It is a dream of many in India to buy and own a house. However, the difficulty lies in securing the right housing finance. Irrespective of whether you plan on buying a flat or need a home loan to purchase land, it is essential for you to comprehend some big financial terms and identify reliable lenders.
This article is a comprehensive guide that will get you through this process without a lot of hassles.
Key terms you need to know
The following terms are crucial when making an application for housing finance:
1. Loan-To-Value (LTV) Ratio
It is the fraction of the value of the property that a lender can finance. For instance, if the cost of the property were ₹50 lakh and an LTV ratio is 80%, you can borrow ₹40 lakh from your lender.
The Reserve Bank of India (RBI) has capped the housing loan LTV ratio at 90% for properties below ₹30 lakh.
2. EMI (Equated Monthly Installment)
EMI is a fixed monthly payment that covers both principal amount repayment and interest charged on housing finance.
It is always perspicacious and insightful to calculate your EMI before applying for a loan so you can be able to plan well for it in your budget by using online EMI calculators which provide fast estimates.
3. Floating Vs Fixed Interest Rates
- Floating rates fluctuate based on market conditions over time. They are influenced by the RBI repo rate.
- Fixed rates do not change throughout the term of the loan. They, thus, offer stability — though they may be higher than floating ones.
Keep in mind that the repo rate in 2024 was 6.5% when you make this decision.
4. Prepayment & Foreclosure Charges
Prepayment charges are what you pay when you’ve paid a part of your loan before it matures. This act reduces your interest burden manifold. Foreclosure charges, on the other hand, are incurred when the customer has repaid the whole amount earlier than the time period agreed upon.
Most banks do not impose prepayment charges on floating-rate loans. This may not be the case with fixed-rate loans.
Finding the right lender
Choosing the right lender is as equally important as knowing what loan terms imply. Start with these:
1. Compare interest rates
Unsurprisingly, different banks charge varying interest rates. Lower interest rates translate into reduced total loan costs i.e. For instance, in India, housing finance interest rates usually range between 8.5% to 10%.
2. Evaluate loan processing fees
These charges are typically between 0.5% to 2% of the loan amount. However, keep in mind that these costs can significantly affect how much money you end up borrowing.
3. Check for lender flexibility
- Tailor-made loans — Some lenders design special products such as home loan for plot purchase.
- Ease of repayment — Research has shown that there are quite a number of borrowers who often opt for extensions or make quick repayments. Ensure that your potential financier grants you this chance if need be; do not forget about repayment flexibility.
4. Assess customer service
If you have good customer service then getting a loan might just be hassle-free. It is important to read through reviews and most lenders will be able to talk about their reputation by talking to other borrowers.
Tips to maximise your benefits
To negotiate the best deal concerning your housing finance use these steps:
- Maintain a high credit score — Most people in India probably have no idea what a CIBIL score is because they think that this only applies to those who have credit cards. However, when it comes to borrowing from financial institutions such as banks or NBFCs (Non-Banking Financial Companies), having higher scores than 750 is beneficial to the lender. It means lower interest rates on loans. It also means easier loan approvals.
- Submit all documents correctly — Documents that need to be submitted for loans to be approved include:
- ID proof
- Documents indicating your income
- Documents relating to the property
- Choose the right tenure — The longer your tenure, the lesser your EMIs will be. However, this will lead to a higher total interest. Go for shorter loan tenures if possible in terms of affordability.
Why choosing the right lender matters
Your financial journey will be shaped by the choices you make when you finalize a lender. This directly impacts your interest rates. An interest rate of 8.5% on a 50 lakh loan saves you lakhs as compared to 10% over 20 years for instance. Similarly, friendly policies and efficient customer care services help a lot during repayments.
The Bottom Line
Getting housing finance is one of the long-term commitments that an individual can make; hence it should be done with great care. This way, by understanding big terms as well as checking potential creditors thoroughly, you would be assured an easier path toward owning your dream home. So, whether you desire to have an apartment or require housing credit to buy land, ensure you research well before settling on any institution for moneylending services that suit your fiscal objectives.
