Finance

TOP RULES YOU MUST FOLLOW WHEN OPTING FOR HOUSING LOAN IN INDIA

The Reserve Bank of India is main authority that decides the guidelines and policies for all financial institutions, and all kinds of transactions and loans must comply with guidelines by RBI.

  • When taking a housing loan in India, whether from a banking or non-banking financial institution, one has to abide by RBI’s policies. 
  • Due to the rising prices of properties in the housing market in recent years, most individuals prefer to buy a home on loan as it reduces the financial burden. With current home loan interest rates in India at multi-year lows, now is the perfect time to buy a property. Though lower interest rates help lower the EMI burden and increase affordability, it is still necessary to get an understanding of all the rules before opting for a home loan. 

Rules you must follow when opting for housing loan in India

  • Home loan eligibility

Lenders approve a home loan only after they feel convinced of an applicant’s home loan eligibility and their capacity to repay the home loan EMI. The CIBIL score of the applicant should be 750 and above for approval of the home loan. It is advisable to check your eligibility before applying for a home loan to reduce loan processing time and to avoid last-minute loan rejection. An individual’s home loan eligibility depends on various factors, such as monthly income, credit score, outstanding loan amount, history of past loan repayments and outstanding credit card bills. The exact amount of home loan EMI that is to be paid can be checked on the lender’s webpage using the home loan eligibility calculator. To be able to use this calculator, you will have to put in your loan value, preferred tenor, and the interest rate being offered by the bank.

  1. Correct Documentation

Make sure to keep a checklist and arrange for all personal, financial, employment and income tax documents before applying for a housing loan in India. These documents are mandatorily required while applying for a home loan. Your loan can approve on the basis on these documents.

  1. Interest rate and bank

It is utmost important that you select a bank that offers the lowest interest rate. A housing loan at low interest rates will help to lower your monthly EMIs and reduce the total cost of the repayment of the loan through the loan cycle. A bank that offers not just the maximum loan amount, but overall better benefits along with good service should be given priority. When the interest rates are high, you should opt for a floating rate on your home loan to enjoy benefits when the rates are cut. However, in the current environment of low interest rates, going for a fixed rate on home loan can be a good option. 

  1. Loan amount limit

There is a limit on home loan amount that can avail from a bank. These limit varies and based on an individual’s income level and the value of the property being mortgaged.  Generally, banks fund up to 75% of the property value in home loan, but some lenders even offer up to 80%, depending on your credit profile. As a thumb rule, your home loan EMI shouldn’t exceed 40% of your net monthly income. 

  1. Processing, prepayment and foreclosure Charges

It’s a competitive market, so banks try to lure customers by offering maximum loan amounts at the lowest interest rates. However, before accepting a loan offer, always read the fine print i.e. the terms & conditions. For instance, always ask your lender about the processing fees, which usually ranges between 0.25% to 1.0% of the loan amount and negotiate hard on this. While the RBI has prohibited financial institutions from levying part or full prepayment charges on floating-rate home loans, banks can still impose penalty on fixed-rate home loans. 

  1. Repayment tenor

Home loans offer a longer repayment tenor of up to 30yrs, depending on your current age. One should select the loan tenor considering their monthly cash inflow to pay the EMIs. Opting for a longer tenor might lead to lower monthly EMIs, but you will end up paying a higher total interest amount over the entire home loan period. Therefore, you should try to go for a shorter tenor, if you can afford it, to lower your total interest cost.   

  1. Home loan Balance Transfer

If you have a floating rate home loan and your bank decides to increase your home loan interest rate either due to an increase in the external benchmark rate or for any other reason, you can always explore other lenders who are willing to offer lower interest rates. This is where the option of home loan balance transfer comes in handy.

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