Taking a House is once in a life time decision for many of us with the spiraling prices of the property and the high interest rate regime in the market. Thus, selecting the right home loan product in the market becomes much more important for many of us to avoid any surprises later.
Suresh Laxminarayan, a Bangalore-based techie, wanted to build a house in Bangalore. With great difficulty, he bought a 2400 square feet plot and was on a hunting phase for a home loan. It took him a great deal of time to do a survey and finalise on a home loan from State Bank of India (SBI) about ten years ago.
“When I took the home loan I had checked out about 10 different loan products. While I was sanctioned a loan for 20 years, I foreclosed my loan six months ago, that is within ten years,” said Laxminarayan.
What are the right things he did? Read on to learn a few useful tips from him.
- Good research: Do not go as per what your loan agent says. You do your own research of the best terms available in the market. “While taking my loan, my agent did everything to stop me from going to SBI. I later on realized why, SBI pays less commission to agents, so they earn less. Hence they badmouth the bank,” said Laxminarayan. “But SBI gave me the cheapest rate of interest,” he added.
- Spend conservatively: keep a tab on your spends during the home loan tenure. The old adage “A penny saved is a penny earned,” holds true in case of home loan too. When you save money, you could actually use it to foreclose the loan.
- Park your additional funds: A couple of banks have a facility, which allows borrowers to park their additional funds in the loan accounts. “This will reduce the interest proportionately from the principal amount for the time that the amount was parked. This is an interesting option. This was not there when I took a loan,” said Laxminarayan.
- Learn what is floating or fixed rates: there are two types of interest rates that banks offer: floating and fixed interests. Floating interest rate is linked to market. It moves in tandem with a base rate. Where as fixed interest remains fixed for a few months defined in the loan agreement. It is important to understand that in most cases floating rates work out cheaper than fixed rates in the long run.
- CIBIL Score : It is important to have a score of 750 plus to get attractive rate of interest on your Home loan. Cibil data indicate that 80% of the home loan approvals are given to customer who have a credit score of 750 plus. Low Cibil score could possibly reject your Home loan application or you may have to pay a higher interest rate.
- Understand foreclosure norms: Recently, RBI banned foreclosure penalties. So make sure you do not pay anything extra while foreclosing your loan.
- Save up to foreclose: if you can save Rs 1 lakh in the current fiscal, do not use it on a dream holiday abroad. Instead use it to foreclose your loan. “My advice to every borrower is that learn to foreclose your loan as soon as possible. The sooner you free the amount you pay for equitable monthly installments (EMI), the earlier can you enjoy the freedom to spend that money on luxuries of life,” added Laxminarayan.
- Compare processing fees: whether it is for a fresh loan or for a balance transfer. Enquire in all the banks before you finalise.
- Read the documents: read everything written in the loan agreement before you sign on the dotted line. It is very important to be aware of terms and conditions.
- Increase the bridge funding: every borrower has to pay some money from his own pocket while buying a house. Try to pay as much as possible as down payment. This will reduce your interest paid on the principal.
The author is Co-Founder & Director, CreditVidya
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