Household debt in India reached $356.6 billion by March 2020. A major chunk of this debt consisted of home loans. However, a continuous drop in interest rates since 2019 has encouraged even more consumers to opt for such credits.
- India’s repo rate-linked home loan interest rates have dropped sharply since February 2019.
- Between February 2019 and August 2020, the Reserve Bank of India slashed the repo rate by 250 basis points collectively, impacting household lending rates, including home loan rates.
While such a remarkable reduction in interest rates signifies a good time to avail a housing loan, prospective borrowers must consider a few essential tips before opting for this credit.
Top 5 tips for home loan borrowers to follow
Before sending in one’s application, an individual must consider the following factors of a housing loan.
- Down payment to make and loan principal
Down payment during house purchase refers to the lump sum amount that a buyer pays upfront for the property. A housing finance company bears the remaining portion of the cost when such a purchase is financed through a home loan.
Although the loan-to-value ratio for a home loan, i.e., the percentage of a house’s current market price available as loan, can go up to 80%, borrowers can minimise the EMI burden by increasing the down payment, which, in turn, reduces the home loan principal.
For instance, consider that a property price is Rs.30 lakh. A borrower can own this property by down paying Rs.6 lakh only, while a lender finances the remaining Rs.24 lakh.
Nevertheless, if this borrower can manage to pay more than Rs.6 lakh, say Rs.10 lakh, then the principal amount would reduce to just Rs.20 lakh. The reduction in principal helps manage interest outgo and lowers EMIs as well.
Therefore, while it is possible to purchase a home with zero down payment on your home loan, the best course of action in some instances is to maximise the down payment amount and minimise loan proceeds.
- Compare home loan interest rates
A lender’s home loan rate determines the amount of interest a borrower would need to pay throughout the tenure. Comparing the available offers online is a simple way to find the most affordable terms. Keep in mind that a difference of even 0.5% can mean significantly different EMIs and interest payments.
Consider an example where the loan amount (Rs.50 lakh) and loan tenure (20 years) remain constant. The first lender offers this sum at a rate of 7.8% per annum, while a different financial institution extends it at 7.3% per annum.
Using a home loan EMI calculator, one can quickly determine monthly liabilities in both these cases. In the first case, monthly EMIs would be Rs.41,202 and total interest payable is Rs.48,88,433.
In the second instance, monthly instalments would amount to Rs.39,670. Similarly, the total interest payable on this loan would reduce to just Rs.45,20,898.
Evidently, interest rates play an essential role in determining a home loan borrower’s liability. Applicants must know about the factors that can impact their housing loan rates to tweak them for an advantageous stance. Doing so can also help them access some of the best home loan offers in the market.
- Assess additional charges and fees on a loan
Besides the initial expenses of availing a home loan, such as the processing fees, borrowers must also consider the additional charges associated with such credit. The late payment fees, prepayment charges, and more are the essential aspects of a housing loan that one should know about.
- Check whether you meet the eligibility criteria
Housing loan eligibility factors can differ from one lender to another. Still, a borrower’s credit score, income, age, and employment status are some of the most common criteria for lenders to consider.
In general, the ideal CIBIL score for a home loan one should aim at maintaining is 750 or more. While it is not a strict eligibility requirement, higher scores only enable borrowers to acquire credit at favourable terms.
Similarly, an applicant’s age must be between 23 and 60 years in most cases, depending on his/her employment status. However, HFCs may allow self-employed individuals to avail such credit well beyond 60 years as well.
- Pre-approved offers
Pre-sanctioned loan offers are the ones usually extended to creditworthy individuals. Generally, such offers provided by HFCs come with perks like an expedited application process in the least possible time. These offers are available on a range of financial products, including home loans, loans against property, and more. One can check his/her pre-approved offer by submitting a few essential details, including the name and phone number.
Check for the availability of such offers before zeroing in on a lender. If one is looking for quick access to housing finance, such offers can make funding convenient.
Keep in mind that these offers are mostly extended when you apply for a home loan online. Thus, online applicants may find it easier to acquire funding, with simpler disbursement in a shorter duration.
- According to the RBI, an HFC must provide 60% of its deployable net assets to the housing finance portfolio.
- All lenders must comply with this rule by March-end, 2024, which indicates a reset under the housing finance portfolio of lenders falling short of the requirement. Such a restructure can ultimately lead to increased chances of loan disbursal for eligible applicants.
Thus, when seeking an ideal housing loan option, the tips mentioned above can help significantly. Before applying, a borrower must always assess his/her monthly liabilities from such a credit to ensure convenient repayment without any financial strain.