Back7 home loan strategies for first-time borrowers
The lowest interest rates are often reserved for female borrowers. It’s very common for home-buyers to co-borrow with their wives to avail the lowest rate.
PremiumAs we enter 2021, home loan interest rates are still at an all-time low -- starting at 6.75% -- making it a delight for new home buyers. While lenders are offering lowest interest rates, it is a long-term commitment. Here's a list of seven parameters, beyond cost of borrowing, that you may consider before signing up for a home loan:
1. Be aware of your credit score
It is important to maintain a good credit score while availing a home loan. “Borrowers with credit scores over 750 are likely to get loans at the lowest interest rates. So be aware at all times of what your score is. Do a free monthly check of your score online. If your score is low, improve it before applying for a large loan," said Adhil Shetty, CEO, BankBazaar.com.
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2. Check your EMI affordability
Homebuyers should always check their Equated Monthly Instalments (EMIs) affordability while choosing loan repayment tenure, and factor in their repayment capacity and monthly contributions towards crucial financial goals. “As home lenders also factor in your FOIR (Fixed Obligation to Income Ratio) during the loan approval process and mostly prefer lending to applicants with FOIR within the range of 50-60% (including the new home loan’s EMI), home loan applicants should ensure to contain their FOIR within this range. The lower your FOIR, higher the chances of home loan approval," said Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.
FOIR is the parameter used by lenders to determine the eligibility for a loan of an individual.
Try to bring down your existing EMIs in case your FOIR does not fall within the range. Chaudhary said, “You can do so by either prepaying or foreclosing some of your existing debts."
3. Co-borrow with a spouse
The lowest interest rates are often reserved for female borrowers. It’s very common for home-buyers to co-borrow with their wives to avail the lowest rate.
“This has been and continues to be the mantra to rationalize your cost of taking a home loan due to multiple reasons which include special concessions on home loan rates for women borrowers, ability to boost your loan amount eligibility with a co-applicant and ability to claim tax benefits by each joint applicant," said Gaurav Gupta, Founder & CEO, MyLoanCare.
4. Consider a long loan tenure
As home loans are large investments and the nature of the loans are long-term, new home loan borrowers should plan their home purchases with the understanding of their current & future commitments while planning their EMIs. As your income increases, consider pre-paying or increasing your EMIs to close out your loan sooner.
“Home loans do not attract any prepayment penalties as per the directives of Reserve Bank of India (RBI), so if you have additional cash you should pay down towards the principal of your loans thereby reducing the term of the loan. While the interest rates on home loans are very low, if you pay off your loan ahead, you can own another property with the free cash flows," said Anil Pinapala, Founder and CEO, Vivifi India.
5. Make a higher down payment
A higher down payment results in the lower loan amount, which in turn can lead to lower EMI and interest outgo. “Making a higher down payment improves the chances of loan approval, given that it reduces the credit risk for the lender. Having said that, you must not sacrifice savings of your financial goals or emergency funds to make a higher down payment. Doing so can force you to borrow loans for meeting those goals at higher interest cost," said Chaudhary.
6. Bargain hard
Home loan rates are at historic lows, and the market is full of attractive offers. You must compare your choices before taking a loan. Even after taking the loan, you should keep an eye on interest rates to ensure you are getting a good deal from your lender. If not, consider speaking to your lender or even transferring to another lender giving you a better deal.
“This is the time to bargain hard as banks are offering schemes on both rates and fees to make up for the lost business from lockdown days. To get healthy loan growth, banks are pushing home loan aggressively in the Jan-Feb-Mar quarter of 2021 and schemes are available. Coming out of covid-19, there is also a scramble amongst lenders to get hold of customers with a strong credit history and a stable income profile. Case in point is the recent home loan scheme announced by State Bank of India (SBI) where has offered a further discount on rates based on the CIBIL Score and a loan amount of the borrower. There are schemes with concessions for women borrowers, processing fees waiver as well as discounts on digitally sourced loans," said Gupta.
7. Do not take too many loans and credit cards
Since home loan is a long-term commitment, you must keep a check on your financial liabilities so that you do not end up in a debt trap.
“Home loan applicants should always factor in their loan EMIs of at least for at least six months while making provisions for the emergency fund. This can help ensure they have sufficient corpus to repay your loan in case of loss of income arising due to unemployment, illness or disabilities. Consider parking your emergency fund in a high yielding savings account, fixed deposits or short-term debt funds," said Chaudhary.
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