While choosing a home loan option to buy a house, there are a few important aspects. You need to go into these
Whether the loan is a fixed or floating rate one. As is common knowledge, in case of floating rate loans, the interest rate will move up or down with each revision in the benchmark rate of the bank. In case of a fixed rate loan, the interest rate may remain fixed for either a given period of time or entire tenure of the loan.
In case it's a floating rate loan, what the rate is benchmarked against is important. Usually, floating rates are determined with reference to the prime lending rate (PLR), fixed at the time of taking the loan plus a mark-up. If your home loan is at a spread of one percent to the PLR, which is say 10 percent, you will pay an interest rate of 11 percent per annum.
How often the bank changes the benchmark rate should be checked. Banks periodically revise the PLR to which the home loan interest rate is pegged. The lending rates may not be automatically adjusted to the revised PLRs.
If one has opted for a fixed rate loan, it is to be checked whether the interest is fixed for a part of the tenure or the entire tenure. Do check the reset clauses. The bank normally reserves the right to revise the interest rates upwards or downwards, once in three or five years, even on a fixed rate loan.
Also check whether the loan can be prepaid, and if so, what the charges are. It may be a fixed fee, a percentage of the loan outstanding, or a percentage of the loan amount. Further, there may be a restriction on the number of prepayments you can make during the tenure of the loan.
Check what the other charges you will be required to pay to get the home loan are. There could be a fee for processing, services, and administration. These could be levied as a flat fee or a fixed percentage of your loan amount on sanction.
The maximum loan amount offered by a bank is important to find out if it can finance the amount you are looking for. Some banks have set limits for maximum amounts they lend for particular purposes. This becomes all the more important because this is a long-term decision.
You should also check the maximum permissible loanto-value (LTV) ratio. The maximum loan you would get with regard to the value of the house needs to be checked. It may be worthwhile to see if a co-applicant is allowed. Some banks insist on only certain relationships as applicant and co-applicant. Some insist on a personal guarantor as an additional security.
- Scheme of loan
Whether the loan is a fixed or floating rate one. As is common knowledge, in case of floating rate loans, the interest rate will move up or down with each revision in the benchmark rate of the bank. In case of a fixed rate loan, the interest rate may remain fixed for either a given period of time or entire tenure of the loan.
- Rate benchmark
In case it's a floating rate loan, what the rate is benchmarked against is important. Usually, floating rates are determined with reference to the prime lending rate (PLR), fixed at the time of taking the loan plus a mark-up. If your home loan is at a spread of one percent to the PLR, which is say 10 percent, you will pay an interest rate of 11 percent per annum.
How often the bank changes the benchmark rate should be checked. Banks periodically revise the PLR to which the home loan interest rate is pegged. The lending rates may not be automatically adjusted to the revised PLRs.
If one has opted for a fixed rate loan, it is to be checked whether the interest is fixed for a part of the tenure or the entire tenure. Do check the reset clauses. The bank normally reserves the right to revise the interest rates upwards or downwards, once in three or five years, even on a fixed rate loan.
- Charges
Also check whether the loan can be prepaid, and if so, what the charges are. It may be a fixed fee, a percentage of the loan outstanding, or a percentage of the loan amount. Further, there may be a restriction on the number of prepayments you can make during the tenure of the loan.
Check what the other charges you will be required to pay to get the home loan are. There could be a fee for processing, services, and administration. These could be levied as a flat fee or a fixed percentage of your loan amount on sanction.
- Loan amount
The maximum loan amount offered by a bank is important to find out if it can finance the amount you are looking for. Some banks have set limits for maximum amounts they lend for particular purposes. This becomes all the more important because this is a long-term decision.
- LTV ratio
You should also check the maximum permissible loanto-value (LTV) ratio. The maximum loan you would get with regard to the value of the house needs to be checked. It may be worthwhile to see if a co-applicant is allowed. Some banks insist on only certain relationships as applicant and co-applicant. Some insist on a personal guarantor as an additional security.
