Buying a home requires a big fund arrangement. A home loan helps you to get your dream home in the present considering your future earning and repayment capacity. Borrowers usually avail a home loan facility for a long term which can go up to 30 years of tenure.
However, a little mistake in choosing a home loan product or its mishandling can cost severely. Therefore, if you’re an aspiring homebuyer, you need to be very careful while availing a home loan facility. The current low-interest rates are enticing home loan borrowers. In fact, currently, there are at least 15 banks and 4 housing finance companies that are offering home loans starting at under 7 per cent p.a. (check the table below for the latest rates being offered by a few prominent lenders).
Home loan interest rates currently being offered by banks and HFCs
|Lender’s name||Home loan interest rate (in % p.a.)|
|Kotak Mahindra Bank||6.65-7.30|
|State Bank of India||>=6.70|
|Punjab National Bank||6.80-7.75|
|Bank of Baroda||6.85-8.20|
|HDFC Ltd. (HFC)*||6.75-7.85|
|LIC Housing Finance (HFC)||6.90-7.60|
Disclaimer: Data compiled on March 3, 2021, by BankBazaar.com. *effective from March 4, 2021.
That being said, the current low rates will not remain the same forever and homebuyers must consider other critical factors too that may impact their home loan decision in the long-term. Let’s check out the 10 most critical things that you should keep in mind while availing a home loan in the current situation.
1. Presence of regular income
Home loans require a long-term repayment commitment. When you apply for a home loan, the lender assesses your repayment capacity, but they don’t consider your future financial plans. So, check your income regularity, current, and future earning capacity, availability of multiple options for income generation, etc., and assess whether you’ll be able to comfortably achieve your financial goals after availing the home loan or not.
2. Availability of margin money
Lenders usually finance up to 90 per cent of a property’s value and the rest needs to borne out-of-pocket which can be loosely termed as the “down payment”. In addition to that, there are many other expenses, like registration and stamp duty charges, interior decoration, etc. that need to be taken care of without financing support.
All these combined make up the margin money requirement, which may vary depending on the borrower’s credit score, age, property cost, loan amount, loan tenure, etc. So, don’t look only at the low-interest rates. Before you apply for a home loan, make sure you have sufficient margin money in hand that will not hamper your other critical financial commitments.
3. Good credit score to get the best possible rates
Banks usually charge higher interest on a home loan if your credit score is below average (i.e. below 750). They levy a higher risk premium to borrowers whose credit score is low as per their criteria. So, before you apply for a home loan, make sure that your credit score is high and take steps so that it doesn’t fall in the future.
4. Availability of a co-applicant to enhance borrowing ambit
A low interest rate may look attractive, but are you eligible to get a loan at that interest rate? If your loan amount is expected to be higher than your borrowing capacity, you should ideally look to include a co-applicant. Having a co-applicant can enhance your borrowing capacity. If your credit score is not up to the mark, the co-applicant can help improve the chances of getting the loan and bring down the applicable interest rate too.
5. Keep the home budget under control
Don’t exceed your budget when planning to buy a home on loan. An over-budget home can increase your home loan requirement and EMI obligation, thus reduce your future borrowing capacity. A larger loan amount may also increase the applicable interest rate.
6. Existing debt condition
If you have already taken several loans, you should ideally try to close the smaller loans before taking a home loan. Existing EMI obligations can reduce your repayment capacity to that extent, and thus you may not be able to get a big loan. And even if you get the home loan, your combined debt obligations could strain your finances. The rule of thumb is that all your EMIs shouldn’t be more than 40 per cent of your monthly income.
7. Affordability of home loan EMIs
Regardless of the current low rates, the question you need to ask yourself is whether you can afford the EMIs. If you feel you won’t be able to repay the EMIs, you should reduce the home loan amount, increase the loan tenure or pay greater margin money. Missing EMI payments can lead to additional interest charges and an accumulation of debt apart from ruining your credit score. If you’re unable to repay the EMIs, the lender can liquidate your property to recover the dues.
8. Condition of contingency savings
It’s important to maintain an adequate contingency fund level to avoid missing out on the EMIs during a financial emergency. Your current financial condition may be sound, but you may not be able to service the loan on time under a financial crisis like a job loss. In such a situation, a contingency fund could come in handy. So, before applying for a home loan, you must strengthen your contingency savings to cover the increase in your financial obligation.
9. EMI would increase if the repo rate increases
If you want to buy a home just because the home loan rates are currently at multi-decade lows, you need to be very careful. The rates of bank home loans are usually linked to the repo rate, and if there is an increase in the repo rate in the near future, your applicable home loan interest rate will also increase proportionally and quickly. So, you need to factor in chances of an increase in the interest rate in the near future and assess your repayment capability accordingly before you decide to buy a home on a loan.
10. Consider going for the maximum eligible loan tenure
Banks usually allow a home loan tenure of up to 30 years depending on the borrower’s age and income. You should consider applying for a home loan for the maximum term that you are eligible for. There is no prepayment charge on a floating-rate home loan. Longer tenure will bring down your EMI obligation and making it easier for you to repay them on time. Later if your income increases, you can prepay the EMIs and close the loan earlier than the allowed tenure to become debt-free sooner.
In conclusion, the current phase of low interest rates makes it an opportune moment for aspiring buyers to realise their home-buying dreams. However, they must exercise caution and evaluate the affordability of the loan EMIs before taking a financial step as significant as this.
The author is CEO at BankBazaar.com. Views expressed are that of the author.