Between April and November 2019, the home loan sector witnessed a 9.9% growth. Although impressive, this number was lower than the percentage growth in home loans the previous year.
The demand for housing loans is always high, thanks to the increasing desires of individuals to purchase residential properties and spaces.
Availing a home loan is a significant financial decision as these advances come with an extended tenure, leading to long-term financial repercussions for a borrower.
Inexperienced borrowers can often commit blunders while opting for such credits because of their limited understanding of various crucial factors affecting housing loan repayment and servicing.
Healthy practices to follow when availing a home loan
A first-time home loan borrower must keep the following factors in mind when opting for such a credit. Doing so should ensure that the ensuing liability does not overburden his/her finances.
- Take measures to maintain and build your credit scores
If the present home loan rate seems unaffordable, focusing on one’s credit score is the simplest way to ensure more favourable terms. Apart from the lower interest charges, credit ratings of 750 or more can also lead to lenders offering higher loan principal to the individual.
Maintaining a healthy credit history is essential if one seeks a high CIBIL score.
Repayment of existing dues in time, payment of credit card bills in full, and maintaining a lower fixed obligation to income ratio are just some ways to leave a positive impact on one’s credit history.
Keep in mind that credit scores can determine your home loan EMIs directly, with a high score adding leverage for rate negotiation and vice versa.
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- Try to limit home loan ticket size
First-time home loan borrowers should know that financial institutions only provide for a percentage of a property’s cost. The buyer must finance the rest from his/her own pocket. One of the commonest mistakes one can make while availing loan is to opt for substantial credits while limiting self-financing considerably.
The correct approach should be to limit the loan amount and instead fund as much of a property’s price from your own savings as possible. Doing so can reduce EMIs significantly, thereby simplifying loan repayment and relieving the financial burden.
Suppose, Amit and Bhushan purchase houses worth Rs.30 lakh each. Amit pays Rs.7 lakh and borrows the remaining Rs.23 lakh. Bhushan, on the other hand, down pays Rs.12 lakh and opts for a loan of Rs.18 lakh.
In such a case, the repayment burdens for B will be lower than A, even though both purchased properties of the same value. Thus, the down payment amount influences housing loan liabilities.
- Inquire about processing fees, prepayment charges and additional costs
Apart from the principal and interest payments, borrowers must also consider various other charges associated with home loans. They can include processing fees, prepayment charges, foreclosure charges, and others. These additional fees can significantly increase your overall outgo for the credit.
For instance, processing fee for a home loan can range between 0.5% and 3%, depending on the financial institution offering your loan. While one may not keep any immediate plans to prepay home loan EMIs, additional stimulus in the future may allow borrowers to close this loan sooner than its targeted tenure. At such a time, borrowers must be aware of additional charges, if any.
- Check for subsidy scheme eligibility
The Pradhan Mantri Awas Yojana or PMAY is one of the affordable housing schemes in India. Eligible candidates can build or purchase properties at subsidised interest rates under this scheme.
All first-time homebuyers must check whether they are eligible for PMAY or not when applying for the advance. Eligible applicants can save considerable amounts on home loan interest payment over the credit tenure, ranging up to more than Rs.2 lakh in some cases.
- Understanding the repo rate and how it affects home loan interest
Repo rate refers to the interest rate at which the RBI lends to other financial institutions in India. Any changes in the repo rate often translate into an adjustment in home loan rates across the country’s lending market.
For instance, lowering the repo rate generally leads to a decrease in current home loan interest rate and vice versa.
Currently, the repo rate is 4%.
- Since February 2020, the repo rate has been slashed by 115 bps (100 bps equals 1%).
- Various financial institutions have also reduced home loan interest by 70-90 bps in the same period.
First-time home loan borrowers must understand what to expect from RBI rate cut announcements. One should wait a few months after such a rate cut has been announced, since lenders are likely to adjust their rates accordingly, offering more attractive terms.
Moreover, existing borrowers can opt for loan refinancing or a home loan balance transfer to avail better interest rates after such repo rate cuts take effect. However, one must first consider the overall profitability of switching housing loan lenders midway through repayment.
Reputed financial institutions also offer top-up loans over and above the home loan principal in case of a balance transfer. This additional sum does not come with any end-use restrictions.
Such lenders also provide pre-approved offers to simplify the loan application process, ensuring speedier approvals. These offers are available on a range of financial products, such as home loans, loans against property, and more. One can check his/her pre-approved offer by submitting only the name and contact details.
Besides following the pointers mentioned here, first-time borrowers must also thoroughly research all available home loan options. Doing so will help them zero in on the suitable borrowing choice with affordable EMIs and interest rates. Online tools, such as the home loan EMI calculator can also help one determine monthly liabilities from such a credit before availing it.