How to select the “Right” home loan lender for you
As with any other financial product today, there are plenty of home loan products which are available. Your choice of the lender will be determined by your personal requirements of :
- Total amount of loan you want to avail of – this is decided both on the basis of the property that you choose and your income.
- Payment terms you are comfortable with
- Interest Rate being offered to you
- Other charges that might affect the cost of the loan to you.
These factors are discussed in detail below:
a. How much loan are they willing to extend to you based on your income ?
Lenders have different norms with regards to the amount of loan that they are willing to sanction to you. All lenders will not extend the same amount of loan to you.
The home loan lender calculates how much EMI you would be able to bear comfortably over the lifetime of the loan. This is done through ratios like Fixed Obligation to Income Ratio (FOIR) and Installment to Income Ratio (IIR).
- Generally, expressed as a % . FOIR ratio includes all your fixed obligations that you pay every month including all loan EMI paid every month.
- The IIR ratio denotes the portion of your monthly installment on your Home Loan to your income. Typically, the lender does not sanction any loan amount where the IIR ratio exceeds 55%.
- Both these ratios can vary on the basis of actual salary details, years of experience, professional qualifications like IIM and IIT degrees, stability of income, future career prospects and sources of other income.
If you are not getting the amount that you need, consider the following ways which your lender can use to increase the eligible loan amount.
- Check the entire income is being considered including annual components like annual bonus which do not appear on the monthly payslip.
- Check whether the lender allows combining of incomes other than spouse such as parents, son/daughter.
- Check whether the bank is open to increasing the loan tenure beyond 20 years to increase eligibility.
- Consider banks that give you better eligibility based on your disclosed income.
- If you are self employed and incomes are spread over many entities, look for a bank that will consider all these entities.
b. How much loan are they willing to extend to you based on the property that you have chosen ?
All properties are not financed by all lenders. Lenders have qualifications in terms of the locality that you have chosen to buy the property, the type of property and the builder. You also need to have a clear understanding of the breakdown between cash component and the cheque component before applying for the loan.
Lenders typically have a maximum loan to value of 80% -85% of value/cost of property. This might further go down to 70% to 80% in case of land or in cases where the cash component is very high.
The rest needs to be put in as margin money by you.
(The valuation of the property is based on the lender's study of the market prices. You might need to put in more money if the agreed price is more than the lender's valuation) Some of the key points that you might need to check here are :
- Is the property acceptable to the lender for financing ?
- Is the valuation done by the lender acceptable to you ?
- How much loan are they willing to extend to you vis-a-vis the cost of the property ?
- If you enter into an amenities agreement will that affect your loan eligibility?
- Will you be able to arrange all the documents and No Objection Certificates in the format needed by the bank?
- If it is an under construction property check that on the approval status of the project,the stage of construction and payment terms being offered by the bank.
c. Rates being offered
After the approval of the loan, you need to choose whether you want to take a fixed rate loan or a floating rate loan. This is a critical decision that can affect your payments over the tenure of the loan.
- In a floating rate loan, the interest rate on the loan depends on a benchmark rate fixed by the home loan lender. This benchmark rate varies as per the market. This change can happen as frequently as once in three or six months. You must choose a floating rate loan, if you are anticipating the interest rates to decrease in the future.
- However, even within these categories of floating and fixed rate loans there are terms which differentiate one loan from another. Below are a set of key questions that you must ask your lender to know these differences, and then make an informed choice thereafter.
- In a fixed rate loan, the interest rate on the loan is fixed at the beginning itself for the entire duration of the loan. This rate is usually about 1.0% to 1.5% higher than the prevailing floating rate. You must choose a fixed rate loan, if you are anticipating the interest rates to increase in the future.
Fixed Rate Loans- Is it the rate fixed for the entire tenure of the loan or just for the initial three or five years?
Floating Rate Loans- Are the reset dates for the loan properly defined ?
- What is the underlying benchmark index? Is the contract properly worded with a clear linkage to a specific index?
- Is the variation process properly defined by way of increase/decrease of EMI or increase/decrease of balance tenure.
As a home loan is typically of a large amount and a long duration even the smallest of charges levied turn out to be a huge amounts to be paid. Hence, its very essential to understand the other charges that are applicable to you. Some of the key questions to ask your lender are:
- Are there any technical/valuation charges?
- Are there any legal charges? What are the prepayment penalties and related charges ?
- Are there any annual maintenance charges?
- Will the bank recover stamp duty payable on memorandum of entry while handing over the title deeds to them?