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Last Updated Saturday April 21 2018 02:00 AM IST

Home loans: How to make the most of it

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Home loans: How to make the most of it

Falling interest rates, attractive offers from lenders, great schemes by governments and affordable projects from builders — it’s a buyers’ market if you are shopping for a home.

Stiff competition among banks to entice the retail customer who is the least risky among borrowers means the best time for the consumer. If you are looking to buy that house you have been longing for long, financing may become easier and cheaper than ever before as offers are galore on mortgage loans.

Look at these:

• State Bank of India has cut housing loan rate to 8.30% from 8.35%

• Dena Bank will fund your home at 8.25%

• Axis Bank offers to return 1% of your EMI

• ICICI Bank is promising a 1% cash back on EMIs if the loan is up to Rs 1 crore

It’s a buyers’ market

The huge subsidy schemes that governments have announced for first-time home-buyers have increased competition among banks. The Reserve Bank of India’s bias towards lower interest rates and attractive offers from builders in a slowing real estate market have turned it further in the buyer’s favor.

It is great if you get government subsidy. But even if you don’t, you could still afford your dream home now than ever before.

Rates are falling. Find out the cheapest loan that suits your requirement. Here are the rates levied by some of the top lenders:

Not just interest cost

Interest payment is not the only cost that you are going to incur on the loan. Most banks will also ask you to shell out a little bit extra towards processing fee.

Processing fee varies from bank to bank. For some banks it is a fixed amount and for others, a certain percentage of the loan amount. This cost — up to 1% of the loan for some banks — may not be a problem for many, but for those who are on a tight budget, it is certainly a cause of concern. On top of that, you need to pay 18% on the processing fee as goods and services tax.

There are times when some banks waive this fee for a short duration. SBI has suspended service fee until December 31. IDBI Bank and Punjab National Bank currently don’t levy it.

Banks and their service fee:

• ICICI Bank: 0.5% to 1% of the loan amount or Rs 1,500, whichever is higher

• HDFC Ltd: 0.5% or Rs 10,000, whichever is higher

• SBI: Nil until December 31

• Axis Bank: 1%, with the minimum at Rs 10,000

• LIC Housing: Rs 10,000 for loan up to Rs 50 lakh; Rs 15,000 for larger loans

• IDBI Bank: Nil

• PNB: Nil

Remember these before taking a loan

Understand your requirements. Don’t emulate a friend or neighbor who had built a palatial house, unless you can afford it.

Have a clear idea of how much loan you can afford. If you fail to service the loan, your dream home would soon become someone else’s.

Do some calculations before you venture out, like on how much loan you need, for how many years and what can be the EMI that won’t stretch you too much.

How much can I take?

The most basic questions of anyone looking for a home loan are: how much loan I could take and what would be the EMI?

These are easy to find out.

There are online loan calculators available on the websites of lenders, loan aggregators and many others. If you fill in the details, these will tell you the amount you are eligible for and what will be the monthly outgo.

But it isn’t advisable to take the maximum loan that you are eligible for. Find out the EMI and weigh it against your ability to pay. Make a decision and plan the house accordingly.

Ideally, keep the EMI to less than 40% of your monthly income. Stretching it beyond that could unsettle your finances. Don’t try to pay an EMI of Rs 20,000 when the salary is Rs 50,000.

In fact, it is more prudent to keep the EMI at 20%-25% of the income. That means, a person with a salary of Rs 50,000 per month should keep the EMI at Rs 10,000 to Rs 12,500. Remember, reducing the loan amount by Rs 1 lakh will shrink the EMI by about Rs 900.

Floating or fixed

Another key question. In today’s environment where the interest rate is falling, no need for confusion. Go for the floating-rate loan.

Floating rate: The rate of interest you pay will change when the bank alters its lending rate.

Fixed rate: The rate will be fixed.

Shouldn’t the fixed rate be better?

There is a catch.

Sure, it’s a fixed-rate loan, but banks don’t keep the rate fixed for the entire duration of the loan, which is quite long in case of home loans. They alter it every two-three years — in that sense, it isn’t really fixed. Also, you may have to pay a 1-2 percentage point higher interest rate, and penalty in case you want to close the loan before its term runs out.

Advantage of floating rate: Interest rate is moving lower now. You will get the benefit of this downward rate bias. When the rate reduces, you can either opt for a lower EMI, or a shorter duration by keeping the monthly payment unchanged. There is usually no penalty for prepaying floating-rate loans.

What if the rate goes up? Rates are on a downtrend now, but the risk of those going up is always there. If such a scenario arises in future, your cost will increase. But by then your salary would have increased as well, allowing you to pay a higher EMI. If you can’t afford the higher payment, ask the bank to extend the tenure of the loan.

MCLR: Your rate won’t reduce that fast

MCLR stands for margin cost-based lending rate. This system is applied on floating rate loans since April 2016. The effect of this is that an existing customer will not immediately get the benefit of changes in the bank’s lending rate. The rate that the customer pays will change only after the reset period, which can be six months or one year. While a fresh customer will get loan at the new rate, the existing borrower will have to wait for the reset period to complete.

Remember: Since rates are on a downtrend now, it is wiser to choose the lender that has the shortest reset period — if the bank reduces its rate, you will get the benefit faster. But when the rate is on an uptrend, it is better to go for the bank that has the longest reset period.

What can be the loan tenure?

The maximum term is 30 years. One advantage of the home loan over other loans is the longer tenure to pay it back.

Extending the tenure will reduce the EMI amount. But that may not be a good strategy.

Longer the tenure, the more the total (principal plus interest) you pay. The interest component will go up and can go beyond the principal. You may have to continue paying EMI even after you retire. Is that a good proposition?

Keep the tenure of the loan to the lowest based on the EMI that you can comfortably pay. Making it too short would balloon the EMI amount and that isn’t a good idea either. Keeping the term to 15 to 20 years can be considered prudent.

Compare the EMIs

Instead of looking for the loan with the least interest rate, it is more sensible to opt for the one that has the lowest EMI with the same tenure.

So, don’t stop the search once you found the bank that offers loan at the lowest rate. Find out the EMI you need to pay and compare it with other banks. This varies from bank to bank and you may save a handsome amount by choosing the right one, which may not be from the lender that charges the lowest rate.

Never ignore the difference in EMI amounts. For instance, the EMI for a Rs 1 lakh loan from HDFC is Rs 976 for 15 years, compared with Rs 1,075 for LIC Housing Finance. The difference here is about Rs 1,000 on a Rs 10 lakh loan.

Here is a list of lenders and their EMI in rupees per lakh:

Bank                     15 years        20 years

SBI                         973.05         855.20

ICICI Bank                975.97         858.30

LIC Housing               1,075             976

HDFC                         976             858

Dena Bank                   971             853

(Source: Bank websites)

Get these answers first

Before you make a decision on having a house, ask some questions to yourself and find out the answers.

Is the house a necessity? Should it be acquired now? Do I have the margin money (since banks usually fund only about 80% of the cost) and can I afford the EMI? Am I taking the loan only to get tax benefits? Is it a good investment if I am not planning to stay there now?

If you don’t plan to stay there now, better not to buy it. Building materials, technology and even your requirements may change before you actually occupy it. Homes, especially flats, are not a great investment idea now, say experts. If it is to rent out, find out whether it is worth going for.

Should I really need to buy a house?

I got an accommodation close to the office at an affordable rent and with the flexibility to shift to another place whenever I wish; I am wary of taking the burden of a home loan; I am comfortable with the idea of old-age homes for my retirement life.

Many among the new-gen think this way. For them, buying a house is a sin. These, of course, are issues to ponder over.

Is insurance a must?

The bank is ready to give you the loan, but insists that you take an insurance policy to cover the amount. You may face such a situation while shopping for a loan, but RBI policies say banks should not link the two. They cannot deny you the loan just because you aren’t ready to accept the insurance offer.

But having an insurance cover for the loan amount is advisable. If something happens to the borrower, the loan repayment liability will fall on his family and cause extreme difficulty if there isn’t any other earning member. So, insurance is a necessity, but choose it wisely.

Home loan protection plan

This plan protects the loan amount. If the borrower dies in an accident, suffers from terminal illness or becomes handicapped, the sum assured will be paid. Premium is usually 0.8%-1% of the sum assured. That means, for a Rs 10 lakh loan, it will be around Rs 8,000 to Rs 10,000.

The premium here is quite high, and the bank takes the premium when it issues the loan. The premium amount will be added to your loan liability, increasing the EMI. That means, you will pay interest on the premium as well through the loan period.

Moreover, if you prepay the loan or transfer it to another bank, the protection will cease, and you won’t get anything out of the premium you paid. Also, there is a possibility of the bank not transferring the premium to the insurer that is offering the facility. That could cause a lot of hardships for the family.

Go for term plan

A better option is an online term plan. You could get a large insurance cover for a low amount. A person aged 30-35 years could get a Rs 50 lakh cover for 20 years at a premium of Rs 5,000-7,000 a year. Under the home protection plan, it could cost Rs 21,000.

Your income to decide EMI

Step-up and step-down loans offer you the flexibility to increase or decrease EMIs according to our convenience.

Step-up loans are for those, usually younger, borrowers who can’t afford high EMIs now, but their repayment capacity is set to increase in future.

Under this plan, the EMI amount will be less in the initial period and will go up as the borrower’s income increases. If the amount goes up by 10-15% every year, you could close the loan quite quickly. If you close the loan early, the interest component will reduce, too.

The step-down plan works the opposite way. It suits those who can easily afford a high EMI now, but may find it tough later — like after retirement. Here, you could start paying a high EMI which would taper down as years pass. If the borrower has extra money, he could prepay the loan.

Who is the most popular?

Here is a list of the top lenders based on their market share in home loans:

SBI                          25.5%

HDFC                       24.13%

LIC Housing               15.8%

ICICI Bank                 13.1%

PNB Housing               6.23%

IDBI                          4.67%

Axis Bank                   4.22%

Choose the best

Take a look at these loan schemes from leading lenders:

Axis Bank – Shubh Arambh

• Pays back a portion of the EMI you paid in the fourth, eighth and twelfth year of the loan. The offer is available on loans up to Rs 30 lakh. Interest rate is 8.35%.

• If you borrow Rs 30 lakh for 20 years, your benefit will be Rs 3.09 lakh. But if you miss an EMI, you will be out of the scheme

ICICI Bank cash back

• Will return 1% on 15- to 30-year loans. NRIs are also eligible

• Offer is available also on loans that are transferred from other lenders

• The cash back can be accounted against loan repayment or received in a savings bank account. On a Rs 50 lakh loan, the benefit will be Rs 5.87 lakh

• The first cash back will be in the 36th month. From then, in every 12 months

SBI – various schemes

SBI, which offers loans at 8.3%, has several schemes such as SBI regular, SBI balance transfer, NRI Home loan and Flexipay home loan. There is no processing fee till December 31.

The opinions expressed here do not reflect those of Malayala Manorama. Legal action under the IT Act will be taken against those making derogatory and obscene statements.

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