With the growing economy, increasing salaries and high disposable incomes, most of individuals look to buying a house. In the current economic scenario, buying a house is perhaps one of the biggest investments that an individual makes. Easy availability of home loans has eased the task of buying home to an extent for average income group Indians but they involve their own risks as well. One should remember that going for a home loan is easy but paying it back can actually be difficult because it affects your personal finances for a long term.
Banks and Housing finance companies (HFCs) are providing various schemes & advantages to woo the borrower with value added services and flexible products. Another option is loan against property, a loan given against the mortgage of property. Tough competition among banks and HFCs has benefited the customer through lower interest rate and added benefits. This has resulted in varying benefits & often times complicated terms.
This added complexity requires that you need to do some research before opting for a home loan. One should not get carried away by tricky advertisements and complicated terms, special interest rates for fixed tenure, hidden terms and conditions etc. Here are some important things to look out at time of buying a home loan.
Gather Data on Interest Rate and Negotiate
It is a wise to get interest rate information from more than one source and compare the offers. A comparison website such as i-save.com helps you compare the interest rates for your home loan. Competition between the banks and HFCs can actually be in your interest so make sure to make maximum profit out of it. Spend some time in investigating the different home loan schemes offered by different banks before you make the final decision. Once you are through with your decision, negotiate with your provider on interest rates and processing fees. Try and take additional advantages like property insurance, etc. from the bank if offered at lower costs.
It is not always wise to borrow a larger amount than you can afford, as the debt will make your repayment challenging and can lead to a debt trap. Decide your loan amount depending or considering your monthly income, Job stability, your age, other debts and financial commitments.
Tenure of the Loan
Borrowers always want to pay off their loan or debts as soon as possible and opt for short tenure loans. When your loan tenure is for short period, your monthly EMI will be very high. Longer tenure is generally chosen to enhance the loan eligibility of borrower but longer the tenure greater is the cost of borrowing. If you are close to retirement, you will not be eligible for longer tenure loan. You can also take a longer term to ease the EMI whilst planning to make systematic early repayments – using your annual bonus or other expected inflows – this can help you manage your EMI whilst lowering your outstanding loan amount and ultimately the total cost of the loan over the repayment period.
Interest Rate Type
When considering a home loan it is important to consider the interest rate. You can either consider fixed rate or fluctuating rate of interest. Fixed rate of interest remains fixed for the entire tenure of loan irrespective of change in interest, although in practice this may be reviewed periodically depending on the terms of the loan.
Floating rate is chosen by borrowers who expect the rates to fall in the future and want to benefit by it or do not mind the interest rate volatility in lieu of the slightly lower cost at the time of taking the loan (Fixed rate loans are typically at an interest rate about 1.5-2% higher than the prevailing floating rate).
You can also opt for the hybrid type of loan; it is a combination of fixed and floating loans. Borrower can lock a portion under fixed and leave the remaining under floating rate. It is suited for borrowers who seek to benefit from the predictability of fixed rates and at the same time want to gain from a falling rate. You must choose the type of interest rate according to your appetite to tolerate interest rate volatility and considering the interest cycle in your economy.
Charges and Penalties
Before applying for home loan, enquire about the rate of charges, penalty or fee charged by your lending company or bank for default in monthly EMI. Enquire about the processing charge and in case you decide to switch your loan from current lender to new lender, current lender will charge penalty or fee for pre-closure of your loan. Most Banks will permit you to make annual repayments of upto 25% of the outstanding loan amount without any penalty charge – check your selected providers policy before finalizing the loan.
Loan eligibility calculated on the basis of your ability to pay along with the actual cost of the house you are willing to buy. To enhance your loan eligibility, you may pay higher down payment, you may club the incomes of your family members, you may apply for the longer tenure and you may apply with the co-applicant.
Ensure to keep the original receipts of all the property documents which will help you in switching over your loan to another bank or showing them as a proof in case bank misplaces your documents. Make sure that you receive detailed statement of your loan account from bank on monthly basis.
Do not deal with any person who asks you to include fictitious data on your home loan application to get quick approval. Also do not get pressured into borrowing additional finance than needed. These can lead to problems with not only your current application but can affect your credit history or in some cases result in legal complications.
Home Loan and Insurance
Home loans increase the financial risk to some extent for the family if anything uncertain happens to you. For avoiding extra burden in such cases, increase your life insurance cover or take mortgage protection cover so that your family remains protected if anything uncertain happens to you.