Owning a piece of land, a house or a property is a lifetime dream for every individual. Maslow's Law of Hierarchy indicates such a dream as well.
Buying a home loan nowadays has become much simpler. Each year the Budget regulations seem to lean towards the housing sector and construction sector in terms of generosity.
There are many home loan providers in the market to make your dream come true. However, before you opt for a home loan, you need to consider certain factors related to the property that you are interested in buying and also understand the features offered by a home loan provider.
Choosing your financial institution
When you shop for a home loan it is good to research your financial institution well before opting to go with them. Remember, when you take up a housing loan, you will be dealing with the lending institution you choose on a regular basis for a long time.
Therefore, you should also consider factors other than just the interest rate. Some of these are:
- How professional is the financial institution in dealing with customers?
- Does it offer quality service in terms of efficiency and reliability?
- What are the available loan packages and which package suits you best?
- What are the various charges involved?
Assessing your loan-repayment capacity
You should ensure that your monthly loan installment repayment should not be more than around 40-50% of your gross monthly household income.
If you have savings or fixed deposits, they can be used to support your loan application as financial institutions may take them into account in evaluating your eligibility.
Different financial institutions have different criteria in calculating the repayment capacity. In the case of a floating rate loan, you should also note that your loan tenure or (if you so choose) your monthly repayment may increase substantially when interest rates go up.
When there is an increase in the Prime Lending Rate (PLR), the interest rate on your loan will also go up, and your repayment would be higher.
However, in most cases, financial institutions would allow you to pay the fixed amount of equated monthly installment (EMI) throughout the loan tenure and would make any adjustment caused by the variation in interest rate by increasing or shortening the loan tenure, as the case maybe.
Also, do note that the PLR will soon be replaced by the Base Rate (BR) from July 2010 onwards.
Margin of finance
It is assessed on factors such as:
- Type of property
- Location of property
- Age of the borrower
- Income of the borrower
Generally the margin for the borrower (down payment) will be about 15% of the property as assessed by the bank/lending institution.
For mortgage loans the lending institutions will assess the value for the property based on the 'Distress Sale Vale' -- this is the value of the property in case it is sold on an urgent need basis. This value can be much lower than the market value of the property.
Rights and duties of the borrower and the financial Institution
Both the borrower and the financial institution have certain rights and duties during the course of the loan repayment period. Some of these include:
- Right to have access to all information that would affect your borrowing decision.
- Right to be treated professionally, courteously and without prejudice.
- Right to be consulted on changes to the terms and conditions of your loan.
- Right to have accurate information on a regular basis on your loan account.
- Right to enforce legal action in the event of a breach of contract.
ii. Financial Institution
- Right to have full relevant disclosure of information on borrower's credit standing.
- Right to correct and truthful information on the borrower.
- Right to timely repayment of interest/ installments of the loan.
- Right to enforce legal action in the event of default/breach of contract.
- Duty to read and understand all terms and conditions of the loan.
- Duty to observe the terms and conditions of the loan at all times.
- Duty to enquire and get clarification on all aspects of the loan to their satisfaction.
- Duty to make prompt payment on the fees, charges, interest and installment of the loan.
ii. Financial Institution
- Duty to discharge borrowers' obligations as described in the loan agreement.
- Duty to consult borrowers on any changes made to the terms and condition, fees charged and other relevant information.
- Duty to attend to all queries made by borrower.
Before getting a housing loan take stock of your finances and assess your loan repayment capacity. Then shop for the best offers available. You can also approach a financial counsellor for optimum allocation and utilization of your money.