Choosing the right home loan lender

Even seemingly minor differences in interest rates can translate into big sums for the borrower.Check if flexibility in loan terms involves additional cost, and whether it is reasonable.



Buying a house is not easy. First you have to find a house; then you have to see if you can afford it and, if you can, you have to find the right loan agency.

Borrowers today are often spoilt for choice. So here are some important hints for lender-selection.

Fine print

Borrowers should read the draft home loan agreement including the fine print carefully, and get doubts clarified before signing on the dotted line. After all, a loan which finances the single biggest investment for many deserves intensive due diligence.

Interest rate

Even seemingly minor differences in interest rates can translate into big sums for the borrower. A loan of Rs 30 lakh for 20 years at 10.5 per cent annually would entail an equated monthly instalment (EMI) of Rs 29,951.

Change the rate to 11 per cent and the monthly instalment increases by more than Rs 1,000 to Rs 30,966. Over the tenure of the loan, the excess amount paid by the borrower would be a substantial Rs 2, 43,421. It follows that borrowers should scout for lenders offering competitive rates of interest.

Fixed rate loans invariably are costlier than floating rate ones. This is because of the certainty fixed rate loans give in terms of stable monthly outgo. Borrowers should consider whether or not they are willing to pay a premium for the benefit of a stable EMI. Many fixed rate loans, these days, are fixed only for a certain period or subject to certain limits.

Borrowers should also check whether and when the fixed rate is liable to change. In floating rate loans, borrowers should ascertain how lenders compute the effective rate of interest and whether it is reasonable.

Banks these days use their base rates (which vary with time) as the benchmark and add a mark-up to arrive at the effective rate. HFCs generally have their own benchmark rates (which change at regular intervals) and apply a spread (a pre-determined difference) to arrive at the effective rate. Borrowers should also check whether the lender offers the option to switch between fixed rate and floating rate loans and vice-versa. Flexibility in this regard and competitive charges would add to the lender's score.

Processing fees

Besides the rate of interest, borrowers should also consider the processing fees levied by lenders.

Processing fees could vary between 0.5 to 1 per cent of the loan value, or could be a flat amount. In most cases, processing fees are collected by the lender upfront at the time of loan application and are non-refundable.

The lower the processing fees, the better it is for the borrower. Some lenders also offer value-added services such as helping borrowers in their home-search process. Borrowers should check whether charges for such services are reasonable.

Loan-to-value

Lenders restrict the home loan amount to a certain percentage of the property value. For instance, in the case of a property costing Rs 40 lakh, if the loan-to-value is 80 per cent, the bank or HFC will lend up to Rs 32 lakh.

The balance amount (Rs 8 lakh) will have to be paid by the buyer to the builder. In many cases, lenders require the borrowers to pay the balance amount as a down-payment to the builder before the home loan is sanctioned.

Lenders who offer a higher loan-to-value may be preferable, since this will reduce the amount borrowers need to arrange.

Reset period

In case of floating rate loans, borrowers should check the lender's reset period. This refers to the periodicity at which lenders review interest rates and change them, if necessary. These days, many lenders reset rates on a quarterly basis.

A longer reset period works to the advantage of borrowers when interest rates are on the rise.

However, on the flipside, when rates fall, the borrower will have to wait longer before the benefit is passed on by the lender. In this context, borrowers should also check about the track record of lenders in passing on benefits of reduced rates.

Besides, they should enquire whether lenders treat their existing and new customers on par. It is often seen that many lenders, to attract new customers offer them better terms than to existing borrowers.

Lenders who do not discriminate would score higher.

Borrowers should also check how lenders calculate interest on the loans - daily, monthly or annual reducing balance basis. The shorter this basis, the better it is for the borrower.

Prepayment penalties

Borrowers would do well to check with lenders their policy on prepayment penalties, which could be around 2 to 3 per cent of the amount being prepaid. With a lot of nudging from the regulators, many HFCs and banks have done away with prepayment charges, at least on floating rate loans. Lenders who waive off prepayment charges would stand on a better footing than those who don't.

Repayment options

Lenders who offer flexibility in repayment options depending on borrower requirements would score brownie points.

For instance, features such as allowing EMI to commence even before construction is completed, and structuring EMI such that they are lower in the initial period and increase in the future with a rise in the borrower's income, could suit specific needs of home buyers.

However, borrowers should check whether the flexibility involves any additional cost, and whether it is reasonable.

Penalty on default

In the event of a borrower defaulting on payment on the home loan, the consequences could be heavy. Penal interest itself could range from 18 per cent to 24 per cent per annum. Lenders with less stringent terms and conditions relating to default, and a lower penal rate of interest would score better.

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