Home loans are usually one of the only big ticket loans an individual takes. As the amount is huge, it is important that you opt for the right one.
Types of home loans
Home loans are of two types— fixed rate loans and floating rate loan. Fixed rate loan, as the name suggests, has a fixed rate. Hence, if your bank says the interest rate is fixed at 12% for the tenure of the loan, the interest rate will remain the same.
In floating rate home loans, on the other hand, the rates change based on the benchmark rate. Banks also offer fixed-floating rate loans. Here the loan will remain fixed to a certain period after which it turns floating.
Floating rate home loans are usually linked to benchmark rates. For instance, banks link home loans to marginal cost of fund based lending rate (MCLR), which came into effect from 1 April 2016. Banks are not allowed to lend below the MCLR. It means no home loan borrower will get loans below the MCLR.
Home loan also has a spread on MCLR. Spread is the margin that bank keeps above the MCLR. For instance, if MCLR is 8% and there is a spread of 40 basis points, you will get the home loan for 8.40%.
One basis point is one-hundredth of a percentage point.
Fee and charges
Every loan comes at a cost. In case of home loan, other than the interest rate, you pay the lender other charges such as processing fee, legal fees and other administration charges. Usually, processing charge ranges between 0.25% and 0.5% and varies from bank to bank. Ensure you compare the charges of different banks before opting for a home loan. For instance, Central Bank charges 0.5% of the loan amount as processing fee subject to a maximum of ₹ 20,000, whereas Bank of India charges 0.25% of the loan amount as processing fee, which is capped at ₹ 20,000. Usually, the tenure of a home loan ranges from 20 years to 30 years.
Cross-check the cost
When you plan to go for a home loan, don’t look at interest rate in isolation. Besides interest rate, check for processing charges and other costs too. You should also compare rates with different banks and housing finance companies. You also need to check the duration of reset clause for the interest rate. Interest rate will also depend on your credit score. Banks generally consider score above 750 as good credit score. So, if you have a good credit score, you will get a better interest rate on home loan. Don’t forget to negotiate with the bank for lower rate and charges, if you have a good credit score.