Owning a house is one of the primary goals of people who have just started out to earn a living. Especially in our country, buying a house is an emotion rather than a financial decision. The cost of owning a house is increasing in India. It is almost impossible to buy a house without taking a home loan, unless you have accumulated a decent corpus already.
A home loan is a great financial assistance to fulfil your dream of owning a house. It offers an easy monthly repayment option along with the flexibility to choose the tenure of the loan. A home loan also comes with tax benefits & deductions that can help you reduce your tax outflow.
In this post, we are going to discuss the important factors to be considered while taking a home loan. Keep in mind that a lot of these factors depend upon the individual’s credit history & income slabs.
Rate of interest
When you borrow money from a bank, the lender will charge you a certain interest on the money to make profits. The interest rate on home loans plays a significant role in deciding where to avail the loan from a particular bank or not.
In India, home loans are offered on a floating rate basis, meaning, the rate of interest will keep on changing based on the interest rates in the economy. Banks usually quote the rate by applying a spread over the base rate. So if the base rate increases, the ultimate interest rate will increase.
Loan amount refers to the quantum of funds that you plan to borrow from the bank. Home loan is a longterm loan, a borrower has to wisely choose the amount of money that he wants to borrow. It is suggested to borrow only the amount which you will be able to regularly repay in form of monthly installments. Banks offer anywhere between 70%-100% of the agreement value of the property as home loan. One should only borrow the amount that he is comfortable with in terms of repayment.
While buying a house, based on your credit history and credit score, the bank offers you a certain percentage of value as a loan and the remaining amount of money is to be paid from your own pocket. This amount that is to be borne from own funds is known as down payment.
Suppose you plan to buy a house worth Rs. 75 lakhs. Your bank is offering you a loan of 80% of the value. This means you will have to make the payment of 20% i.e. Rs. 15 lakhs from your own funds & remaining 80% i.e. Rs. 60 lakhs will be funded by the bank.
Home loans are longterm in nature. They could range between 15 years to 30 years in tenure depending upon the bank that is offering the tenure. The longer loan tenure helps you lower the monthly repayments but ultimately increases your total interest outgo. Whereas choosing a shorter loan tenure can create a burden of huge EMIs. Hence, it is advisable to choose the right loan tenure to make your monthly repayments smoother and save you from paying huge interest.
Since a lot of paperwork & legal work is involved. The banks charge processing fees in order to process the loan application. These charges are recovered to cover the operational expenses incurred by the banks to process your loan.
They are usually charged as a percentage of the loan amount. It could be anywhere between 0.25%-1% of the loan amount. Some banks also offer a flat fee based processing charges. Home loan amounts are usually huge hence even a small percentage could make a difference in cost.
Pre-approved home loan
Depending on your relationship with the bank, they may decide to offer a pre-approved home loan upto a certain extent. Having a pre-approved home loan will give you a clear idea of your loan budget and help you negotiate with the developers better. It will also make the loan process quick and easy.
The amount of home loan is quite huge, hence, most of the time, people prefer to repay the home loan as early as possible. Pre-payments can either be part-payments where you make a lump sum payment towards the principal amount or foreclosures where you repay the entire loan amount before the completion of the loan tenure.
By making part-payments whenever possible, you will be able to save a substantial amount on interest and become debt-free earlier. Some banks charge a fee when you make a pre-payment against your home loan. Some banks have a minimum amount threshold of making the prepayment amounts. Some have a restriction on the number of times you can prepay the home loan in a single year.
Hence, before availing of a loan, you should get a complete idea about the pre-payment charges and choose a lender that allows pre-payments with zero to minimum charges.
To sum up, buying a house is a dream along with a responsibility of repaying the home loan instalments on time. You should consider all the above mentioned factors and choose the right type of loan and the right amount that will not burden you later. It is advisable to get in touch with an advisor who can assist you in selecting the right product suitable for you.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.