7 Things you must know while choosing a Home Loan
As we know, that Food, Clothes and shelter are our basic needs. Every individual has a desire to have his own house. Prior to home loan facility, Individual have purchase the house or build the house by his hard earned money. They works throughout their life to fulfil it. Now, due to Home Loan facility provided Banks and Financial Institutions, it is very easy to buy or build home by taking up to 90% loan of Purchase Value. Individual can opt Home Loan for minimum 5 years to maximum 30 years. Lone Tenure decided on the basis of Loan Amount, Borrower’s Credibility & Age, Financial Institution’s internal policy and Interest rate. In last 15 years, initiatives taken by Government of India lead to grow the home loan industry drastically. Government of India has classified home loan under the category of Priority Sector Finance. Government has also given subsidy, discount in stamp duty and tax benefit on Interest and Principal paid.
In India, there are more than 50 companies inclusive of Nationalized Banks, private Sector banks and NBFC’s offers Home Loan Facility. Most of the public and private sector banks offers Home Loan at very low rate and therefore there is huge competition amongst them. In addition to that NBFC’s and some Co-operative banks also offer Home loan at lower rate. There some standalone NBFC’s like HDFC Ltd, LIC Housing Finance Ltd., DHFL, etc. who deals only in Home Loan Products. SBI is the largest Home Loan Provider amongst all banks whereas HDFC Ltd & LICFHL are largest amongst NBFC’s. Due to cut-throat competition amongst these finance companies, to survive in the market and to grow the asset size, every company has their special plans and unique benefits which they offered to customers.
As a home Loan aspirant, person must identify required carpet area, Locality, connectivity, repayment capacity of loan, current age, Years justify for retirement, availability of down payment amount, future liabilities, etc. A person must avail the home loan as much as he can. Because as per Income Tax Act, deduction available for the repayment of interest on Home loan is up to Rs 2 Lakhs- u/s 24B & repayment of principal is up to Rs. 1.50 Lakhs u/s 80C. If you are buying your 1st home on loan, then there is additional benefit on payment of Interest up to Rs. 50000/- u/s 80EE.
While choosing the Home Loan, borrower must keep some essential things in mind like Rate of Interest, types of interest, Loan tenure, Moratorium period, EMI, Processing Fees, Other Charges at the time of disbursement, Loan Insurance, Pre closure charges, part payment limit.
- Interest Rate: While availing the loan you must understand the type of interest rate. Interest rate are classified on the basis of Loan amount and volatility in rates. You have to choose either Fixed Interest rate or Floating Interest rate. Fixed interest rate is fixed through the loan tenure whereas in floating, Interest rates varies as per the bank policy. Flat interest rate is like calculating the simple interest on loan amount for the complete tenure and then it is added to the loan amount, then total mount is equally divided into no of months of tenure. Reducing Interest rate is applicable when the interest is calculated on outstanding loan amount. You will always get the combination two, where you have to choose Fixed or Floating & Flat or Reducing.
- Processing fees (PF): While choosing the Home Loan, you must ask for the Processing fees (PF). Processing fees is generally between Rs. 5000 to Rs 10000 for salaried person and up to 2% for business man. Sometimes, banks may waived off PF. Always go for lower processing fees, which will save at least Rs. 5000.
- Disbursement Charges: Apart from processing charges, there certain charges you need to pay at the time of disbursement. These charges generally include stamp duty for equitable mortgage or registered mortgage, bond paper & notary charges, etc. Disbursement charges generally varies form 0.1% to 0.5% of LTV (Loan to Value). Generally, bank and financial institutes never disclose these charges. Some of them are covered from the disbursed amount. Borrower must ask the details about such charges.
- Type of mortgage: Generally banks go for registered mortgage, however NBFC’s go for equitable mortgage. Process of Equitable mortgage is easy & economical compared to Registered.
- Foreclosure Charges: Banks & NBFCs charge foreclosure charges if the loan is repaid fully before completion of certain tenure. So, at the time of foreclosure ask the applicable charges and taxes. Now days, many financial institutions are offering home loans at zero foreclosure charges.
- Prepayment Limit: While going for part repayment, confirm the maximum free limit for part payment, otherwise it will fetch additional unwanted charges. Generally, part repayment limit is up to one fourth of the outstanding loan amount.
- Loan Insurance: Loan insurance support the borrower’s family in case of sudden death of the borrower. Loan insurance pays the outstanding loan amount at the time of borrower’s death. This reduces the burden of EMI from the borrower’s family’s and property will be become debt free. Insurance premium is calculated on the basis of LTV and tenure of loan, which is added to loan amount or sometime new loan account opened for this amount and repayment of this premium is added into main loan in the form of EMI.
Above seven things must keep in mind while choosing the home loan.
Prof. Suyog Chachad
(Faculty – Indira School of Business Studies, Pune )