What You Need to Know About Home Loans and Interest Rates

Welcome to the world of options, banks, interest rates, repayment terms and mortgages. Here is a list of things that we find our customers ask about, which we are sure will help you navigate the road easily.

What you need to know about home loans for properties in Bangalore

A home loan, also known as a mortgage, is the sum of money given to you by a financial institution to buy a property. In exchange, the financial institution has legal entitlement to keep your property’s deed until your home loan has been paid back in full. The bank also charges a bank mortgage rate as interest for the loan.

Key terms regarding preapprovals and home loans

• Principal– The total amount you are borrowing from your bank
• Interest– The charges the bank levies to you for lending you the principal. You will be paying back your loan amount plus the interest to the bank
• Fees– The charges from the bank to cover things such as servicing the home loan
• EMI – Equated Monthly instalments of your outgoing amount that will clear your outstanding loan within a stipulated time frame
• Term– The length of time you must repay your loan amount plus interest to the bank
• Lock in period – The length of time where you will incur a penalty from the bank if you choose to do a full settlement of your home loan. For example, if your lock-in period in your home loan contract is 5 years but you have decided to pay your home loan in full before the 5 years, the bank can impose a penalty of 2% to 3% of the total loan amount
• Repayments– The amount you pay to the bank to cover your home loan
• Collateral– The bank is entitled to hold your property’s deed as a form of security in case you are not able to repay your home loan

What are the types of home loans for properties in Bangalore

There are four basic housing loan options at different interest rates and payment specifications. You need to work out the best repayment options here, even before you start your property search.

• Term loan– With a maximum loan tenure of 35 years. If you pay off your home loan earlier within the first 3 to 5 years, you will be charged a penalty fee of approximately 3%
• Fixed Rate Loan– The interest for this home loan is a fixed rate throughout the loan tenure. If you don’t want to worry about whether the interest rate will increase or decrease, this would be a suitable type of home loan to apply for
• Overdraft Loan– This loan requires you to only pay for the interest rate of the loan and the amount will be deducted directly from your current account. There is no loan tenure. However, the interest rate you are required to pay is higher than usual
• Flexi Loan– This loan is a combination of a term loan and an overdraft loan. You can get a lower interest rate when you put in more money in your current account.

Who is eligible for a home loan

Home loan eligibility is based on a calculation of your salary, age, credit score, the location, your work experience as well as your other monthly financial obligations. Some banks may use a different variable while calculating your loan amount, it depends on the bank and the financing scheme. Make sure you check with the banks on their requirements.

To understand better how much of a loan you are eligible for, use any online Eligibility calculator. This will give you the ballpark of your loan amount, so you can also work on the budget of your property search of your dream home that you can currently afford.

The importance of a low interest rate

As home loans are usually a large amount and long repayment, even a small change in the mortgage rate changes your totals and the calculations of your EMI. Getting a lower interest rate for property loan reduces your financial obligations, so consider all possible options available and choose the lowest rate of interest on offer.

Currently, the lowest home loan interest rate being offered is 6.65% p.a. by Kotak Mahindra Bank, followed by other top lenders such as ICICI Bank, Bank of Baroda, State Bank of India, Union Bank of India, Punjab National Bank and HDFC Ltd.

For the different interest rates charged by banks, click here : https://www.august.in/blogs/what-to-know-about-home-loan-interest-rates/

When researching the home loans and the rate of interest, do remember all other fees and charges that will be added to the total cost. Processing fees, CERSAI charges, prepayment charges (a penalty fee if you want to close the home loan before the tenure ends) etc. Calculate which loan with its additional charges helps you save more. Some lenders may charge the same home loan interest rate but different associated fees and charges, which may change the total cost you have to repay.

How to get a home loan at the lowest interest rate

Since home loans are usually high-ticket size loans, banks and NBFCs will do a complete and detailed assessment of your credit history, your capacity to repay the loan, your income PLUS a lot of checks on the property you want to purchase. For borrowers seeking a home loan, check your own credit worthiness. Lower interest rates also usually come with stricter eligibility conditions.

Here are the factors that lenders evaluate to determine your eligibility for a home loan and the interest rate to be offered:

• Credit Score: Your credit score is a result of your behaviour with credit in the past. Those who have paid other EMIs and credit card bills on time and in full are deemed to be not too dependent on credit in the past, and will possibly have a good credit score from CIBIL. A ballpark of 750 and above is favourable for a home loan. Also banks use your credit score to fix home loan rate of interest, over and above the external benchmark rate, so work towards lowering this before you apply for a home loan
• Income and employment:Lenders evaluate your income, type of employment, where you work. Those with a stable income with a reputed organisation like an MNC or a government job are usually preferred. Businessmen or the self-employed with an erratic income, or someone with an unstable job, even those who have just started working find it more difficult to get a loan at a lower interest level
• Loan amount:Home loans up to Rs. 30 lakh usually have a lower interest rate. Also those with a high number of down payments get a better rate of interest as it reduces the overall loan burden on the person
• Joint loans: If the home has a co-ownership, the credit score of each owner is likely to be checked by the lender, even if the loan is taken by a single co-owner. Most banks give concessions up to 0.5% lower interest rate for women loan borrowers, so for married couples, take the loan in the wife’s name even when the loan is a joint loan
• Type of loan: Regular loans have a standard rate, while Plot Loans or NRI home loans have higher interest rates automatically

Consider refinancing your home loan too. You can apply for a transfer between banks if your current organization is charging a higher rate of interest, but do work out the total cost of loan transfer before you do.

Types of interest rates

The type of interest rate you choose for your home loan will determine the rate at which you will repay to your lender. The EMI for fixed-rate home loans remain the same for the entire loan period. The interest is calculated on the same principal amount, making you pay more. Floating rates, on the other hand, change as per change in its lending rate such as Repo Linked Lending Rate (RLLR). You pay lesser interest with each repayment, as the principal outstanding gets less.

Considering the current trend of decreasing lending rates, banks provide customers with an option to switch over to the variable/floating housing loan interest rates after completing a specific period of time. So work out which bank and what terms to calculate the best home loan for you.

Documents needed for a home loan application

With the housing loan applications to the initial payments and booking fees, the receipts and legal fees etc need to be produced when required.

Suggested reading: To see the entire list of the documents you will need to keep handy, click here