Tuesday, July 19, 2011

Let lenders compete to give you a home loan - Indian Express

Let lenders compete to give you a home loan - Indian Express

Harsh Roongta

Now that you have made up your mind to buy that home, the next step is to obtain finance. But hold on, before you write out that cheque. As a prospective borrower, you should take care and avoid the common mistakes that most people make while taking a home loan.
Most home buyers would want to know the loan amount they will be eligible for, before they finalise the property. There is nothing wrong with this approach, except that there is no need to finalise the lender just to get the loan eligiblility approved. If you are below 40 years just multiply your and your spouse's annual gross income by four and to give you an approximate figure of the loan amount you should be able to obtain.

The second point to note is whether the lender you have in mind would finance the purchase of the property. While most banks do finance ready-to-move-in properties, some do not readily finance properties under construction or one being self-constructed. Also, if the property is very old or if it is being developed by a relatively unknown builder, the bank may have reservations on providing a loan.

The best way is to select your property and then find out if any other lender has funded any apartment in the same building. That lender should be in your list. Also if you approach lenders at this stage, you are likely to get better terms as they reserve their best rates for cases of immediate disbursement.

The third point is that a lot of people buy into properties under construction assuming that they can pay the down-payment proportionately while the bank disburses the rest. All lenders, without exception insist that you make the entire down-payment first.

The fourth point is that home loan is also a market and you should be on the look out for bargains. Make a shortlist of four or five banks and get them to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Always remember that all the terms and conditions of a housing loan are negotiable. Apart from interest rates, also check various charges such as processing fees, pre-payment charges, legal fees, valuation fees etc.

The next point, interest rate. With the demise of the teaser rate schemes, this debate has more or less been laid to rest. A 'true fixed rate' (TFR), defined as a rate that remains fixed for the entire duration of the loan no matter what, is available only from select lenders such as HDFC and Axis Bank is fairly expensive at 12 per cent and 14 per cent respectively for a 20-year period. All other 'fixed rate' options remain fixed only for a certain number of years say 2-5 years and is reset after that. One exception is LIC Housing Finance where the interest rate is fixed at 10.75 per cent for the first five years and is then reset at the prevailing floating rate.

A regular floating rate is available today at around 10.25-10.5 per cent for most loans with a tenure of 20 years. When going for a floating rate loan, all other things being equal, it makes sense to borrow from banks which work on a base rate mechanism which is expected to be more transparent than the mechanism followed by housing finance companies.

It is also important to insure yourself to cover your loan liabilities in the event of the unforeseen.

— Author is CEO, Apnapaisa.com
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