A home loan is a popular borrowing tool and a key enabler for countless home buyers. If you are looking to apply for a home loan, chances are you are primarily focusing on factors like the loan’s interest rate, processing fees, among other eligibility requirements. However, there may be a few other crucial things that you don’t know or don’t know that are just as important, not only to potential borrowers, but to existing borrowers as well.
Let’s take a look at 5 of these critical factors regarding a home loan that you may not be aware of as a borrower.
1. Your lender may revise interest rate spreads if your credit rating changes during the term of the loan.
Some mortgage borrowers mistakenly think that the credit rating is only crucial when getting the loan to meet the eligibility criteria and not after taking out the loan, but here they are wrong. Since the Reserve Bank of India ordered lenders to link the rates on their floating rate loans to an external benchmark such as the repo rate, many banks have tied their credit risk premium to the credit rating. of the borrower. This means that if you are managing a variable rate home loan tied to an external referral and your bank sees your credit rating down during the loan period, the lender can increase your applicable loan rate until your credit rating improves.
Lenders generally have their standards in place to determine the risk premium based on the credit score band. Most banks offer zero or minimum risk premium loans if the borrower’s credit rating is above 750 points. With the change in the credit rating, the risk premium also changes. So, if you have taken out a home loan, a little financial indiscipline, such as missing a credit card payment, can cause EMI to charge more for the home loan. You will be well advised to make sure you pay all of your existing and revolving dues on time to ensure that your credit score does not suffer. Also, try to check your credit score at least quarterly for total clarity.
2. Not all loans come with a prepayment charge.
According to RBI, banks are not allowed to charge prepayments of mortgage loans, but this directive only applies to variable rate mortgage loans and not to fixed rate loans. So, if you have a fixed rate home loan, your lender may charge between 0.5% and 2% of the outstanding loan amount if you prepay. So, if you are considering taking out a home loan, make an informed decision about fixed and variable rate home loans after considering the pros and cons of the two financing facilities.
3. The purchase of a home loan insurance product is not compulsory
Your bank may require you to purchase a home loan insurance product associated with the home loan during the loan approval process. However, purchasing such an insurance product can be an expensive affair. There is no doubt that in taking out a home loan, the applicant must cover his life adequately to protect his dependents from any financial hardship should something untoward happen to him during the term of the loan, in addition to minimizing the loan risk. But the applicant can also get adequate life coverage by purchasing a term plan which will be much cheaper than a bundled home insurance plan. So, if you are applying for a home loan, you can still choose a term insurance plan instead of a home loan insurance product and save a lot in the long run.
4. You cannot claim a tax advantage as a co-borrower if you are not the owner or co-owner of the property.
A home loan is one of the most important tax saving tools, and even home loan co-borrowers can benefit from the associated tax benefits. However, many are unaware that in order to do this, the co-borrower must be the owner or co-owner of the property. As such, the ownership of the property is an important criterion to obtain tax advantages against the mortgage. If you are not one of the owners of the property, as a co-borrower, you can only strengthen the eligibility for the loan under a mortgage and cannot benefit from any of the benefits. fiscal.
5. Low interest rate offers from banks are subject to several conditions
Potential home loan seekers applaud whenever there is a drop in the bank’s lending rates. However, there are many other crucial factors besides the interest rate that should be taken into account when choosing a loan product. As a potential home loan seeker, you should also consider the fees associated with the loan and whether there are any links between the lender and the builder that may reduce or eliminate some of the associated fees. You should also get complete clarity on the lender’s eligibility conditions and all the characteristics of the loan, in addition to the flexibility with which it will be possible to switch lenders. The applicable loan interest rate is determined based on several factors such as age, income, gender, credit rating, occupation, loan term, amount, etc. of the applicant. You will be well advised to check all of these critical things before signing on the dotted line and not just focus on the advertised low interest rates.
Hope these tips help you make informed decisions. I wish you all the best !
(The author is CEO, BankBazaar.com)