By V Swaminathan
Interest rates on housing loans are at their lowest levels in several years and even real estate prices for residential properties have been largely stagnant over the past few years. For those looking to purchase a home of their own, the current opportunity may be exploited to the maximum benefit. The low interest rate in the environment is also conducive to investors who want to invest in a real estate property through a combination of own funds and loans, and many investors are already buying properties through financing across major cities in the country.
But, either you are taking out a home purchase loan as an end user or as an investor, here are some basic things to know before approaching a lender. You can contact a bank that offers a home loan or any non-bank finance company (NBFC) that offers home loans.
The amount of the home loan that you will be eligible for depends on certain factors such as your income, age, credit score, loan term, etc. While income will play one of the biggest roles in determining the amount of the loan, you can always show your spouse’s income as a loan applicant. This helps in enhancing eligibility for a home loan to a large extent. Generally, the lender will provide a loan, an EMI that you can serve with about 50 percent of your outstanding salary. Eligibility can also be improved by increasing the loan term as this leads to lower EMIs.
As a borrower, you can use the home loan eligibility calculators available online or ask the lender to provide the account based on your individual requirements. It is suggested to work with at least 3-5 lenders to determine the optimal home loan amount before completion.
2. Interest rate
If you are approaching a bank for a home loan, the offered home loan interest will be tied to an external standard. For most banks, the repurchase rate (RBI) is the one to which the bank’s lending rate relates. Every time there is a change in the RBI repurchase rate and the borrower’s home loan interest rate may see a change with an interval of up to three months, especially if you have a flexible home loan interest rate.
As a borrower, ask what the bank’s external benchmark rate is generally referred to as the Repurchase Lending Rate (RLLR) and then look at how much of the interest rate applies to you on the home loan. The RLLR can be the minimum rate for banks more than the rate for individual borrowers may vary depending on loan amount, term etc.
In the case of housing finance companies or NBFCs, the lending rate is mainly dependent on the cost of funds and is still indirectly affected by the movements of the RBI’s repurchase rate. Find lenders that have an RLLR or lower lending rate and then compare the home loan interest rate applicable to you.
3. Credit score effect
Your credit profile plays an important role and allows lenders to offer you a lower interest rate. Lenders prefer a higher credit score than anything above 750 and you can save a lot of interest by availing a home loan at a competitive interest rate. Many lenders have started offering lower rates to borrowers based on their credit score. If your credit score is just below the magic number of 750, you can take steps to boost it and then contact lenders for loans.
4. Down payment
Most lenders will loan 80 percent to 90 percent of the value of the home you want to buy. You should arrange the balance from your own sources as the advance payment amount. Ideally, choose a maximum down payment arrangement and take advantage of a lower loan amount so as to reduce the interest burden. If this is not possible in the initial stages, then choose a larger loan amount and pay off a significant part of the loan in the first period of the loan term. This will also keep the interest cost on the home loan low.
Documentary evidence of your income will vary depending on whether you are a salaried, professional or entrepreneur. Among other things, for salaried borrowers, the lenders will ask for Form 16 or ITR for the last 3 years, bank statement etc. 3 years profit/loss and balance sheet including bank statements for the last 6 months and up to GST returns.
Now that you are familiar with the basics of a home loan, it is time to take action and finish your home loan by approaching a few lenders. Make the right decision and keep interest costs low. A difference of a few percentage points can save you many rupees and get a home you can call your own.
(The author is CEO of Andromeda and Apnapaisa)