Taking out a home loan is a major decision that can impact one’s financial health for years to come. Hence, it’s vital to be aware of all its aspects and avail of a loan in total alignment with the borrower’s financial interests.
A house is a big purchase and most of us are likely to rely on financial assistance – in the form of a home loan – to buy the property. A housing loan is a smart choice, offering you the opportunity to fulfil your dream of owning a house without the need to strain your finances.
The RBI’s move to cut the repo rates to 4% has aided this cause further as home loan interest rates are at an all-time low.
Nevertheless, availing of a housing loan remains a significant financial step. Prospective applicants must be judicious when they apply for a home loan because it’s a long-term financial commitment, which will constitute a sizeable part of their disposable income in years to come.
Here are some factors to check before a potential borrower decides to apply for a home loan.
1. Interest payments
It’s vital to compare financial institutions to avail of the lowest interest rates on home loans. But, it’s equally significant to choose carefully between the two types of interest rate:
Floating interest rates are subject to change over time, based on alterations in RBI’s base rate and overall market conditions. Fixed rates, as the term implies, do not change over time.
Financial experts recommend the former option when the interest rates are expected to decline in the future. Floating rates are usually 1%-2% lower than fixed rates, enabling savings in the long term.
The latter option is suitable when the economic climate indicates a rise in interest rates. Borrowers can be more at ease and chalk the budget with more certainty by opting for a fixed interest rate. However, it’s recommended to choose between floating and fixed interest rates based on whether the applicant is comfortable with the ensuing EMIs or not.
Housing loan repayment periods can extend to as long as 20 years, which translates to 240 instalments. A lengthy-term is more conducive to monthly savings as it eases the EMI burden. Shorter tenure is suitable for overall savings on interest payment because it’s calculated for a briefer period.
For instance, EMI for an Rs.80 lakh housing loan taken for 15 years at 8.25% p.a. will be Rs.77,611.
The total interest will be to the tune of Rs.59,70,000.
If the repayment period is extended to 20 years, the instalment will be down to Rs.68,165, but interest will spike to Rs.83,59,760.
Individuals may use a home loan EMI calculator before they apply. One needs to ensure instalments do not take up more than 30% of their disposable income. One should also choose the tenure by factoring in their age, income prospects, and other aspirations they want to fulfil.
3. Down payment
Lending institutions only offer a part of the property’s value as loan and applicants need to bear the remainder amount. This percentage can range between 75% and 90%, depending on the property’s cost and applicant’s eligibility. Borrowers can either pay the minimum sum as a down payment or volunteer to pay more.
Prospective applicants must be prudent concerning the amount they want to avail of as a loan and what they want to pay from their savings to the builder or seller. A sizeable down payment improves chances of eligibility for a home loan. Hence, if it’s feasible, individuals may opt for a higher down payment. It will also lower their repayment burden.
When it comes to eligibility, individuals should also check if they are eligible for any pre-approved offer on home loans. These expedite the application process by toning down the prerequisites. Such offers are available on a range of other financing options, such as a loan against property. Prospective applicants can provide their name and phone number to view their pre-approved offer.
4. Associated charges
Interest is not the only cost one has to bear on a home loan. Borrowers must also account for processing fees, late payment penalties, and foreclosure charges. It’s imperative to sort these at the outset with the lender.
Individuals may also note that foreclosure or prepayment charges are only applicable on fixed-rate home loans. Hence, this is also a factor that should be considered when deciding between fixed and floating rate since prepayment is one of the ways to reduce tenure and save lakhs.
5. Credit score
An applicant must also check his/her credit score before applying for a home loan. A healthy score, preferably higher than 750, helps one secure a loan at low-interest rates. It’s wise to clear all dues and look for ways to build a healthy credit score in the months leading to availing a home loan.
Individuals must also check the documents required and read the loan agreement thoroughly. Taking out a home loan is a major decision that can impact one’s financial health for years to come. Hence, it’s vital to be aware of all its aspects and avail of a loan in total alignment with the borrower’s financial interests.
Now that you are aware of the above-mentioned points, it is important that you make an informed decision while taking a home loan. The home loan offered by Bajaj Housing Finance Limited is a convenient option to consider. You can borrow up to Rs.3.5 crore to buy or construct your dream home. The amount is available at attract rates of interest and can be repaid over convenient tenures of up to 30 years.
Disclaimer: This content is distributed by Bajaj Finserv. No HT Group journalist is involved in the creation of this content.