Buying your first home is aspirational as well as sentimental for the middle-class Indians. In a bid to set your foot into your own house as soon as possible, you might get tempted to choose the wrong deal. To avoid that, remember to do your own research and try to speak to your friends and kin who already have a loan on their properties. Learning from the mistakes of others is always better over learning from your own.
Before you buy your first home, make sure you consider the following:
1. Try to improve your CIBIL score: This will help you increase your chances of loan approval, and to get a better deal on interest. Banks give approvals to loan applicants whose CIBIL score is more than 750.
“I often tell my clients not to keep credit card bills outstanding when they plan to raise a home loan any time soon. Delayed or missed credit card bills can impact your credit score, and thus your chances of getting approval for home loan,” says Deepak Kumar Aggarwal, a Delhi-based financial advisor and chartered accountant.
2. Foreclosure: When you have a home loan, you should try to clear it as soon as you can. If you have a spare lakh or two, try to use it to foreclose the loan. The sooner you clear the debt, the better it is for your financial health.
Ajay Sharma, a 37-year-old IT consultant in Bengaluru, borrowed ₹40 lakh loan in 2015 for 15 years to buy a house. He says that he has been repaying at a rate faster than required. “I use my quarterly bonuses towards clearing my home loan debt. I am aiming to pay the entire sum by 2025, which is 5 years earlier,” says Sharma.
3. Processing fees: Although home loan is a long-term commitment, a high processing fee can be a put off for a borrower. So, it is good to inquire about it beforehand. It also makes a difference when you are transferring your outstanding loan to another bank.
4. Scan all the documents thoroughly: Instead of merely signing all the documents, it is advisable to first read all the loan documents. Even if it means taking an entire day to go through the fine print, it is worth spending that time.
5. Pay maximum down payment: Usually lenders want borrowers to pay 20 percent down payment, but there is no maximum amount that you can pay. So, you should borrow as little as possible and not the maximum threshold. However, if you are young in your mid or late 20s, it is not unwise to borrow a maximum amount to become a homeowner. After all, you will become the owner of an asset, which will appreciate in value in future.
6. Floating rate versus fixed rate: Home loans are approved at a rate which could be either fixed or floating. In the fixed rate, the rate stays constant whereas in the latter, it will fluctuate depending on the market conditions. More often than not, floating rate is considered cheaper in the long run.
7. Do your research and exercise caution: Notwithstanding what others are saying, you must do your own research before raising the home loan. Every person has a different experience, so what your close relative went through may not be a norm for every home loan borrower.
Similarly, what your colleague told you may be an exaggeration or the result of his overly pessimistic outlook. But what you cannot, and should not, overlook is your own observation based on research and reading.
8. Lower rate for lower amount: The lowest rate offered by banks and housing finance companies is usually for the loans under ₹30 lakh. So, consider this option if your loan requirement is around this amount. For instance, if your loan requirement is ₹31.5 lakh, then you can raise ₹1.5 lakh from your personal sources to get your loan for a lower rate.
9. Refinance your loan: In case you happen to know that your home loan interest is more than normal, you can go for a refinance option to another bank to get a better deal. But remember to factor in the loan processing cost, which should be lower than your savings on refinancing.
10. Prefer to buy a new property: Chances of a loan approval or of a low rate of interest are higher when you buy a newly constructed house. Since the life of a new house is longer, banks prefer to approve loans for a new house vis-à-vis an old one.
So, we can highlight that getting a home loan is a long-term commitment, and one must be very careful and compare different loan offers before signing the dotted line.
From rate of interest to processing fee, and from refinance option to foreclosure – everything should be factored into the final decision.