Work towards getting the best deal for your Home Loan
- By Nikolai Kirtikar, Product Manager, Apna Paisa
Often buying a home is the largest purchase we make in our lifetime and taking a home loan to finance it, is likely to be largest debt. Hence it is very essential to get the best deal to finance your home.
In a competitive market scenario, the financial institutions are offering more and more consumer friendly loan options. But, with so many product offerings available in the market with different features and varying interest rates, it is sometimes not so easy to choose the right loan for your requirement. A little knowledge about home loan and what is being currently offered in the market will go a long way in getting that best deal on your home loan.
But before you proceed to meet the lender, you need to ask few quick questions to yourself first. Some of the key questions are: -
What is the maximum loan amount I can avail?
Normally lenders finance maximum up to 80% - 90% of the agreement value (excluding stamp duty and registration charges) of the property. The final loan amount is dependent on host of other factors like income and regular outgoings, repayment track record, valuation of the property by the lender, etc.
Normally the lender will assume around 40%-45% of your net salary as available for payment of EMI to serve all the loans, though it varies from lender to lender and there is no standard norm / formula. Hence, your existing loans (if any) will also have an impact on your loan eligibility and the lender will calculate the eligibility based on the existing outstanding amount and the EMI being paid at the time of loan application.
To increase the eligibility amount, you can add your earning parents / spouse / children and in some cases brothers as co-borrowers to the loan.
Should I opt for Fixed or Floating rate home loan?
Very few lenders offer pure “Fixed” interest rate that remains fixed for the entire duration of loan. Some lenders do offer Semi- Fixed also known as “Dual Rate” where the interest rate remains fixed for duration 1 – 5 years and then gets converted to floating rate of interest. In “Floating” rate, the interest rate fluctuates with market conditions. The rate of interest is tied up with the Base Rate (BR) of the bank or Prime Lending Rate (PLR) of the Housing Finance Companies and gets affected whenever there are changes in the repo rates announced by RBI or any changes in Base Rate / PLR of the lender.
Since the home loan is taken for a reasonably longer period it is advisable to opt for floating rate of interest and not for fixed rate interest loan, unless you feel that the rates of interest are at the lowest in the interest cycle.
What is Spread?
Normally, the interest rate is calculated with reference to Base Rate or Prime Lending Rate. In case of base rate it is expressed on the spread above base rate and in case of prime lending rate it is normally express as spread below the PLR.
It is a known fact that lenders are hesitant to reduce Base Rate & PLR when interest rates fall and hence consumer rarely get benefit of fall in market interest rates as quickly as they should get logically. The lender tends to provide the benefit of lower rates selectively to new borrower by changing the spread rather than by decreasing the Base Rate / PLR.
Here is an example of what lenders do to attract new consumers at lower rates whilst keeping rates high for existing consumers. Suppose your floating rate is Base Rate plus 0.50% and the Base Rate is currently at 10.25% it means your effective floating rate is 10.75% (i.e. 10.25% + 0.50%). For new consumers the same lender may be offering a rate of Base Rate plus 0.25% (i.e. 10.25% + 0.25% = 10.50%).
Therefore, you should ideally consider the spread (preferably lowest or nil in case of banks and highest in case of housing finance companies) along with the BR / PLR, if you want to get the benefit of lower interest rate on par with new customers.
What tenure should I choose for my home loan?
Most lenders offers maximum tenure of 30 years but it is also restricted by the borrower’s age at the end of the tenure so as to ensure that the loan repayment ends on or before the retirement age of the borrower. Ideally you should opt for a longer tenure floating rate loan to retain the flexibility of low Emi’s and at the same time you can prepay the loan without any penalty whenever you have surplus funds. There are no additional costs involved if you opt for longer tenure. The interest that you pay will depend on the time for which you actually use the money.
What are the charges I will have to bear on home loan?
Every loan has a costs attached to it, some of which your lenders’ representative may conveniently fail to disclose during your loan application process. Get an approximate of the all charges you may have to pay on your home loan are Processing Fees or Administrative fees which are non refundable, Legal fees payable to the lender or to the legal consultants of the lender, Stamp duty on creation of mortgage, etc.
The home loan offering continues to evolve and it is very important that you as a prospective borrower do your own research or talk to relevant advisor. You can also take help of online price and feature comparison engines to compare the latest interest rates, features, fees, etc. to shortlist the lenders.
You should ideally shortlist four or five lenders and get the short-listed lenders to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Remember that all terms and conditions of a housing loan are negotiable if you have good credit history.
Apna Paisa is Online marketplace for loans – Home Loans & Investments.