How to Buy your Dream Home: Home Loans in India

So have you recently tried to get a home loan? If you have, I am sure you went through a lot of confusion before you could finally get a fix on which one to take. You would have faced several problems. Where to take a loan? Which bank provides the cheapest loan? Will you get the required amount on the loan? Is it wise to take loans on the variable or fixed interest rates because of speculation on bottoming out of interest rates? Unless you are a financial genius, choosing your home loan lender will be tough.
First, you must realize that the lender cannot be decided on interest rates alone.

Here are a few guidelines to help you take a better decision:

a)Housing finance companies (HFCs) and banks calculate eligibility differently. For instance, some lenders are very comfortable with self-employed people and their loan eligibility calculations reflect that. On the other hand, some lenders have special schemes for people drawing salaries above a certain value. In many cases, the amount the lender is willing to give will override interest and other considerations.
b)Choose a lender who has pre-approved the property you are planning to buy. This ensures relatively easier disbursement formalities.
c)In case of property that is being resold, it is advisable to show the draft documentation of the property to the potential lender before confirming your choice. Some lenders may have some specific requirements which your seller may not be in a position to fulfill.
d)Some lenders do not fund property under construction. Some banks are uncomfortable making part payments on self-constructed property.
e)Always check whether the lender is familiar with home loan procedures. Many banks which advertise for cheap home loans are often not conversant with the procedures involved.
This problem is especially glaring in the case of some nationalized banks. For these banks, home loans is only one of the many activities that they undertake. Whilst the bank itself will have a lot of experts who know this product inside out, this expertise is rarely available at the local branch level. This leads to avoidable delays, especially at the disbursement stage.
Now let us turn to the cost factors:
f)Never take a loan where the interest rate is stated on annual rest basis. All leading home lenders now calculate interest on a monthly / daily-reducing basis. There is no difference between monthly rest basis and daily rest basis of interest calculation.
g)You should know how to calculate the equated monthly installment (EMI) for a given interest rate to ensure that the stated interest rate is indeed being applied. EMI refers to the money you pay to your lender every month by way of repayment of the loan. A part of this EMI goes towards repaying your outstanding principal amount while the remaining amount goes towards payment of interest on that amount. An easy way to calculate the EMI is to use the function (Fx) formula in Microsoft Excel (see 'Easy EMI In Excel').
h)Also, always take into account the upfront fee. This fee could be called administration fee, sanction fee, legal fee, technical fee, file fee or commitment fee. Some banks may levy documentation or consultation charges as well. This adds to your total effective cost of the loan. (see ' How upfront fees add to Interest Cost'.)
i)Most lenders provide loans up to 90% of the cost of the property but the definition of cost of the property varies from lender to lender. While agreement value, stamp duty and the registration charges are standard inclusions in the cost of the property, some lenders also include the society charges and deposits with statutory authorities in the cost.
Please note that all large lenders work their EMIs on a monthly/daily-reducing basis. It is advisable not to take any loan where the interest rate is calculated on annual rest basis. In any case, currently, only a very small number of lenders offer rates on an annual rest basis. Second, most loans are being taken on a variable interest rate basis. This means that the interest rate applicable to your loan will go up or down depending upon the changes in a reference rate, which is usually the retail rate of that bank.
j)Another thing you need to keep in mind is the prepayment charges charged by the lender. Most borrowers end up partially or fully prepaying the home loan and hence, a prepayment charge adds to your total cost. Other things remaining equal, you must choose the lender who does not charge a prepayment charge. In an environment of intense competition, lots of lenders offer incentives to attract the consumer.
Having understood the nitty-gritty of home finance, let us now take a look at the variable and fixed rate debate. Most home loan consumers taking new loans today are signing a 'variable rate' loan. In theory; the operation of a variable interest rate loan seems simple. If the interest rate goes up, your interest rate goes up proportionately and vice versa.
However, in actual practice, the operation of the variable rate loan is not all that easy to understand.

Let us now take a look at some of the complexities involved in it:
1)Tracking the movement of the reference rate: The interest rate paid by the consumer during the tenure of the loan is based on the movement of the reference rate, which may be equal to or lower than the PLR (prime lending rate) of banks. For example, a bank's declared reference rate for a 15-year home loan may be 9.25% and the PLR may be 10.75% (reference rate is 1.50% below the PLR of the bank). Today, it is common for consumers to obtain better rates than the declared reference rates of the banks. It is important for the consumer to know that such lower negotiated rates can be linked appropriately to the reference rate so that there is no confusion when the reference rate changes. In the example given above if the consumer negotiates a rate of 9% from the bank, he must ensure that the reference rate mentioned in the document is 1.75% below the PLR. This would ensure that the applicable interest rate can be found automatically in case of movement in the PLR. So before you sign the documents for your home loan, always make sure that the reference rate is explicitly mentioned in the agreement.
2) Reset dates: Another complication is the date on which the variation in the reference rate is to be taken into account for passing it on to the consumer. As a consumer, you must remember that the reference rate could move in your favor or even against you. While, by and large, the home loan industry has high transparency levels, some banks have fallen short of the standards outlined above. Some banks have a vague variation clause, which talks about the rate being variable without even specifying the reference rate, let alone talk about the variation mechanism or reset dates. So what can home loan consumers do to safeguard their interest? First, they should read the sanction letter/loan agreement before they sign it. As discussed above, they must also read the variation mechanism and ensure that It is transparent. In view of the soft interest rate expectations, I would recommend that the consumers should sign up a variable rate loan so that they can benefit from any future reduction in interest rates. However, as the saying goes, eternal vigilance is the price of freedom. So you must always keep track of what is happening in the home loan market so that you can switch to fixed rate loans if it seems as though the interest rates are bound to increase. Wishing you luck on your home loan- shopping venture!