated monthly installment (EMI) amount that you can afford, and then use it to calculate the loan amount using the existing interest rate and target tenure period. Generally, banks do not lend an amount that would take your EMI more than 40-50% of monthly salary, excluding allowances and reimbursements. Also, most banks cap the loan amount at 80% of the property value.


Many banks also provide a loan eligibility calculator on their websites that allows you to calculate the maximum loan amount on the basis of your monthly compensation. However, the actual loan amount offered by a bank can vary on the basis of many other factors that are not considered by these calculators. Factors such as source of income can impact the loan amount, as a bank will less reluctant to give the maximum loan as per eligibility to a salaried employee compared to a businessman with erratic income. Also, factors such as number of dependents, existing loans and the age of the applicant can also impact the loan eligibility.


BANK’S RELY ON YOUR CIBIL RATING TO GAUGE YOUR CREDIT PAYMENT TRACK RECORD

 

The score or rating provided by Credit Information Bureau (India) Limited (CIBIL) plays a crucial role in deciding your credit worthiness. The score is provided on the basis of your track record related to credit card bill payment, bank account statement, existing loans or liabilities, loan repayments and how many times you have applied for a loan in the past. The score, which is provided on the scale of between 300 and 900 points, tells a bank how likely you are to pay back the loan based on your past repayment behavior. The higher score increases your chances of getting your loan application approved. Anyone can get their CIBIL report through CIBIL’s website by paying a fee.


GETTING QUOTES FROM MULTIPLE BANKS CAN REDUCE YOUR COSTS

 

In order to get the best deal, one need to conduct thorough research to understand the terms and conditions, tenure, fees and interest rates being charged by different banks. You should speak with at least 4-5 banks as it can provide you a good base reference point, i.e. the details collected can help you gauge, how different banks are structuring loan agreements and fees, and which bank will work the best for you. In addition to understanding interest rates, termination fees, pre-payment fees, switching fees etc., you should also compare the customer service that you should expect from the bank. Private Banks are generally more forthcoming while public banks may offer lower interest rates. As a borrower, you will have to strike a balance between the two while choosing the lender.


Also, by speaking with multiple banks, you can get better footing to negotiate on interest rates or other charges or penalties with the bank. Similar to any business, banks have targets and thus at times it is open to negotiating on the terms of an agreement. Banks tend to offer discounted rates to old clients with good track record. Also, if you have a good CIBIL score, it can also help you to get a good deal from the bank.


CHOOSING RIGHT LOAN TYPE CAN HAVE A BIG IMPACT ON YOUR OVERALL COSTS

 

Property loans are offered under two main financing options – fixed rate and floating rate. It is important to understand the difference between the two options, as each can have an impact on your overall financing cost, and impact your return on investment.


In a fixed rate loan, the monthly repayment installments are equal for the duration of the loan period that you have agreed with the bank. Whereas in a floating rate loan, the rate of interest changes periodically, based on a combination of factors such as the inflation rate, overall economic conditions, liquidity and the Reserve Bank of India (RBI) measures. Banks use the Benchmark Prime Lending Rate (PLR) to set the floating lending rates. Thus, monthly repayment installments or EMI fluctuates on the basis of changing linked factors.


Floating rate loans are generally 1-2.5% cheaper than fixed rate loans. Floating rate loans are a good bet in a declining interest rate markets as it prevents you from being locked-in higher rate fixed rate loans. While evaluating a fixed rate home loans it is important to closely examine the current macroeconomic conditions, and the direction, in which, both domestic and global economies are heading, as this has a direct impact on RBI’s decision on interest rates, which dictates bank lending rates. Choosing the right loan type can have a huge impact on the cost of the overall home loan.


LOANS WITH LONGER TENURE ARE MORE EXPENSIVE

 

With ever increasing real estate prices and high interests, a borrower in most cases has to take a long tenure loan to get the capital needed to purchase the house while keeping the EMI at affordable levels. However, one needs to remember that long-tenure loans are more expensive as you pay huge interest payments.


Consider this scenario, wherein a person takes INR 50 lac loan at 10% rate of interest for 20 years. In this case, his EMI works out to be INR 48,251 and he pays INR 65.8 lac as total interest payment during the tenure period. As you may notice that the interest payment is even more than the principal that was taken from the bank. The longer tenure makes loans expensive and costs you more in the end.


Now compare this to another scenario, wherein the same loan is taken at same rate of interest for 10-year period. In this case, his EMI works out to be INR 66,075 and he pays INR 29.3 lac as total interest payment during the tenure period. Thus, 
reduction in the tenure period by 10 years reduced the interest payment by INR 36.5 lac. This is huge, and the example demonstrates how much extra one pays by increasing the loan tenure period.


ENSURE THAT YOU UNDERSTAND LOAN AGREEMENT AND ALL PAYMENT TERMS BEFORE SIGNING THE AGREEMENT

 

It is important to read all terms of the agreement carefully before you sign it. Banks would generally protect their interest by putting various clauses in the contract, and you should ensure that all terms are consistent with your discussion with the bank. Not reading the terms carefully can hurt you later if you decide to take an action that has financial penalties associated with it.


One should especially give a lot of attention to terms related to additional charges that a bank applies to the loan. The charges range from processing fee, service and administrative fee, pre-payment fees, switching fees, etc. While signing the contract and evaluating offers from different banks one should very carefully compare terms and conditions, and additional charges that banks apply. If you are not aware of these terms while signing the contract, it can result in unexpected costs during the tenure of the loan. If needed, you can also get the contract reviewed by a lawyer, who can help you understand the legal jargons.


As a home loan borrower, you are unlikely to fall in a trap if you remember these six points while applying for a home loan.

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