- How to ensure a smooth home loan repayment journey?
- That will depend greatly on your due diligence regarding interest rates, processing fees, etc.
Nothing more comforting than having a home of your own. With the increasing supply of home loans, having a home has become a reality. From banks to housing finance companies (HFCs), everyone is busy luring customers into buying a home via a home loan. While some give the lure of lower interest rates, others play the card of least to NIL processing fee to trigger the home buying impulse of customers. With so many home loan deals on offer, it becomes difficult for a layman to judge which one is better for his/her cause. We, in this post, have pointed out the need to evaluate home loan offers. Read on to understand how the evaluation should be made so that you can choose the best home loan deal.
The First Point of Evaluation is Undoubtedly the Interest Rate
As a home loan runs for as long as 20-30 years, any negligence on the interest rate part can be painful if you go on to choose a loan offer at an interest rate higher than what’s prevailing in the market otherwise. If we talk about the present times, home loan interest rates have come down to even below 7%, following the latest 0.40% cut made in the repo rate by the Reserve Bank of India (RBI) on May 22, 2020. A few lenders have brought down their interest rates after the latest RBI move. In the coming days, many more will cut their home loan rates much to the joy of new and existing borrowers. Soon, the maximum rate of most lenders will fall below 8%. While comparing the interest rate deals, do check the rate that your lender is offering and compare it with the one offered by others. Needless to say, you should look to apply for the lowest rate. This will ensure lower EMIs and translate into a much reduced interest obligation over time.
Can You Bag the Lowest Interest Rate by Default?
Nothing comes to you automatically! Lenders have started offering the lowest rates to individuals having a good credit score of 750 or 800 and above. Your income and repayment potential also influence the rate of interest. The interest rate is further impacted by the loan amount you apply for. A greater loan amount poses a greater credit risk for lenders and thus they charge a higher rate on those. The interest rates are basically segregated on loan amounts in three brackets – upto INR 30 lakh, above INR 30 lakh to INR 75 Lakh and above INR 75 lakh. The rates rise with the rise in the loan amount. But having good income and repayment potential will ensure you get the best interest rate deal for the said amount.
Assess Loan to Value Ratio of Different Lenders
It’s a fact that home loans are not financed to the extent of the property cost. They are usually disbursed at a certain percentage of the property cost. The part of the property cost not financed by a home loan is the margin money that you need to pay to the seller. Loans upto INR 30 lakh, above INR 30 lakh-75 lakh and above INR 75 lakh are disbursed at upto 90%, 80% and 75% of the property cost. The maximum Loan to Value (LTV) ratio is shown above. Whether you will get the maximum loan based on the property value will depend on factors such as your income, repayment potential, credit score, and even the location of the property. A property located in a posh area can result in greater disbursals compared to when it is placed in a very low profile area.
Shall You Compare the Processing Fee of Lenders?
Yes, you should! After all, it’s not a personal loan where the processing fee gets debited from the loan amount and you don’t pay the same from your end. In a home loan, you will need to submit a processing fee cheque to the lender. Now, this fee could vary from one lender to another. On average, the processing fee can be anywhere from 0.25%-1% of the loan amount plus applicable goods and services tax (GST), which presently stands at 18%. Given the seemingly large home loan quantum, the processing fee can be quite a big amount. Suppose you are seeking a home loan of INR 60 lakh and the processing fee for the same is 0.75% plus GST. So, the processing fee will come as INR 53,100 on calculation. Now that the processing fee could either include the legal and technical fee or you have to pay for them separately. So, check the processing fee offers carefully.
Above, we discussed how new borrowers should go about checking home loan offers. It’s time we focus on the work to be done by existing borrowers to get their loan on the right track.
Interest Rate Conversion Facility
Many of you may already be servicing the home loan somewhere but at a higher interest rate courtesy putting yourself in the fixed rate regime. Yes, a fixed rate of interest ensures the same rate throughout the loan tenure and thus keeps out the volatility. And that may have made you choose the same. But a fixed interest rate loan is disbursed around 2%-3% higher than a floating rate loan where the interest rate keeps changing with the changing times. Even with constant rate changes, floating rate loans can save more for you. In the long-term, the effect of the hike in interest rates can even out with a spell of rate cuts. If we talk about the last 5-6 years, the interest rates have decreased more than they have gone up, saving enormous interest payments of borrowers. Listening to this must make you ponder whether you can switch from a fixed rate loan to a floating rate loan. Well, you can! Just check with the lender how much it is charging you for the same. Pay it and get the portfolio switched to a floating rate loan. Below is a table showing the fees payable on converting from fixed to floating.
|State Bank of India (SBI)||INR 5,000|
|HDFC Limited||As Applicable|
|ICICI Bank||1.75% of the principal outstanding|
|LIC Housing Finance (LIC HFL)||INR 10,000|
|Punjab National Bank (PNB)||As Applicable|
|PNB Housing Finance (PNBHFL)||0.50% of the principal outstanding|
|Axis Bank||2% on the drawing power|
|Kotak Mahindra Bank||0.50% of the principal outstanding|
|YES BANK||0.50% of the principal outstanding|
Given the depth of the home loan, you will find more to compare. Yes, floating rate loans are not based on one benchmark. There are three benchmarks in operation – base rate, the marginal cost of lending rate (MCLR) and repo-linked lending rate (RLLR). Of the three, the last one is an external benchmark and is more receptive to changes in market rates. Since banks started adopting the RLLR benchmark very recently from October 1, 2019, a large portfolio of bank home loans is under the other two. If your portfolio is in any of the two, get that switched to RLLR and let your home loan interest rate move in tandem with the repo rate. Now as the rate cuts are getting rampant with weak economic growth due to the lockdown induced by the COVID-19 pandemic, you will benefit greatly as the rate will reduce substantially. Like changing from fixed rate to a floating rate, charges also apply when changing with a floating rate. Check out the charges for the same in the table below.
|State Bank of India (SBI)||INR 5,000|
|ICICI Bank||If prepayment charges are not applicable, INR 1,000 will be debited|
If prepayment charges are applicable, the bank will levy a charge at 0.50% of the principal outstanding
|Punjab National Bank (PNB)||As Applicable|
|Bank of Baroda||INR 2,000|
|Axis Bank||0.50% on the drawing power, subject to a minimum of INR 10,000|
|Kotak Mahindra Bank||As Applicable|
Shall You Look at Balance Transfer Seriously?
A balance transfer is a process by which you can transfer your outstanding loan balance from your existing lender to a new lender at a lower rate of interest. But the balance transfer deal will benefit you more if the new lender offers you the facility at an interest rate lower than that of the existing lender by at least 0.25%-0.50%. Plus, there are many years left for the repayment. Let’s glance at the example below to understand the benefits of a home loan balance transfer.
Example – You took a 20-year home loan of INR 60 lakh at 8.50% per annum three years ago. Now you get a balance transfer deal at 8%. How much will you gain from it? Let’s check out the table below to know the same.
|Original Loan||INR 60,00,000|
|EMI Payable @8.50% Interest Rate||INR 52,069|
|Interest Outgo @8.50% Interest Rate||INR 64,96,655|
|Interest Paid Over 3 Years||INR 14,83,659|
|Outstanding Loan Balance at the End of 3 Years5||INR 56,09,160|
|New EMI @8.00% for the Remaining 17 Years||INR 50,385|
|Interest Outgo @8.00% Over the Remaining 17 Years||INR 46,69,311|
|Savings in Terms of EMI on a Balance Transfer||INR 1,684|
|Interest Paid Over 3 Years + Interest Payable Over the Remaining 17 Years||INR 61,52,970|
|Savings in Terms of Interest on a Balance Transfer||INR 3,43,685|