Buying a house is a big step in the life today for many people. For the majority of those hailing from India, to make this dream come true, one has to apply for a home loan first. However, various banks and financial institutions with different options for home loans can feel overwhelming if you want a suitable one, tailored to your requirements. Choosing the best home loan is all about considering all the factors involved and making an informed decision to prevent running into financial ruin. Here is a basic guideline outlining the key attributes that characterize good home loan finance in the Indian context.
1. Interest Rates: Fixed vs Floating
Fixed interest rate: This means that the interest remains the same all through the period of your loan. In case you need EMI (Equated Monthly Instalment) which would not change monthly, this option is best for you but on average, fixed rates are approximately 1-2% higher than floating rates.
Floating interest rate: In this case regarding home loan finance, interest will continuously change with time, based on the market dynamics, especially RBI’s repo rate. Yes, floating interest sounds like gambling to some extent but they usually turn out cheaper in the long run, particularly during periods when interest is low.
Pro tip
Compare floating rates as offered by various banks, they tend to provide long-term savings when market rates decrease. For example, in 2023, the average floating rate for housing loans in India stood at 8 to 9% while fixed ones averaged around 9 to 10%.
2. Loan Eligibility and Repayment Tenure
Your eligibility depends largely on three things — your income level, age group and credit score. Financial institutions gravitate towards individuals who earn regularly and have a good credit score of 750+ points.
Some points to remember include:
● Shorter term: Lower interest implies higher EMI.
● Longer term: Lower EMI but higher overall interest.
When planning to switch lenders during the refinancing or loan transfer process, use a loan transfer calculator to figure out how much you could save upon shifting.
3. Loan-to-Value (LTV) Ratio and Down Payment
In India, lenders usually offer up to 80 to 90% of the property’s cost while you have to contribute the rest as a down payment — a model referred to as the Loan-to-Value (LTV) ratio. A higher LTV implies a larger loan, higher EMIs and more interest over time.
For example, let’s say you’re buying a property worth ₹50 lakhs and the bank offers an LTV of 80%, you’ll need to arrange ₹10 lakhs as a down payment, and the remaining ₹40 lakhs will be financed by the home loan. Here, you will be expected to pay ₹10 lakhs as an upfront payment for the loan.
Some tips to keep in mind:
● Opt for a higher down payment to reduce the overall loan amount and EMI as well.
● Fit your LTV ratio within the budget constraints.
4. Processing Fees and other charges
Processing fees for huge loans like home loans in India attract large processing fees ranging from 0.5% to 1% of the total loan amount. In addition to this, lenders may charge extra money in the guise of legal fees, admin costs and stamp duty.
Make sure to:
● Negotiate with the lender for the processing fee — they may be willing to lower it to lure customers.
● Know about other hidden charges in advance.
5. Prepayment and Foreclosure options
One of the merits of home loan finance in India is that you are free to prepay your loan at any time or even close it if you have surplus funds available. This can help reduce the interest paid as well as the loan tenure. Nonetheless, certain banks levy prepayment penalties, especially those who have opted for fixed-rate credit facilities.
However, no prepayment charges apply where housing finance company extends floater-rate loans. Thus, it is advisable to consider this before deciding on a home loan.
6. Loan Transfer options
When interest rates fall, it may be advantageous to transfer your home loan to another lender offering cheaper loans. The loan transfer calculator is very handy in this case as it helps in estimating the amount of money you would save by shifting your loan from one bank to another when interest rates for home loans are dropping.
Guidelines while transferring your loan:
● If the new interest rate is not significantly lower, you shouldn’t consider any form of transfer.
● Before making a decision, consider the process fees and other charges from the new lender.
● The transfer might be ideally done when the interest rate environment is falling but also assess if the savings from a lower interest rate outweigh the costs associated with the transfer.
7. Tools and Online Calculators
Online tools such as loan transfer calculators and EMI calculators are among the most efficient methods to determine if you can take out a loan, your EMI and how much you would save. In this way, the exact amount that you will part with each month can be known through these methods hence enabling an individual to make informed choices.
Wrapping It Up
Evidently, for the efficient selection of an ideal home loan in India, different features need to be considered. These include the interest rate and tenure for repayment among other aspects that have to be looked into. Further, it’s important to scrutinize whether one should go for fixed or floating interest rates, given that there are government schemes for homeownership support available but they come with their own consequences. Always try to negotiate for lower charges and make use of tools such as loan transfer calculators that can help you determine savings over a certain period.
Ultimately, taking a home loan that best suits your financial situation, future goals and risk tolerance is key. With these considerations in mind, thus, one can be able to make rational choices while acquiring a home loan that doesn’t only meet their particular requirements but also ensures they save money in the long term.
Disclaimer:
CBD:
Qrius does not provide medical advice.
The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) outlaws the recreational use of cannabis products in India. CBD oil, manufactured under a license issued by the Drugs and Cosmetics Act, 1940, can be legally used in India for medicinal purposes only with a prescription, subject to specific conditions. Kindly refer to the legalities here.
The information on this website is for informational purposes only and is not a substitute for professional medical advice, diagnosis, or treatment. Always seek the advice of your physician or another qualified health provider with any questions regarding a medical condition or treatment. Never disregard professional medical advice or delay seeking it because of something you have read on this website.
Gambling:
As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman, and Sikkim, prohibit gambling. Land-based casinos are legalized in Goa and Daman under the Goa, Daman and Diu Public Gambling Act 1976. In Sikkim, land-based casinos, online gambling, and e-gaming (games of chance) are legalized under the Sikkim Online Gaming (Regulation) Rules 2009. Only some Indian states have legalized online/regular lotteries, subject to state laws. Refer to the legalities here. Horse racing and betting on horse racing, including online betting, is permitted only in licensed premises in select states. Refer to the 1996 Supreme Court judgment for more information.
This article does not endorse or express the views of Qrius and/or its staff.
Stay updated with all the insights.
Navigate news, 1 email day.
Subscribe to Qrius
