Since home loan is mostly sought once in a lifetime and the amount involved is usually huge, it is needless to say that utmost care should be taken to select the right loan. The loan seeker must do a thorough assessment of the financial needs in the near, medium and long term future of his/her family along with aspects like job security, chances of income going up or down in the future. Doing a thorough assessment of these factors is important because the EMIs can go up if there is worsening in any of the above aspects. For example, banks can increase the markup rate (Banks now lend on MCLR plus a markup rate) for a customer anytime during the tenure of repayment if there is deterioration in the credit risk profile of the customer, causing the EMI to go up.
We take a look at all the aspects of a home loan in detail:
While credit score is the only way a bank or NBFC will be able to decide whether the loan seeker is to be disbursed the loan or not, there is huge variety of factors that go in to constitute the credit score that includes how timely is the person in paying electricity bills or school fees of his/her kids. The credit score of people is usually any value between 350-900 but any score of 700+ is considered good. The factors that determine the credit score of a person would become even more diverse now with the use of big data algorithms and applications that will churn huge amounts of data to determine hidden patterns, correlations and related insights of the people. The whole idea behind all this is to reward a disciplined person with lower interest rates. There are many banks that are already offering up to 10 basis points lower interest rates to people with a good credit score.
A person wishing to buy a house in the near future can opt for Pre-approved Home Loan from a bank which will save him time when the actual house is selected and the payment is to be made but there are certain limitations that the person must be aware of. Under the pre-approval system, loans are offered on floating rate of interest and not on fixed rate. Moreover, the loan has to be availed within 6 months of getting the preapproval. It must be borne in mind that the pre-approval is in-principle approval but no guarantee. A person who has pre-approval may still be denied actual disbursement of the loan if the property selected is has regulatory or other issues.
While pre payment of a home loan is an option, there are several factors that must be considered before a loan is fore-closed. One such factor to ponder over is that since interest component in the EMI is much higher in the initial stages of repayment period, one may not be not be in a very advantageous position to fore-close a loan after initial years of availing the loan. Another point to consider is that since home loan attracts the lowest intertest rate among all other types of loans, it may make sense in certain cases to invest wisely and get higher return on that investment than the interest saved by fore-closing a home loan. Combine this with the fact that a person is entitled to get tax exemption of up to Rs. 1.50 lakh per fiscal on repayment of principal amount of housing loan, then the overall picture might change dramatically. On full fore-closure of housing loan, these exemptions will no longer be available. On part prepayments, the tax benefits will also the smaller.
Since April 1, 2016, all loans are linked to MCLR (Marginal Cost of Funds Based Lending Rate) of banks. A person who is trying to calculate his/her EMI before going to a bank on presumptive loan amount and interest rate must take into account Mark-up Rate that the banks charge over and above the MCLR. The EMI is calculated on the basis of loan amount, interest rate and the tenure for which the loan has been availed. While the interest rate cannot be altered by the home buyer, the tenure can be adjusted to make the EMI more suitable but the longer the repayment period, the higher will be your overall interest outgo. Debt over a longer period of time come with a higher interest burden that needs to be taken care of.
The author is the Director Sales-Mortgages, Square Capital.