Main Points to Consider while Taking a Home Loan
Based on the country’s current macroeconomic situation, the RBI’s Monetary Policy Committee (MPC), in its bi-monthly resolution meeting on February 5th, 2021, decided to keep the Liquidity Adjustment Facility’s policy repo rate unchanged at 4.0%. This is the 4th time since May 22, 2020, that the policy repo rates are left unchanged, which is one of the many steps undertaken by the Government of India to boost the real estate sector.
- The real estate sector is projected to account for up to 13% of the Indian economy if all the reform measures announced are adequately executed.
- The Indian home loan market is expected to grow at a CAGR of around 22% between 2021 and 2026.
With interest rates at their historical lowest, availing of a housing loan is an exciting prospect, especially for first-time homebuyers looking to capitalize on the low rates and maximize their savings. Nonetheless, prospective borrowers should also approach financial institutions judiciously and not jump on the first option that comes their way.
The following factors should help such borrowers plan their investment in real estate and make the most out of their home loan.
Important points to consider while availing of a housing loan
- Budget and monthly outgo
When availing a housing loan, appropriate financial planning should be the borrower’s topmost priority as it can significantly reduce the burden. Since the LTV ratio of a property is usually limited to 80-90% of its market value, one should plan his/her budget and EMI based on the required corpus using a home loan EMI calculator.
Knowing how much EMI you can afford significantly reduces the financial stress during repayment. Financial institutions use the applicant’s Fixed Obligations to Income Ratio (FOIR) to determine the eligible corpus and repayment capacity.
- The loan tenor decides the interest payment
A longer home loan tenor directly equates to lesser monthly EMIs, which can be extremely beneficial to first-time homebuyers and individuals starting their careers. However, keep in mind that long repayment tenor also directly means that the total interest outgo to a lender will be higher.
A smaller tenor also means a lower financial risk for lenders, meaning that borrowers have a higher chance of housing loan application approval. That being said, if you opted for a longer term while applying, some lenders allow renegotiating the terms later. Make sure that you know the foreclosure procedure and its process and approach your lender accordingly.
- Credit score can impact eligibility
Financial institutes use a borrower’s CIBIL score as a reflection of his/her repayment behavior. This score can, thus, significantly impact the housing loan eligibility and chances of approval. Essentially, lenders are more willing to extend housing finances to responsible borrowers with a good repayment history.
A credit score in excess of 750 is considered satisfactory when availing of loans from financial institutions in the country. Individuals can look at ways like repaying bills and existing liabilities timely and maintaining a low credit utilisation ratio on credit cards to keep their CIBIL in this range. This will help facilitate the housing loan transfer procedure if you later want to switch to more favourable terms with another lender.
- Lender credibility and origination fees facilitate savings
Housing loans are usually long-term commitments with tenor ranging 20-30 years at a stretch. Hence, borrowers should look for trustable and credible lenders that have a good reputation of offering the necessary support and communication with minimal turnaround time.
Quick market research about the financial institution should help applicants verify their track record. Ask existing lenders about how they calculate repayment interest rates, what are the hidden costs of buying a home, loan penalties levied on default, etc.
- Verify eligibility criteria and documentation
Housing loans often require a comprehensive set of documentation, including proof of address, income, and identity. Additionally, applicants might be required to submit several property-related documents and a consent letter from the housing society or complex if the property is part of the housing loan procedure.
Selected HFCs streamline this entire process by extending pre-approved offers that require minimal documentation. These offers are available on products like home loans and loan against property, among others. You can check your pre-approved offer by providing a few essential details like name and contact information.
The recently concluded Union Budget 2021 has extended the tax benefits on availing a housing loan under the affordable housing scheme, making availing these credits cheaper for low- and middle-income households. With this amendment, home loan borrowers can avail a total tax deduction of Rs.3.5 lakhs per annum.