With real estate prices inching up and interest rates on home loans still at multi-year lows, it may be a good time for end-users to purchase a house. As the repo rate is at 4%, the lowest since April 2001, and the low-interest rates are unlikely to continue for long, understand the home loan features and options to get the best financing deal.
In fact, housing sales in the three months to March were at an all-time high since 2015, with 99,550 units sold across the top seven cities, according to data from Anarock. The Mumbai Metropolitan Region and National Capital Region accounted for over 48% of the total sales in the top seven cities.
As home loans are for a very long period, negotiate with the bank to get the best value for money and look at ways to reduce the interest payout in the long run.
Credit score
A credit score of CIBIL 750 plus will not only help you negotiate a lower rate of interest, the bank will also process and disburse the loan amount quickly. So, check your credit score and try to clear all outstanding dues before applying for a home loan.
Fixed or floating rate?
Banks have to link their retail loans to external benchmarks such as repo rate or government of India’s three-month or six-month treasury bills. Most banks have linked the interest rate on their home loans to the repo rate called repo linked lending rate (RLLR). So with the cut in the repo rate, interest rates on home loans have fallen sharply in the past two years. For instance, the country’s largest lender, State Bank of India, is offering home loans below Rs 30 lakh to the salaried at 6.7-7%; and for loans above Rs 50 lakh it is 6.7-6.9%.
Banks offer home loans either on floating interest rate or fixed rate. In a fixed rate, the interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In case of a pure fixed loan, the EMI will remain constant. If the loan is fixed for a certain period,then the rates will be reset after a period of time. In case of a floating rate, the interest rate will be determined by market rates (repo rate) and the spread, which is an extra amount that the banker adds to cover credit risk, profit mark-up, etc. The spread differs between lenders and is determined on factors such as credit score, loan amount, earnings, tenure of the loan, employer details, etc.
If you plan to pre-pay the loan and not run the full course of the original tenure of the loan, then opting for a floating rate is a better idea. For a fixed loan, factor in the interest rate differential which would be 150 to 200 bps more than a floating rate and keep in mind that you will not be able to do part pre-payments without penalty.
Loan tenure
The tenure of a home loan is 15-30 years. Most borrowers choose to pay EMIs as low as possible so that they have a greater cash flow to pay for other expenses and keep the tenure long. But the longer the tenure of the loan, more the interest payout.
Also, in case of pre-payment, do not reduce the EMI as it will not help to lower the interest payout. Instead, keep the EMI same or even increase it if your cash flow permits and lower the tenure. Doing this within the first five years of the loan will significantly lower the total interest outgo over the entire period. Banks allow you to repay the loan ahead of schedule by making lump sum payments, provided the borrower pays from his own sources. Also, try to credit more than your EMI amount into your loan account regularly to bring down the interest amount.
Monthly reducing balance
Look for a loan which is set on a monthly reducing balance instead of the annual basis. In case of a monthly resets, interest is calculated on the outstanding principal balance for that month and the principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the reduced principal outstanding. In annual resets, the principal paid is adjusted at the end of the year and the borrower will continue to pay interest on a portion of the principal that has already been paid back to the lender. So, a monthly reducing balance will bring down the overall interest outgo in the long run.
Homing in
- Ensure your credit score is 750-plus and clear all outstanding dues before applying for a home loan.
- If you plan to pre-pay the loan, opt for a floating rate.
- Look for a loan which is set on a monthly reducing balance instead of the annual basis.
- Longer the tenure of the home loan, higher will be the interest payout.