Buying a property in India is by no means a small feat. A home loan is an effective way help you with this. Over the years, RBI and NHB have made sure borrowers and lenders are protected in the equation.
If you have shortlisted your property, you will find the next step is to find a bank or institution that suits your requirements. The bank should also be willing to take you on as a customer. There are so many home loan providers these days that you could easily get overwhelmed.
Lets take a look at some important factors that will help you choose the best bank for your home loan.
Your credit history & eligibility
There are two kinds of institution that offer home loans:
Housing finance companies (HFC)
Most banks follow conservative ratios to assess a borrower. This means, most banks are very strict in choosing their home loan customer. They will look at your property, your income and your past repayment track record to decide whether or not to lend.
HFCs also look at your property, income and past record, but the framework is slightly more flexible.
For example, if you have a case of cheque bounce in the past 12 month, you may not be able to apply for a home loan at a bank regardless of your CIBIL score. However, an HFC may accept your case.
HFCs are also slightly more lenient when it comes to calculating loan eligibility and loan value. They are flexible about which components can be included to show a higher income and higher property value.
You can choose either HFC or a bank for your home loan depending on your requirement. But you should remember that benefits come at a higher cost.
Lowest interest rate
These days loans are available for almost every need: education, marriage, vacations, appliances etc. You don’t give much thought when you buy an appliance on EMI or or if you need an auto loan. But when it comes to home loans, you have to be very diligent with your choice. There are two important aspects that set home loans apart from every other kind of loan:
The amount involved is huge
Repayment tenure is very long
For these reasons when you take a home loan, the interest payable is one the most important things to look out. Even a difference of 1% can impact the total payout significantly.
For example take a look at these two scenarios:
Annual Interest Rate
8.35% per year
Loan Period in Years
9.35% per year
Loan repayment tenure
Here the loan amounts and tenure are the same, but there is a 1% difference in the interest rate. When interest is 8.35%, you will pay total interest of Rs.53 Lakhs. But if you pay 9.35% interest on the loan for 20 years, you will end up paying over Rs.60 Lakhs as just interest!
So it is important that you shortlist banks based on the interest rate they are offering. Don’t discard the savings you may see even with a small difference in interest rate.
Frequent rate cuts
These days banks follow two basic interest rate systems:
Base rate system
Generally speaking, MCLR rate system is more transparent. Usually banks using this system of are able to pass on rate cuts to their customers quickly. We have published a details post comparing MCLR and Base rate, which you may find useful.
As a rule of thumb, banks follow MCLR and HFCs follow other rate systems like base rate.
When you short list banks and HFCs, choose those who have frequently passed on rate cuts to their customers. This is a good way to save some interest if interest rates decrease in the future.
Many banks are specific about which property type they will fund and those they won’t. For example, not all banks finance B-Khata properties is Karnataka. Some banks don’t prefer properties under Gram panchayat or Zilla Parishad. So when you approach a bank, you have first ask them if they will finance the type of property you have chosen.
Some banks are also particular about the age of the property. For example, in Mumbai, some banks don’t prefer buildings that are more than 15 years old. With such properties there is always a chance of redevelopment. But some banks accept properties as old as 20 years too.
Banks are generally open to multiple parties to a home loan. A joint loan taken by a married couple, by a father and son or Mother and son are generally accepted. But there are some banks that allow even brothers to co borrow for a property as long as they are both share ownership too.
So if you are taking a joint home loan, keep this in mind when choosing a bank.
Fees and charges
When you take a home loan, there are some upfront charges that you will have to pay. Here are some of them:
Stamp duty & registration
Documentation fees etc
Together, these can amount to a lot of money. So when you choose a bank for your home loan, see if once of your shortlisted banks/HFCs is offering a waiver on any of these fees. This could be a good chance for your to save some money.
Branches and ease of operation
These days all banks are operating on a centralised system. This means you can open and account anywhere in the country and operate from anywhere else. But it would be useful if your bank has multiple branches across the country or city. Since a home loan stretches over 15-20 years, there may be times when you have to visit a branch in person.
It is also extremely useful if your bank has a good web based banking portal. If you can operate your bank account online, you would not have to visit the branch for small but important tasks like:
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