1. Improve your Credit score
My friend was planning to avail a home loan and has been making enquiries at all banks regarding home loan, its interest rates, and terms & conditions. Most banks are quite competitive with their interest rates. If Karnataka Bank had offered a loan at 8.95%, HDFC & Axis Bank offered at 8.75%. Most other bank’s interest rate was around the same figure (in March 2023). But what happened next was interesting.
HDFC offered him a discounted rate at 8.45%. Why? The answer lies in the credit score. He has been judicious with his credit card usage and since he had no other loans to pay, his credit score was upwards of 800. HDFC had an offer for Home Loan takers with credit score above 800. They could avail home loan at 8.45%. This is a massive discount. For instance, for his EMI of 40L (lakh), a 20 Year loan would be Rs. 36,000 per month at 8.95%. While it would be Rs. 34,500 at 8.45% (approximately). On the outset it looks like a small difference. But hey! Who would say no if you can get Rs. 1,500 a month for free? Afterall, it is a whopping Rs. 3.5L of savings over the tenure.
We know a credit score above 750 is very good. But what if you can get an added advantage if your credit score is above 800? HDFC’s offer was valid only for applicants with Credit Score of 800 and above.
Buying a home is a planned event.
You would probably plan it for many years. If you know that you would probably be availing a home loan soon, it would be wise to check your credit score and work towards improving it.
2. Calculating in hand cash needed
Most banks offer 70-90% of the cost for buying/ constructing a house. This depends on the market mood. If the mood around real estate is hot, or if the banks are searching for ways to give out as many loans as possible, they can offer up to 90% of the total value. While, if the housing boom is on the verge of volatility, banks would be a little conscious and might offer only up to 70%. You can always call your bank representatives and check how much the bank is ready to give.
Apart from this, we tend to leave out some important expenses that will come while you buy a property. Like in case of my friend, he had to pay around Rs. 25,000 of lawyer expenses, about Rs. 5,000 of processing fees, registration charges and stamp duty charges which run into lakhs (~ Rs. 1.5L in his case). Since he was buying a land, he had to pay about Rs. 50,000 for compound wall construction. He also had to pay 15,000 as security deposit and some amount as society charges.
These are some external costs that we need to be able to pay while buying a house and not keeping money for this would prove detrimental as you would have only 45-60 days to close everything from the date of registration. Do not forget to consider the cost for interior designs.
3. EMI affordability
Banks consider your EMI eligibility (in all loans combined) at 50% of your monthly in hand income.
If your salary is 1L per month, banks believe that you can pay up to 50k in EMIs. Mind you, this includes all other loan EMIs as well. This is a thumb rule they follow. Hence, if you already have a loan, you can consider closing it first and then availing a home loan as freed up money from other EMIs can fetch you higher affordability. Also, if you are planning to take some other loan in future, say a car loan or a loan for wedding, you need to ensure that all EMIs would fall under your budget and can be repaid easily every month. You can check your repayment affordability online and plan your loans. Not only it will help you to avoid any defaults in future, but also to ensure that you do not end up with lower loan amount and thus settle for a smaller home.
4. Choosing between fixed rate of interest vs floating
When my parents took home loan back in 2004-05, the fixed rate was at ~8%. I don’t know what the floating rate was back then (around 7%). Since then, market has seen several ups and downs. Interest rates had gone very high in 2008s, very low once in 2009 and then went up again 2011s and had stayed relatively up until late 2015. So, for my parents, opting for a fixed rate proved to be good.
However, we cannot predict the future. And it is a long duration of 20-30 years. If you ask me today, I would probably say that India is on a growth path, RBI is hell bent on keeping inflation low and in turn interest rates low as well. This should ideally translate to lowering of interest rates in future. That means, it could be ideal to take a floating rate as at least in the near term, if everything goes well, there is a little chance of rate hikes.
But you need to be smart while selecting your option. If the rates are already low and the difference between floating and fixed rate is not much, it is better to opt for a fixed rate.
5. Home Loan insurance
Indians are traditionally very optimistic. We tend to believe that nothing will happen to us. In fact, we tend to avoid such thoughts in the first place. However, when you take a home loan, it is a long-term commitment. You cannot afford to miss any payments for the next 20-30 years. God forbid, if something happens to you, the burden of repaying the loan falls on to your partner, children, or old parents. Unfortunately, loans do not wait for your family to come out of the shock, find a source of income and then pay EMIs.
Your next EMI is due next month.
When my father left us, we still had to pay about 2L of home loan. Unfortunately, he did not have any term insurance, nor he had taken a home loan insurance. My mother is a home maker and I had just come out of college. I was yet to receive my offer letter. Fortunately, I had a few friends around me to support my finances and some cash to depend on. Honestly, I so wished he had some insurance that could help us tide the situation. It then took me 2 years to repay the loan and I had to pay it from my little salary at the age of 27.
6. Age factor
Age is one of the most underrated factors to be eligible to take a home loan. Home loans are a long-term commitment. If you are aged 50 when you take a loan, bank knows one thing with certainty – you do not have much working age left in you. You are highly likely to stop working soon or at 60. It is just a matter of time that your income is going to stop. What does the bank do? They just give you a loan with shorter duration and increase your interest rate. They would not want to take much risk on you.
My friend at 30 was eligible for 20 years of loan. Well, as much as it can be negotiated, the banks are definitely reluctant to go beyond the age of 50. So, if you are one like me who is planning to buy a home later in life, be ready to take a short duration loan. This will imply higher down payment and higher EMIs.
These, among a few others are the Top factors to consider while availing a Home Loan.
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