Buying a house is a major financial decision, and for most people of India, a home loan is a way to achieve this aspiration. With different financial institutions offering different home loan schemes, the selection of the most appropriate home loan becomes tiresome. An identification of the key determinants of a good home loan is the first thought in making a choice that caters to the demand of short-run funds and long-run sustainability.
Following are some step-by-step instructions to help you choose the most important determinants to remember when choosing the best home loan in India.
1. Interest Rates: Fixed vs Floating
The most important thing to remember when choosing a home loan is the type of interest rate. There are two dominant types of interest rates in India:
- Fixed Interest Rate: The rate of interest is fixed for the entire duration of the loan. This is appropriate for someone who prefers to have constant EMIs and does not want to see any change in his monthly expenditure. Fixed rates are, however, usually 1-2% higher than floating rates.
- Floating Interest Rate: A floating interest rate is an interest rate that fluctuates based on market conditions, i.e., the Reserve Bank of India’s (RBI) repo rates. Floating rates do change, but over the long run, they turn out to be cheaper, especially when the rate of interest falls.
Pro Tip: Compare the floating rates available from different lenders before finalizing the choice. In the past, floating rates have proved to be beneficial in the long run when the market rate plunges. The floating rate in India as of 2023 was approximately 8-9%, while that of fixed rates was between 9-10%.
2. Loan Eligibility and Repayment Tenure
Loan eligibility is based on several parameters, including:
- Income Level and Employment Type
- Age (applicants with a lesser age are given higher tenures)
- Credit history (700+ is advisable)
- Excellent financial obligations
When selecting the best home loan tenure, the following factors should be taken into consideration:
- Short term: Results in larger EMIs but smaller total interest paid over time.
- Long-term: Lightens the EMI burden but increases the total interest outgo.
When switching lenders through a balance transfer of the loan, the best option would be to apply an online loan transfer calculator in order to compute the potential savings.
3. Loan-to-Value (LTV) Ratio and Down Payment
In India, the financier advances 80-90% of the property value, and the remaining amount is paid by the borrower as down payment. It is called the Loan-to-Value (LTV) ratio.
Assume the property is listed at ₹25 lakhs and the financier is offering an LTV of 80%. Then, the borrower will pay a down payment of ₹5 lakhs, while the remaining ₹20 lakhs will be serviced by the loan.
Some aspects to consider:
- Opt for a higher down payment to minimize EMIs as well as interest paid.
- Maintain the ratio of LTV within your planning and budget constraints.
4. Documents Requirement for Home Loan
Paperwork is a very crucial part of home loan sanctioning. The standard home loan documents requirement varies for salaried and self-employed applicants.
For Salaried Applicants:
- Identity Proof (Aadhaar, PAN, Passport, Voter ID)
- Residence Proof (Aadhaar, Utility Bills, Lease Agreement)
- Salary Slips (Latest 3-6 months)
- Bank Statements (Last 6 months)
- Income Tax Returns (ITR) or Form 16 (Latest 2 years)
- Property Documents (Sale Agreement, Title Deed)
For Self-Employed Applicants:
- Business Evidence (GST Certificate, Registration Certificate)
- Profit & Loss Statements (3 months previous)
- Income Tax Returns (3 years prior)
- Bank Statements (6 months prior)
- KYC Documents (Aadhaar, PAN)
Ensuring every document is authentic and complete saves time in processing.
Note : For people who do not file ITR, ITR/P&L/Balance sheet/GST etc are not mandatory. Grihum provides loan even without ITR or any income proofs.
5. Processing Fees and Other Charges
Processors and other miscellaneous fees are levied by lenders who will need to be added to the loan amount cost. Among such fees typically levied are:
- Processing Charges: 0.5-1% of the loan.
- Legal and Administration Charges: Document processing, proofing.
- Registration Charges and Stamp Duty: State government policy determines these charges. Overdue Payment Charges: For delayed EMIs.
Pro Tip: Negotiate processing charges with lenders where possible. Special customers in certain banks need not pay.
6. Prepayment and Foreclosure Policies
Prepayment of a home loan reduces the interest burden and loan period. Banks and financial institutions, though, have varying prepayment policies:
- No foreclosure charge on floating-rate loans.
- Foreclosure charges (2-3%) on fixed-rate loans.
- Check if the lender permits partial prepayments without additional charges.
It is always better to check prepayment facilities prior to fixing a home loan in an attempt to maintain complete financial flexibility.
7. Home Loan Balance Transfer Facility
There is also a home loan balance transfer facility where consumers can shift their existing loan to another bank where the interest rate is lower. This saves huge amounts of money.
Key Factors to consider before transferring a loan
- The new bank’s interest rate must be significantly lower than the current one.
- Find out the cost of transferring a loan and all other secret charges.
- Calculate an estimate from an online balance transfer calculator loan to find the amount saved.
It is logical to apply for a balance transfer if savings from interest are higher than transfer charges.
8. Government Schemes and Subsidies
The government offers schemes to make housing more affordable for eligible individuals. One of the key initiatives currently available is:
Under the Pradhan Mantri Awas Yojana – Urban 2.0 (PMAY-U 2.0), eligible beneficiaries can avail an interest subsidy of 4% per annum on the first ₹8 lakh of their home loan, for a tenure of up to 12 years. The maximum subsidy amount is ₹1.8 lakh, disbursed in five equal annual instalments of ₹36,000 each, subject to the loan remaining active and meeting the specified conditions.
Borrowers should ensure they meet the income and property ownership criteria to qualify. This subsidy applies to loans sanctioned and disbursed on or after 1st September 2024.
9. Online Calculators and Tools
Online calculators like EMI calculators and loan eligibility calculators help the borrower make good financial decisions. These calculators support:
- Calculation of monthly EMIs based on tenure and loan size.
- Comparison of different loans.
- Affordability check based on income and expense criteria.
Using these tools ensures financial preparedness before choosing a home loan.
Conclusion
Choosing the best home loan requires a careful evaluation of multiple factors, like interest rates, loan eligibility, repayment tenure, LTV ratio, and documentation. Processing fees, pre-payment terms, balance transfer facility, and any government subsidy applicable should be considered. Diligently comparing different loan proposals and using aids like EMI calculators, the lenders shall be able to make choices favourable to their fiscal objectives. The appropriate home loan not only makes buying a house more affordable but also provides long-term financial stability, thus being an important step towards the dream of home ownership.