When you think ‘home loan’, we’re sure you think about mountains of paperwork, masked interest charges, and a bunch of regulations that don’t make sense to you. From repayment periods to rental yields and reducing interest to subvention clauses, buying a home can be more daunting than exciting when you’re looking to get a home loan. So we thought we’d decode the nuances of getting a home loan, so you can refer to this Home Loan 101, the next time you start planning to buy your dream home.
A lot of these insights were part of our ‘Home Loans Masterclass’ by Aditya Mishra, Founder, AMORQA.
“Ok, so where do I start?”
Beginning your home loan journey can feel overwhelming with multiple banks offering different schemes. Depending on whether you’re salaried or not, banks offer a wide range of interest rates along with some complementary benefits like top-up loans or insurance plans. So first evaluate which plan suits you best based on your current needs and stage of life. Whatever you choose, Aditya recommends getting a floating interest plan instead of a fixed one, as those are usually lower.
The next thing you’ll need to do is check your home loan eligibility based on your credit score. Having a good credit score naturally indicates that you are a responsible borrower and you pay your EMIs back in time. If you think your lack of credit history might be a problem, we suggest getting a credit card and building your credit score with timely payments.
“What are some home loan clauses I should look out for?”
Whether you’re getting an asset-backed home loan that you can sell to recover your EMIs or you’re just getting a loan because you don’t want to self-fund it with your entire corpus but still wish to make an early purchase for a better life, here few things to keep in mind about how you structure and approach your loan:
- Ideally, you’d have to fund 20% of the home cost with your corpus upfront, while the rest is paid by the bank. Most builders take 10% of the amount while the house is being built and another 10% nearing possession.
- Try and structure your down payment in a way that helps you build your corpus- You can pay 5% at the start and the pending 15% closer to possession during which your corpus increases.
- For ready-to-move-in properties, the entire amount gets disbursed in one go. For houses that are under-construction, only 20-30% gets disbursed in the first year, so the EMI’s are smaller and income is slightly higher until you get possession.
- Remember that if you’re in a subvention with your bank and builder, you probably can’t switch later, so you need to take note of the interest rate post-subvention. (For the uninitiated, subvention is when the home buyer, banker, and the developer enter into a tripartite agreement where the buyer pays 5-20 percent of the money upfront. The rest is paid by the bank.)
- There are two approaches to taking a home loan. The first is where you maximize the size of the loan in the beginning and then switch to a low-cost lender. The second is to start with a low-cost lender like a PSU so that you can minimize interest.
- If you get an overdraft loan then it adjusts the principal and interest and you can deposit excess cash as well as withdraw it when you need it.
- You’re going to have to pay a registration fee of 5% based on which city you’re buying a home in.
- Remember- every builder would want to sell their inventory and every bank will look to increase their business, so you need to make decisions that are well-thought-out and trust your gut if you sense trouble.
“How do I make sense of my interest and EMIs?”
When you apply for a home loan, chances are that your lender will also apply several additional fees such as foreclosure charges, prepayment charges, EMI bounce penalties, processing fees, etc. So before you go ahead with the loan, you’d have to thoroughly go through the agreement to understand everything you’re being charged for. In terms of the interest rate, here’s a quick video on how you can reduce interest on your home loan-
As for EMIs, Aditya says that it ideally shouldn’t exceed 30-40% of your monthly income. Some properties could come up to 65% of your income and you’ll need to evaluate the stage of life you’re at, your other priorities, and how much you’d be willing to stretch your finances. If you’re thinking of repaying your loan early, remember that it should be based on interest vs earning opportunity and of course excess cash availability.
We hope this blog acts as a guide if you’re buying a home for the first time. If you have more questions, shoot them to firstname.lastname@example.org and we’ll try and answer your doubts.