Making an informed choice will help you save money and some hassles too, says Rajiv Raj.
Buying a home is a joyous occasion and usually something that is done after a lot of preparation and careful thought. As most homes today are bought with the aid of home loans be vigilant when buying your home; make sure you also focus equally on your loan agreement specifics.
Before you finalise the loan or sign the dotted line ask these five questions to get a good understanding about your home loan fundamentals.
Is the interest rate fixed or floating?
Home loans can be extended on fixed or floating rates. If a home loan is taken on fixed rate then the interest rate will not change during the entire loan period and the borrower continues to pay the same EMI throughout the loan tenure.
If the loan is on floating rate then the lender may change the rate as per the market conditions.
Floating rates are linked to the 'base rate' (the lowest rate below which a bank cannot lend money; the interest that you pay to your lender is base rate plus margin, say, 0.5 per cent or one per cent) as fixed by the Reserve Bank of India from time to time. So if the base rate changes then the home loan rate will also change.
Just don't opt for the loan that is on the lowest interest rate; check if it is floating or fixed.
If the interest is expected to fall then opt for a floating rate and if it is expected to rise then opt for a fixed rate loan.
What are the pre-payment conditions?
Lenders allow borrowing for a fixed tenure and they plan their cash flows accordingly. So in case a borrower decides to pre-pay a loan or make a partial pre-payment then it could mean loss of interest income for the lender which obviously will make their cash flow planning go wrong.
To dissuade borrowers from making a pre-payment banks may charge a penalty clause (though most banks have done away with this) or may allow it only after specific years of loan tenure have elapsed.
A borrower might think it is a good idea to repay or make partial payment of a loan if s/he has spare funds as it will help her/him save the interest cost. Do check about the conditions laid down for pre-payment by your lender.
What is the 'Loan to Value Ratio?'
This is something that needs to be checked in the initial stages of the loan process before you decide from which bank to borrow. Each lender has a different loan to value ratio though RBI also lays down certain guidelines for banks to adhere to for the LTV.
LTV is the amount of loan as a percentage of the property that can be given to the borrower. So if the cost of a property is Rs 50,00,000 and the LTV is 80 per cent then the maximum loan that the borrower can get is Rs 40, 00,000 (80 per cent of Rs 50,00,000); rest the borrower has to finance from her/his own funds.
If the LTV is low you will need to make arrangement for more funds from your own pocket to buy a house and vice versa if the LTV is high.
What are the additional costs?
When you take a home loan remember that interest is not the only cost you have to bear; there are certain additional costs too.
Some of them might be known to you while some may catch you unawares; so when comparing between loans and choosing where to borrow from have a look at these costs too before you reach a decision.
Additional costs like processing cost, legal fees etc need to be paid by the borrower. These charges may be fixed or may be charged as a percentage of the loan value so get clarity before inking the deal.
Is home insurance bundled with the home loan?
Home is an important asset and offers a great deal of security to any family. It would be very unfortunate if someone were to lose their house because the primary applicant is no more and the dependent/nominee cannot bear the loan EMIs.
To safeguard against such a scenario getting an insurance policy to cover the loan burden is a must. However a term policy suffices the purpose as it provides the required safety in an economic way; it is not necessary to buy home insurance.
Sometimes loan providers may bundle insurance cost with the EMI without the borrower being aware of it. Check about this aspect too!
Buy your dream home; choose the most suitable loan and check all aspects before you make the final decision.
Photograph: See-ming Lee/Wikimedia Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.