With a wide range of home loan options extended by banks and lenders in India, it could be a daunting task to identify the best home loans available in the market. When we think of applying for a home loan, we consider only the interest rate offered by the lender. However, there are several other factors that you need to consider before you choose the best home loan.
Whether you’re in the process of deciding to buy a house or have identified your dream home, comparing a variety of home loans and choosing the right lender or bank should be your first step. Given the number of financial institutions and banks offering different types of home loans, it can sometimes confuse us.
For a housing loan, it’s important that you understand in detail about the interest rates, EMI (Equated Monthly Instalment) offers, tenures, and other factors before choosing a suitable lender and home loan. As a home loan borrower, let’s focus on the below factors and review them in detail.
Fixed or Floating Interest Rate?
This is an obvious and the first step towards understanding how you can opt for the best home loan. The rate of interest influences the EMI and the total interest paid at the end of the tenure. There are two types of interest rate levied in home loans. They are fixed and floating interest rates. A fixed interest rate loan is when the interest rate remains unchanged throughout the loan tenure. This also means that your EMI amount will remain the same every month.
As for the floating interest rate home loan, the interest rate keeps fluctuating as per the market and hence there could be a change in your EMI amount or the tenure. However, you need to note that if you choose a floating interest rate linked to Prime Lending Rate (PLR), the tenure will either increase or decrease as the bank will not touch the EMI. Usually floating interest rates are higher compared to a fixed interest rate.
Processing and Pre-Closure Fees
Before your home loan is processed, certain documents are required to be submitted which are verified and processed by the bank. For these services, the bank charges processing fees. Processing charges can vary from bank to bank depending on the loan amount. Bank can either charge a fixed amount or a percentage on the loan amount.
So, if you’re comparing home loans, the processing fees needs to be considered before you choose one. Usually during a festive season or during the financial year-end, banks and lenders offer competitive home loans with attractive discounts or offers on processing fees.
The other charge is the pre-closure fee. Banks and lenders usually set terms and conditions for pre-payment of the home loan. You must verify the terms related to pre-closure of the outstanding amount, loan balance transfer, pre-payment of a part or full amount of the home loan.
Banks and lenders charge legal fees towards the verification of the property documents, which you need to be aware of. It’s essential for banks and lenders to ensure the property on which the loan is sanctioned is free from any disputes and have required clearances. They hire legal experts and lawyers to execute the legal process and the charges are then levied on the applicant.
There are several projects which offer to absorb the legal fees if a property is purchased with them. Chances are than these builders will waive the legal fees as they might be associated with the bank to offer loans for the entire project.
Insurance Cover for the Home Loan
It’s important that your home loan is covered under an insurance to meet unexpected situations. Some lenders offer the home loan insurance bundled along with the EMI. However, you need to understand the terms and conditions of the insurance availed for the loan and find out how it will protect you in case any untoward situations.
You could choose to insure your home loan separately, but it could be expensive. Hence, it’s advisable to find out the details of the insurance cover offered by the loan and that it protects you without worrying about payments.
Loan-to-Value (LTV) Ratio
The proportion of your property value the lender is ready to finance through loan is known as Loan-to-Value (LTV) Ratio. The balance amount is otherwise known as down payment. Banks can offer finance up to 90% of the property value as home loan as per the RBI guidelines; however, the LTV Ratio differ from banks to banks and the bank can offer 80% or 75%.
This will let you calculate how much you need to pay from your pocket and not get it through a home loan financing.
Responsiveness to Changes in Interest Rates
The Reserve Bank of India (RBI) often visits the repo rate, that’s the lending rate to the bank, based on the market conditions. An important aspect is that you need to judge your bank or lender based on how quickly the interest rates were revised. If the repo rate is cut and the lender passes on the benefit to you by reducing the interest rate on home loan immediately, then you should choose this lender. This is because you can expect a good deal from the bank now and in the future.
Documentation and Turnaround Time
While these two factors might not be of utmost importance, they reflect the efficiency of the bank or lender. Though most lenders request the same documents such as identity proof, address proof or income proof, there are banks which may require many other documents. This could lead to an extended period of wait for sanctioning a home loan.
The turnaround time or the time taken to sanction the loan differ from banks to banks. Usually, lenders disburse loans in about 5 days, that’s if all documents are in processed and are in order. You need to understand that there are several post-disbursement services. It includes receiving regular account statements and interest rate certificates on time. You need to choose a lender with strong record in the after-sales service area.
In conclusion, once you have to compare different home loans available in the market based on the above factors, choose the one which suits you and not based just one parameter. Choosing the right home loan is important as you would entering into a binding agreement to pay certain amount of your income towards the payment of the loan. So, every parameter of the loan must be carefully understood before you opt for the best home loan suitable for you.