Attractive interest rates on the back of a recovering market have made purchasing a new house an enticing proposition for many. In fact, a recent report indicates that residential property sales across 8 major cities in the country grew 44% year-on-year in January-March 2021 quarter.
As such, a home loan becomes an exceptional financial aid in the process of owning a house of your own. With proper financial planning, individuals can effectively manage the cost without hampering their monthly finances.
That said, like any other financial product, it is important to know how a home loan works to avoid getting caught in its complications later. So, here are some of the important factors you need to know before getting a home loan from a financial institution.
Things to know before getting a home loan
- Home loan eligibility criteria
Home loan eligibility massively depends on the applicant’s current financial strength. Financial institutions consider an applicant’s existing liabilities to determine the loan amount and monthly instalments.
Lenders usually try to limit the instalments to 40-50% of the applicant’s salary. For example, suppose an individual’s take-home salary is Rs.60,000, and his/her fixed obligations take up Rs.25,000. This applicant will be eligible for a higher loan amount than an applicant with existing liabilities worth Rs.45,000 as the former has a higher repayment capacity.
Loan eligibility also depends on the borrower’s age, nationality, work experience and such.
- Negotiate housing loan interest rates
Irrespective of the interest type you choose, i.e., floating or fixed, remember that you can always negotiate the interest rates to get favourable terms. This is especially true for existing customers with a longstanding relationship with the lender and clean credit history. A higher CIBIL score can be used to negotiate loan amount and interest rates.
Also, be careful of additional charges and penalties. Apart from the interest charged on your home loan, there will be several add-on fees, including administrative, processing, and service charges. Consider these when comparing home loan offers from different lenders.
Some financial institutions also extend pre-approved offers to streamline the loan application process further. These offers are applicable on various financial products, including home loan, loan against property, etc. You can check your pre-approved offer using your name and contact details and apply for home loan online.
- Longer tenor equals costlier loan
Opting for a longer tenor is one of the most common ways to alleviate the burden on monthly finances when repaying a loan. Increasing the home loan term reduces monthly outgo, which can be extremely beneficial in desperate situations. While it is an effective temporary relief, it also increases the total cost of the loan.
For example, a home loan EMI calculated using an EMI calculator for a loan of Rs.30 lakh at 10.5% is Rs.33,162 when the tenor is 15 years. The total interest payable by the end of the repayment tenor will be Rs.29,69,154.
Now, if you opt to increase the tenor to 20 years, the EMI will amount to Rs.29,951. The total payable interest, however, will amount to Rs.41,88,335. Consequently, the interest liability increases significantly when the tenor increases. Although, doing so reduces the monthly instalment amount.
- Switch lenders for lower interest rate loans
Availing a loan from a particular financial institution is not a permanent decision. In extreme situations and in case you get better deals from another lender, you can make the switch. Most lenders do not levy pre-payment charges on floating rate loans, meaning you can opt for a home loan balance transfer by only bearing the processing fees. Try negotiating for a reduction, if not a full waiver on this as well.
Sit with the financial institution representatives and discuss every minute detail before getting a home loan. Ask regarding opting for a co-applicant to avail more favourable terms. Lenders also consider a property’s value before sanctioning a loan, and the disbursed amount is usually capped at 70-80% of the property’s current market value.
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