Things one must know before Taking a Home Loan

May 24, 2011   ·   0 Comments

Lesson 1: Home Loans – Things You Must Know

This is a special series on Home Loans where we try to cover all the aspects which are involved while taking . If you are Buying a Home or planning to buy one soon, then this Chapters will surely help you decide how to go about your .

www.stockssavvy.comGiven the boom in real estate in India, housing/home loan has become the most popular form of loan. This type of loan benefits the middle class the most in their quest of fulfilling their lifetime dream of owning a house. One should look into the details of a housing loan before deciding on going in for any of the numerous offers available.

Types of Home Loans:

Home loans can be classified in various categories:

Home Loans with Variable Interest Rates – Most Common

Preferred by most first home buyers. These loans have repayment periods up to 30 years.

Advantages

  • Regular monthly, fortnightly or weekly repayments
  • Redraw – most institutions will allow you (subject to terms and conditions) to withdraw additional repayments you have made over and above the minimum repayment.
  • It may have the ability to offset credit balances held in other accounts at the same institution against the principal of the loan.
  • Any extra repayments are welcome at any time

Disadvantages

  • Variable interest rate which means the loan will be subjected to any interest rate fluctuations in the market
  • The interest rate is always higher than Low Frills Home Loan rates.

Basic Loans – Lower Interest Rates + No Extras – Most Popular Low Frills Loan

Has the lowest running costs and does not include any extras such as credit cards and joined accounts to loan.

Advantages

  • Regular repayments help you with budgeting.
  • Lower interest rate.
  • Extra repayments are usually allowed.

Disadvantages

  • Variable interest rate which can be affected by fluctuation
  • Loan redraw may not be available

Fixed Term Home Loan with Fixed Interest Rate

For a period of time your interest rate is set so you know what your repayments will be for that fixed rate term

Advantages

  • If the interest rate rises you will be safe for that set period
  • Regular repayments

Disadvantages

  • You may pay more if interest rate drops in that set period
  • Most lending institutions penalise you for making additional repayments.
  • You may be penalised if you pay off your home loan before the due date.

Split Loans – Fixed & Variable Interest Rate – Cautious Choice

Having a split loan means that part of the loan is fixed and part is variable

Advantages

  • If interests rate rises you are protected at the fixed rate
  • If interest rate drops you are not vulnerable in having to pay more
  • Additional payments are allowed on the variable portion of the loan.

Disadvantages

  • With interest rate fluctuations you may not benefit greatly
  • You may be charged set-up fees, account fees and discharge fees on both the fixed portion and the variable portion.
  • You may be penalised for making higher repayments on the fixed portion.
  • You may be penalised if you pay off your loan before the due date on the fixed portion.

Lo Doc Home Loans, for the Self-Employed

Takes the stress out of borrowing money as you can “self-certify your income,

Advantages

  • No need to provide financial documentation to the lender
  • Access to your loan and greater flexibility.

Disadvantages

  • Higher interest rates and fees.
  • You may be at risk of over committing yourself if your income varies.

Process of Taking a Home Loan

The process of taking a loan could be quite nerve-racking for someone who is unfamiliar with it. Not many people repeat the process of a housing loan and it is just a one-time deal. Knowing the process of taking a loan will help a great deal in going about the entire issue.

1.      Choosing the Property

The beginning of the process of getting a housing loan is choosing a property that the borrower is interested in. While choosing the property, one should ensure that he or she is sure about the property and it is to their liking as it is a long term process that is time consuming and properly regulated.

2.      Transfer in Ownership

The process of transfer in ownership is very essential in seeking a loan. Lending organizations want to be absolutely sure of the title of ownership while granting a loan. This is to make sure that there is no dispute over the property in question at a later stage. Only after the details are thoroughly checked will the lender go ahead with issuing the loan. Sometimes the lenders themselves do these evasive checks.

3.      Derive the Actual Total Loan Amount

There is a limitation on the purposes for issuing a housing loan and a certain percentage of the amount only can be sanctioned. This means that the loan seeker needs to arrange of the remaining amount through a different source. Some of the expenses borne while buying a property are not covered under the loan and these will need to be financed by the individual. Only after taking all these factors into consideration can one derive the actual loan amount.

4.      Documentation Process

The documentation process involved in availing a housing loan is absolutely vital. This process involves looking into various requirements that need to be fulfilled like the loan agreement and security documents. There is also a proposal form that needs to be filled with additional surety documents surrendered. Only on completion of this process will the loan process move forward.

5.      Using the Loan for the Right Purpose

Using the loan for the required purpose is essential as the loan amount is sanctioned based on the agreement that it would be used for a specific purpose. The use of the amount in the right manner is a completion of the agreement between the lender and borrower on the reason for the loan.

6.      Repayment

The repayment of the loan follows the completion of the borrowing process. The EMI amount is written out for repayment of the loan and the pre EMI inertest is also mentioned. Repaying the loan is to be done in accordance with the terms and conditions agreed upon. The floating rate of interest will need to be taken into consideration for loans that have a provision of foreclosure.

Further Changes

There could be a situation at any stage of the loan process wherein changes would need to be brought in. These changes could be with respect to the process of the loan itself or the repayment or even the calculations made on the loan. These changes could be brought about as and when the requirements for changes arise.

1.      Choose the Right Lender

There a various lenders of housing loans, but to be sure of the best deal and a smooth process flow, one should choose the right lender. The various lenders and their services should be closely evaluated before deciding on the right one.

2.      Check the Lenders Reputation

Housing loans are a long process and finding the right lender could make the process easier. Loan seekers should check for the reputation of the lenders in order to finalise on the source for borrowing. A lender with a good reputation is sure to make the loan process a pleasant one.

3.      The Experience of the Lender

Lenders with higher experience can be easily judged with the numerous financial deals gone through. It helps in analysing the nature of the lender and its functionality. A lender with more experience could help in solving problems that arise easily.

4.      Features of a Loan

The features of a loan are an important factor in choosing a lender. There are numerous lenders offering various features on a loan. An individual need to figure out hi or her wants from a loan in order choose the right kind of loan. The features of a loan that are to sought for are the structure of the loan, interest calculation, provision for pre-closure and other benefits that arise from a loan.

5.      Rate of Interest

Different financial institutions provide different rates of interest. People always go in for lower rates of interest that is beneficial. But a proper analysis needs to be made while distinguishing the rates of interest offered by the various lenders. In case of a floating interest rate a proper study has to go into the benchmark for the rate of interest.

6.      Rests in the Rate of Interest

The rate of interest is the factor that determines the cost of a loan. There are annual rests and monthly rests in the calculation of interest. The annual rest brings about a change in the interest rate on an annual basis. With the payment for the loan being made on a monthly basis, it will be beneficial for the borrow if the rests are calculated on a monthly basis as it will bring down the interest on a reducing capital and one can enjoy the immediate benefits.

7.      Options in Repayment

The repayment option provided by the lender is a crucial factor in clearing off the loan. If there is an option for pre-closure or premature clearance of the loan, it will benefit the borrower in terms of paying at his or her convenience. In most cases there is a penalty in the form of pre-closure charges to be paid mostly in the case of fixed rate loans because of the mismatch of asset liability for the lender.

Reduction of Tax

A housing loan brings with it the benefit of reduction in tax due to the repayment of the loan and the cost involved in the form of interest. For loans taken after April 1, 1999 for the purposes of construction, buying, repairing, renewal or reconstruction of property the interest rate up to Rs. 1.5 lakh per annum is allowed as a deduction. The payment of the capital amount qualifies for a deduction under Section 80C of the Income Tax Act where it is part of the overall limit of Rs. 1 lakh present for various instruments. Submitting a certificate from the lender with the amount of capital repaid and the interest charged along with the return of income can be used to claim the benefit of reduction of tax.

Make sure that the home loan availed is within the means in terms of repayment.

  • Go in for fixed rate loans when the interest in low and there is a possibility of it growing.
  • Choose a floating rate loan if the interest rate is high at the time of availing the loan.
  • Be cautious of the duration of the loan exceeding the working years of the borrower.
  • Closely monitor the impact of the changes in the market, especially in case of a floating rate loan.
  • Claim the benefits of tax reduction for the loan availed by submitted the documents required.

 

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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