Having difficulty selecting a home loan?

Having difficulty selecting a home loan?

If you are facing Having difficulty selecting a home loan? this article is for you. It is critical to understand the new RBI guidelines on home loan sanctions in order to choose the best home loan. From October 1, 2019, the Reserve Bank of India (RBI) has directed that all local area banks, small finance banks, and scheduled commercial banks (except regional rural banks) link home loans and all other retail loans to an external benchmark. As a result, the Reserve Bank of India’s repo rate is frequently used as the benchmark for all floating rate loans made by the majority of commercial banks. Apart from the repo rate set by the Reserve Bank of India, banks may also choose to link loans to the 3-month Treasury bill yield published by Financial Benchmarks India (FBIL), the 6-month Treasury bill yield published by FBIL, or any other benchmark rate published by FBIL.

By taking this step, policy rate changes will appear to be more transparent and timely. When the Repo rate was reduced, the benefits to customers were not always passed on as they had been under the MCLR regime (marginal cost-based lending rate). Banks’ interest rates also increased as a result of the RBA’s rate hike. This is fantastic news for home buyers who are unsure which loan is right for them!

Let us review a few fundamentals prior to applying for an Indian home loan.

Interest rates on home loans

Recognize mortgage interest rates: Which mortgage product is best for you?

Because the interest rate has an effect on your home loan decision, every prospective borrower considers the interest rate before applying for a home loan. Choosing the best interest rate on a home loan is critical when determining the best home loan. It’s beneficial to understand the two types of home loan interest rates: fixed and floating, as this will assist you in making an informed decision. You can choose between two types of interest rates.

  • Fixed Interest Rate: The advantage of a fixed interest rate is that it does not fluctuate in response to changes in market conditions. As a result, it is a popular choice during times of market distress. Additionally, when the financial market falls or rises, borrowers typically opt for a fixed interest rate. Finally, liabilities are subject to fixed interest rates, and loans are repaid in equal instalments over the loan term.
  • Flexible Interest Rate : According to its name, this type of interest rate fluctuates in response to changing economic conditions. The interest rate charged by a lender is determined by the lender’s base rate. As a result, when the base rate changes, interest rates change as well. Numerous banks and non-bank financial companies (NBFCs) have begun offering homebuyers floating interest rates that are lower than the market average. The Reserve Bank of India cut its repo rate to 4% in order to stimulate lending in the Indian economy and revitalise it as it slowly but steadily recovers from the economic loss caused by the Covid-19 pandemic. As a result of this development, homebuyers are being treated to a surprisingly low interest rate on floating rate home loans.

Along with the principal and interest on the loan balance, an Equated Monthly Installment (EMI) is also due each month. EMI rates are typically lower for loans with a longer term, such as 30 years or more. It helps to increase your chances of obtaining a home loan if you are aware of the amount of your EMI.

There is some debate over how home loan EMIs are calculated. Online EMI calculators assist in calculating monthly home loan instalments via an intuitive interface. Along with calculating the EMI, the calculator provides an accurate estimate of the monthly payment on your housing loan. This is a useful tool for financial planning, as it enables you to determine which home loan is the best fit for your circumstances.

To calculate the EMI online, the following information is required:

  • Enter the loan amount you desire.
  • The loan term (in years) specifies the duration of the loan. The loan’s eligibility is enhanced by the loan’s term.
  • Finally, the interest rate must be entered ( percent per annum).

According to the new RBI guidelines, banks must reset home loan interest rates at least once every three months based on an external benchmark. This means that new benchmark rates must be communicated within three months of the external benchmark’s change.

When choosing a home loan, the following factors affect your interest rate:

  • The MCLR (Marginal Cost of Funds-based Lending Rate) is the lowest rate a bank can charge. Your interest rate will fluctuate in lockstep with the MCLR rate.
  • The type of interest – fixed or floating – has an effect on EMIs and interest rates.
  • Loan-to-value ratio (LTV): A loan’s percentage of the property’s value.
  • The CIBIL Score is a comprehensive assessment of your repayment history, financial behaviour, and creditworthiness. When a consumer’s credit score is low, lenders charge a higher interest rate. Credit scores increase when interest rates are low and credit risk is low. Lenders can get a sense of a borrower’s financial history using CIBIL scores.
  • Your interest rate is determined by the property’s location. Because properties located in developed and well-connected areas have a lower resale value, interest rates are also lower.
  • A borrower with a consistent income is considered a low-risk borrower, while one with an unstable income is considered a high-risk borrower. Thus, salaried professionals’ interest rates are lower.
  • The term of a loan has an effect on the amount of money you repay each month. As a result, it should be taken into account when deciding on a home loan. Loan terms that are shorter enable you to repay your home loan more quickly. However, shorter loan terms typically result in higher EMIs. Additionally, shorter loan terms mean that borrowers must make larger repayments. You can repay your loan over a longer period of time because the EMI is reduced when the loan tenure is extended. The longer the tenure, the higher the interest cost, as interest is paid on a daily basis during that time period. Always conduct a financial analysis prior to selecting a loan term.
  • Female borrowers in India typically receive the lowest interest rates when co-borrowing. As a result, Indian homebuyers frequently co-borrow with their spouses in order to take advantage of the lowest interest rates.
  • The more money you pay as a down payment, the more likely you are to be approved. Due to the large amount, you also end up with a smaller loan, which results in lower EMI’s and interest payments. As a result of the increased down payment, you will have to give up some of your emergency funds and savings.

Important points to consider when deciding on the best home loan

  • Conduct extensive research on banks that offer the most affordable home loans.
  • Before applying for a home loan with a particular bank, carefully review the bank’s eligibility criteria.
  • Keep photographs, identification proofs, proofs of address, and proofs of employment, as well as other documents, on hand at all times.
  • Never provide forged documents, as this will land you in hot water.
  • Carry the original documents with you when you meet with the bank representative in person.
  • Being approved for a home loan does not always imply that you can borrow a larger sum.
  • Utilize the opportunity to the fullest extent possible, as interest rates are negotiable.
  • Bear in mind that there is a separate fee for processing the loan, conducting a reality check, estimating the site, and performing other administrative tasks.
  • Follow the valuation and verification process from start to finish.
  • Before signing any loan documents, carefully read them.

Conclusion

Borrowers in India are permitted to take out as many home loans as they wish. Although obtaining a home loan in India is a lengthy and complicated process, no law prohibits borrowers from servicing more than one home loan at a time. You must, however, assess your repayment capacity. This is the sole criterion for obtaining multiple home loans, as lenders sanction loans based on the borrower’s repayment capacity. Additionally, lenders consider the borrower’s income, age, qualifications, savings, and work experience.

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