India is one of the biggest Home Loan markets in the world. Availing a Home Loan to buy a home remains a piped dream that many families strive to accomplish. At the time of getting a loan, most of us use the interest rates as a yardstick to compare the various types of loans at our disposal. While interest rate still remains a key proponent for comparison, there are several other factors which also require to be analysed while comparing the different types of House Loans.
Additionally, while it can be easy to simply focus on the headline interest rates when comparing banks’ best Home Loan rates, the truth of the matter is that interest rates only tell you a part of the story. To uncover the whole picture, you will need to look beyond the interest and also check out all the fees, charges, and costs involved along with the several other features that could help you save big bucks in the long run.
Needless to say, the interest rate is the primary factor which one looks at when comparing the Home Loans. Interest rates are important as your EMI outgoings are entirely dependent on the interest rate. That said, there are two types of Home Loan interest rates which you should consider at the time of applying for a loan.
Fixed interest rate: As the name suggests, these types of loans come at fixed-rate interests which also for the most part remain unchanged throughout the tenure. What this means is that your EMIs will also stay the same throughout the loan period. However, it needs to be highlighted that the interest on fixed loans are not always fixed and the banks have the discretion to change the interest rate at any time they deem necessary.
Floating interest rate: In the case of a floating interest rate loan, the interest rate can fluctuate owing to any changes in the economic or market conditions. This might lead to change the amount of your payable EMIs or the tenure as well. This makes them riskier than fixed-rate Home Loans but they can be beneficial if interest rates suddenly drop.
Let’s highlight this further with the help of an illustration. Saloni opts for a Home Loan with a fixed interest rate of 10.50 percent per annum while Sameer instead decides to go in for a Bank of India Home Loan with a floating interest rate which is initially pegged at 9.50 percent. In this case, there be will be no fluctuation in Saloni’s interest rate throughout her loan period as essentially she will be paying the same EMI unless there’s a change notified by the bank. However, in the case of Sameer, there will be fluctuation in his EMIs as his interest rate is dependent on any changes in economic or market conditions.
Furthermore, it also needs to be mentioned that fixed interest loans have a higher rate of interest vis-à-vis floating rate loans and are hence ideal for people who are usually risk-averse. This is why it makes sense that you look beyond the raw figures and ensure that the interest rate and home loan you decide to opt for suits your circumstances.
House Loan fees and costs
Even the Best Home Loans in India come packed with a bundle of extra expenses including processing fees, pre-closure charges, legal fees, and more. These can add substantially both to the amount of EMIs you pay each month along with increasing the overall cost of your loan. So, at the time of comparing Home Loan, gauging these fees thoroughly and reading the fine print to see what extra expenses you’ll have to pay is something you should definitely factor in at the time of taking out a Home Loan. Let’s take a look at these expenses further:
Processing fees– At the time of Applying for a Home Loan, there are certain documents which are required to be submitted which need to be further verified and processed. These charges are termed as processing fees. The processing fees you’ll have to pay will probably vary from lender to lender and are also dependent on the amount of loan which has been sanctioned. It could be calculated as a percentage of the loan amount or might be a fixed charge. That said, there are chances of these charges being waived off if you have an existing relationship with the bank and/or your negotiation skills at the time of applying for the loan.
Pre-closure Charges– Some lenders also tend to charge an early repayment fee in the form of pre-closure charges if you decide to pay off your Home Loan early. One might opt for pre-payment if they would like to get rid of the financial burden that comes with a long-term Home Loan as soon as possible. Whatever might be the reason behind the pre-closure, certain banks might charge a fee if you would like to pre-close your loan. That said, in case you have a floating rate interest loan, a pre-closure charge is no longer applicable as the RBI has directed the banks to stop charging a pre-closure penalty.
Legal Fees– At times, your bank will need to check the legal status or carry out a survey to value the property to ascertain if the property is free from any legal disputes. They do this by hiring lawyers and the fees for the same are recovered from the customer. While some lenders may agree to waive this fee– depending on the cost of the property and other factors– others are not so considerate. That being said, currently, most properties put up by well-known builders are already pre-approved by banks which can help you save on these fees.
Insurance Cover for your Home Loan
In this day and age, getting yourself an insurance coverage for your home loan is an equally important factor which is why due thought must be given at time of choosing one. An insurance cover safeguards your home as well as your financial investment and probably ranks as one of the most crucial things you can do for your loved ones. Getting a cover can help your family avoid a host of unnecessary hassles, problems and hardships in the event something unforeseen were to happen to you. Moreover, you gain the peace of mind knowing that your hard-earned property will end up in the right hands in accordance with your wishes. Needless to say, a basic home loan is often a standalone product and opting for this cover would be an added expense for you. Some banks may decide to bundle this along with your Home Loan and add the costs to your EMI. However, it’s crucial that you understand the details of the insurance cover thoroughly before signing on the dotted line.
Loan to value (LTV) ratio
Loan to Value ratio is a calculation that helps financial institutions measure House Loan risk. It is essentially a ratio which helps determine the amount of House Loan that can be sanctioned to the total value of the property. The amount which remains is referred to as down payment which is required to be sourced and financed from your own pocket. A higher LTV translates to a larger loan amount which, in turn, entails you to arrange for a lesser down-payment out of your pocket.
As per guidelines laid down by the RBI, banks are allowed to finance up to 90 percent of the value of the property as a Home Loan. However, more often than not, the LTV ratio differs from bank to bank and can range between 80 to 75 percent as well.
For example, let’s assume Renuka wants to buy a house for Rs. 50,00,000. She plans to put Rs. 7,00,000 as down payment and finance the rest (Rs. 43,00,000) with the help of a housing loan. Her loan-to-value ratio would be: Loan to value = (50,00,000 – 7,00,000) / 50,00,000 = 86 percent.
The Bottom Line
By gauging the above-mentioned factors and by knowing them better, you will be in a better position to understand all the key details required to compare Home Loans in India. In that regard, it’s always best to speak to a financial expert first and discuss the various offers available on Home Loans before going ahead and applying for the final offer.