Tuesday, 27 February 2018

Guide to smart banking: Know your home loan: It’s your life’s biggest financial decision

It is perhaps the single most important purchase that anyone makes in their lifetime, and the realisation of a dream. But owning a home is also, in a sense, a basic necessity. Securing a home loan, therefore, is one of the most important personal finance decisions an individual will make.

Today, home loan tenures vary from 10 to 30 years depending on the borrower’s age and the loan amount. Home buyers now have the option of going in for home finance from banks and financial institutions that not only help them with the best finance options based on their individual eligibility but also help them in the entire process of owning a home.

With so many incentives, more and more Indians are confidently embarking on the journey that leads to their dream home. In view of this renewed vigour among consumers, various Housing Finance Companies (HFCs) have enhanced their customer support programmes to encourage prospective home buyers to avail themselves of home loans. However, it is imperative from the borrower’s perspective to understand various aspects of home loans.

The right loan for you

There are an assortment of home loan schemes available in the market. Since a home loan is probably the biggest financial commitment you’ll take on, you will need to take the time and read through the fine print carefully before signing on the dotted line. A few of the options that individuals can go in for are: loans for purchase of ready property; loans for purchase of under-construction property; loans for self-construction; loans for purchase of plot; loans for renovation/extension of existing property; loans against existing property, and so on.

Based on the income criteria, some borrowers may qualify for the Pradhan Mantri Awas Yojana (PMAY), where an individual can avail of a credit-linked subsidy of up to ₹2.67 lakh, depending on eligibility. Borrowers can avail of benefits under this scheme for purchase/construction/extension/ improvement of their home.

But while negotiating the paperwork maze, you will need to get acquainted with a few technical terms and a few operational details.

Some of the critical ones are:

Loan-to-value ratio
Loan-to-value defines the ratio of a loan to the value of an asset purchased. Earlier the LTV was 80 per cent of the value, but now it has been increased to 90 per cent of the home loan value for properties up to ₹30 lakh.

Equated Monthly Instalment
One of the most critical factors that influences a home loan decision from the borrower’s perspective is the EMI, which is the monthly outflow of money that will go towards repaying the home loan. As a golden rule, never let your EMI exceed 40-45 per cent of your net monthly income. Also, note that there are no prepayment charges or penalties levied if the customer prepays his/her home loan.

The interest rate
Home loans typically come with two types of interest rates — fixed and floating. Under a fixed-rate arrangement, the interest rate on your home loan remains constant for a period of 3-5 years (depending on the scheme offered by the financial institution) or, in certain cases, for the full tenure of the loan. Under a floating interest rate regime, the interest rate on your home loan varies depending on the movement of cost of funds for the financial institution.

The rate on your home loan may increase or decrease in line with the trend in the cost of funds. A fixed rate will typically be higher than a floating rate; you should opt for a fixed-rate regime with caution, keeping in mind your judgment of the interest rate scenario. There are also options to switch between a fixed and floating rate of interest at anytime during your tenure of your loan.

Creditscore
A borrower’s credit score is a critical consideration for a financial institution while making an assessment of the individual’s home loan eligibility and the interest rate component. The credit score of an individual defines the credit-worthiness of the person and is one of the key determining factors for the approval of a home loan. While a good credit score is one of the most critical factors for the lender to ascertain home loan eligibility, it is not the only criteria. Banks and financial institutions prefer to lend to borrowers with a credit score higher than 750 since it reflects stronger credit-worthiness.

Over the years, securing a home loan has become a hassle-free procedure, with financial institutions increasingly focussing on providing the best deal to the customer. Affordable housing has emerged as a priority focus area for the government as well, which has been steadily laying out supportive measures and building a conducive environment with new and innovative policy measures to enable home ownership. With the expanding industry landscape, both new and existing home buyers have ample home loan options to choose from. They should embrace it at the earliest to make their home ownership dream a reality.

The writer is Joint Managing Director and CEO, DHFL

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Source: The Hindu Businessline