Do you want a home loan? KNOW the important points about eligibility, interest rate, length of tenure, required documents, EMI, security and other details
Are you considering buying a house or an apartment or renovating your existing house? You can qualify for a home loan for all of these purposes. According to information provided by the Reserve Bank of India, you can usually apply for a first home loan to buy a house or apartment, renovate, expand and repair your existing house.
However, you may note that most banks have a separate policy for those who opt for a second home. So, if you want to apply for a home loan, here are a few things you need to know.
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How will your bank decide on your eligibility for a mortgage?
Your bank will assess your repayment capacity while deciding on mortgage eligibility. Repayment capacity is based on your monthly disposable / surplus income (which in turn is based on factors such as total monthly income / surplus minus monthly expenses) and other factors such as spouse’s income, assets, liabilities, income stability, etc.
The main concern of the bank is to make sure that you comfortably repay the loan on time and secure the end use. The higher the monthly disposable income, the higher the amount you will be able to claim.
Typically, a bank assumes that around 55-60% of your monthly disposable / surplus income is available for loan repayment. However, some banks calculate the income available for EMI payments based on an individual’s gross income, not their disposable income.
The loan amount depends on the length of the loan and the interest rate as well, as these variables determine your monthly outings / outflows which in turn depend on your disposable income. Banks usually set an upper age limit for mortgage applicants.
What documents are generally sought for a loan approval?
In addition to all legal documents relating to the purchased house, banks will also require you to present proof of identity and residence, the latest payslip (authenticated by the employer and self-certified for employees) and the form 16 (for entrepreneurs / self-employed)) and bank statements / balance sheet for the last 6 months, if applicable.
You must also submit the completed application form with your photo. The loan application form would give a checklist of documents to attach to the application.
You are advised not to be in a hurry to enter into the agreement and discuss and seek more information on any waiver of the terms and conditions provided by the commercial bank in this regard.
What are the different interest rate options offered by banks?
Banks usually offer one of the following loan options:
Variable rate home loans and fixed rate home loans. For a fixed rate loan, the interest rate is fixed either for the entire term of the loan or for a certain portion of the term of the loan. In the case of a pure fixed loan, the EMI due to the bank remains constant.
The EMI of a fixed rate loan is known in advance. This is the cash outflow that can be planned at the start of the loan. If the economy’s inflation and interest rate increase over the years, a fixed EMI attractively stagnates and is easier to plan. However, if you have a fixed IME, then no interest rate reduction in the market will benefit you.
The EMI of a variable rate loan changes with changes in market interest rates. If market rates go up, your repayment goes up. When rates go down, your contributions go down too. The floating interest rate is made up of two parts: the index and the spread. The index is a measure of interest rates in general (based, for example, on the prices of government securities), and the spread is an additional amount that the banker adds to cover the credit risk, the profit margin , etc.
The amount of the spread may differ from one lender to another, but it is generally constant over the life of the loan. If the index rate rises, your interest rate also rises in most cases and you will have to pay a higher IME. Conversely, if the interest rate drops, your EMI amount should be lower.
Additionally, banks sometimes make some adjustments to keep your EMI constant. In such cases, when a lender increases the floating interest rate, the loan term is increased (and the EMI is held constant).
Some lenders also base their variable rates on their Prime Reference Rates (BPLR). You should ask which index will be used to set the variable rate, how it has generally fluctuated in the past, and where it is published / disclosed. However, the past fluctuation of an index is no guarantee for its future behavior.
How does the tenure period affect the cost of the loan?
The longer the loan term, the less your monthly EMI output will be. Shorter terms mean a higher EMI burden, but your loan is paid off faster. If you have a short-term cash flow mismatch, your bank may increase the loan term and your EMI charge decreases. But longer terms mean paying more interest on the loan and making it more expensive.
What security will you need to provide?
The security for a home loan is usually a first mortgage on the property, normally in the form of a title deposit. Banks also sometimes ask for other collateral guarantees if necessary. Some banks insist that the margin / down payment (borrowers’ contribution to the creation of an asset) be maintained / made as well.
The collateral assigned to your bank can be life insurance policies with a cash surrender value set at a certain percentage of the loan amount, guarantees from creditworthy guarantors, pledges of shares / securities and investments like KVP / NSC etc. that are acceptable to your banker. Banks would also ask you to make sure the title deed is free of any encumbrances. (i.e. there should not be any existing mortgage, loan or litigation that could negatively affect the title to the property).