Festivals are round the corner…Navratri, Durga Puja, Dussehra, Dhanteras, Diwali, Christmas and New Year...what could have been better if they knock at the door of your own home? This will surely enhance festivities in your life this season.
Particularly, if you have been planning to buy your dream home for very long and you are unable to do that as you are unsure about whether you will get the right amount of loan from right type of lender and are not able to strike good bargain.
First and foremost, finalise the property you wish to buy so that you have clarity to take it forward with your prospective lender. Before reaching out to lender, it is important that you take out time to compare home loan interest rates offered across various banks and housing finance companies. Price comparison engine which are unbiased in their approach are great help here.
Coming back to loans, for the uninitiated, home loans in India are provided by the lenders up to a maximum of 80% (90% for loan amount below Rs 20 lakh) of the agreement value of the house if you are buying a new apartment. Balance 10- 20% amount you have to arrange yourself for making the down payment. Also note that banks do not consider other charges like stamp duty, registration charges, etc. while considering the home loan amount eligibility. Hence, home loan is no longer on property value, it is on agreement value.
In case of home loan for resale of flats, most lenders get the property valued independently and banks will provide the housing loan based on their value rather than the cost mentioned in the purchase agreement.
Frequently, the valuation as determined by the banker's valuer for the purpose of home loan is significantly lower than the actual cost and hence the requirement of the borrowers for down payment for the loan goes up.
Home loans are repaid through monthly instalments (EMIs) spread over up to 20 years. Some of the banks provide housing loans even for a tenure extending up to 25-30 years. The maximum tenure of any loan and home loan specifically is also restricted by the borrower's retirement age at the end of the tenure so as to ensure that the loan gets fully paid by or before the retirement age.
Home loan in India can primarily be classified into two categories on the basis of interest rates i.e. fixed rate and floating rate of interest. Now there are few lenders in India who offer pure fixed rates where the rate of interest remains constant for the entire tenure of the home loan while most lenders govern by money market clause. In floating home loan type, the rate of interest on such loans is subject to change whenever there are changes in the repo rates announced by the RBI or any changes in base rate of the bank. Borrower should opt for fixed interest rates only if she/he is certain that the rate of interest is the lowest in the interest cycle. And they are looking for certainty of EMI for a long tenure.
A part of this EMI goes towards repaying the principal component of the loan and the other part goes towards paying the interest. The EMI is calculated on a reducing balance basis. A reducing balance home loan means that in the initial days of the loan, the interest component of the EMI is high as the loan amount is high. But gradually, when the principal amount starts becoming lesser and lesser as you keep on paying it through EMI, the interest component of the EMI goes down and the principal component increases.
The author is Chief Editor, Apna Paisa. The views expressed in this article are his own