Understanding the home loan matrix
We explain the various components of home loans that you should be aware of before you apply for one.
For a first time home buyer, taking a home loan is a slightly scary proposition. You fear traversing a mountain of paperwork, grappling with jargon and staring at mindboggling numbers. But it’s not as complex as it first seems.
The following guide helps you understand the various parts of the home loan:
* The principal. This is the amount of loan that you borrow from the housing finance company. Normally, you would try to borrow an amount that is as close to the house price as possible. However, housing finance companies do not lend more than 80% to 90% of the property value. The remainder 20% to 10% must be supplied from your own resources.
* The interest. The home loan interest rate in India determines the affordability of the loan. Post-demonetisation, the home loan interest rates in India hover between 8.5% to about 11% across all banks and financial institutions. The lower the interest rate, the lower is the EMI and the lower the overall repayment amount paid to the lending institution. Thus, a lower interest rate makes the loan more affordable. You can choose between fixed and floating rate of interest, depending on whichever makes financial sense for you. Most people opt for a floating rate of interest to avail of reduced interest when the market rates fall. But a fixed rate of interest helps keep the EMIs steady over the tenure of the loan.
* The tenure. This is the period of time over which the home loan is spread. It is measured in terms of months or number of EMIs. For example, a home loan taken for 10 years will be counted across either 120 months or 120 EMIs. You can opt for a longer tenure to get a reduced EMI. Mathematically, a shorter tenure will result in higher EMI pay-outs.
* The documentation. You must start by applying for the home loan either online or via a physical application at the lending institution’s office. Applying online saves a lot of time and also money for you. You can fill out the application form and upload your self-attested documents as directed on the lender’s web portal. You would need to furnish proofs of your age, education, income, permanent residence, identification (PAN/Aadhaar/Passport), registered sale agreement between the seller and you, and any other documents that the lender asks for. You can find a list of documents on the housing finance company’s web portal.
* The processing fees and other charges. The lending institution charges you for processing your application, conducting legal evaluation of the application and the property, and physical verification of your current residential and office address. Besides, you may have to furnish a pre-EMI cheque counting from the date of loan disbursal to the date of the first EMI auto-debited from your account. You must also pay for registering the loan agreement between the lender and you. Do get a schedule of all the processing and administrative charges beforehand.
* Other salient points. You can also take home loan insurance when the loan is disbursed to you. It helps your family members pay the remaining loan amount in your absence (while the loan is still being serviced). The lending institution might also allow you to switch between fixed and floating rates of interest at a later date. Also research the loan transfer formalities in case you need to transfer the loan to another lender later on.
