Home buying is one of life’s biggest investments that everyone aspires for. But the sheer quantum of capital involved may prove to be a huge hurdle in this endeavour. Home loan is a form of credit specifically offered for this purpose that can ease one’s financial worries. A secured type of loan, housing finance simplifies the property purchase process to a great extent with low monthly instalments and comfortable repayment tenors.
Factors to Keep in Mind When Considering a Home Loan in India
To facilitate a faster and convenient home loan procedure, applicants seeking housing assistance should keep in mind a few key factors that can garner favourable loan deals. These are as follows:
1. Home Loan Interest Rate
The rate of interest charged for a home loan plays a significant role in deciding which lender to choose and whether to avail of a home loan. One should thoroughly research the various loan options available in the market before finalising the right housing loan. A home loan calculator comes in handy during this exercise as it helps you to compare loan costs by computing the payable EMIs, desired loan amount and the preferred tenor.
Home loans in India are offered with various types of interest rates. Borrowers should be aware of these differences to pick the most suitable rate:
Floating Interest Rate
Also known as a variable interest rate, a floating rate may change at any time during the tenor, subject to current lending rates. Loan EMIs could vary with fluctuations in the interest rates. A higher rate will push up the monthly instalments; while a drop in the interest rates will give you reduced EMIs.
Fixed Interest Rate
In a fixed rate loan, the rate of interest stays the same throughout the loan tenor, keeping the EMIs unchanged. One can opt for a fixed rate when the interest rates are low and an upward trend is expected in the future.
Hybrid Interest Rate
A hybrid or combination interest rate is a combination of both floating and fixed interest rates. Some lenders offer fixed interest rates for a certain period, which can be later switched to a floating interest rate.
2. Home Loan Amount
The principal sum affects several aspects of a home loan. The rate of interest normally differs for loan amounts in slabs ranging from below Rs.30 lakh, between Rs.30 lakh and Rs.75 lakh,
and above Rs.75 lakh.
Since home loans require consistent cash flow for repayments that extend over longer duration, it is better to opt for loan amounts that one can comfortably repay. Most importantly, instead of choosing a loan principal that individuals are eligible for, they should borrow only what they need. This way, you can repay the loan without any delay or defaults, which could otherwise impact your credit score and future credit eligibility adversely.
3. Loan Repayment Tenor
Housing loans involve higher principal sums that necessitate a flexible tenor to enable timely repayments. An extended tenor allows you to get a reduced EMI amount but ultimately increases your net interest outgo, making the loan costlier. Whereas, choosing a shorter tenor can hike your monthly instalments. Not only do you end up paying off the loan earlier, but you can also limit the cost of credit. Hence, one should pick the right tenor as per requirement.
For an under-construction property, the loan is sanctioned in stages based on the schedule of construction. In such cases, one has to initially pay just the interest component called the pre-EMI interest.
4. Down Payment
Lenders may offer loans up to 90% of a property’s value depending on applicant eligibility. The remaining amount has to be paid by borrowers on their own, which is known as a down payment. One should aim for a higher down payment as much as one’s finances permit. This will decrease the loan amount and the effective interest.
5. Pre-Approved Home Loans
Availing a pre-approved housing loan gives you a clear idea of your credit budget that helps you negotiate better deals with developers. It also fosters a quicker and smoother home loan process. Further, since lenders have tie-ups with several builders and they maintain a list of approved projects, you have the option of selecting the best properties along with the ideal housing finance.
Apart from loan eligibility, lenders need to evaluate the paperwork before they approve your loan application, which include:
- KYC documents – These are your identity and address proofs like PAN card, Aadhar card, passport, driving license, voter ID etc.
- Income documents – It will vary for both salaried and self-employed applicants. Lenders ask for salary slips, bank statements, income tax returns, computation of income and other details, based on occupation.
- Property papers – This includes agreement of sale, title deed and so on.
Before taking up housing loans, borrowers must understand other loan-related charges that lenders may levy like part pre-payment and foreclosure penalty, processing fees, etc. which could increase the cost of your loan. So, check all relevant details with your lender to avoid any confusion later on. One should also anticipate the future financial conditions to prevent loan defaults. Sometimes, lenders may insist on loan cover insurance to safeguard against unfortunate events so that the burden of credit does not fall on the borrower’s family.