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6 things to know before taking a home loan

Taking a home loan is easier said than done. Though it may seem all banks are eager to
lend, getting a loan sanctioned can be a tedious task. Also, like any other financial
product, it is important to be acquainted with how home loans work to avoid any nasty
surprises later. Here are some important things you should know before signing on the
dotted line.
1. Factors Affecting the Eligibility Criteria: A crude way to calculate your loan eligibility
is by calculating the EMI. Banks usually limit the installments at 40-50% of the
borrower's salary, that is, basic plus dearness allowance. Reimbursements and allowances
are not considered for this. Also, if you have existing liabilities, say another loan, the
eligibility goes down further. Some banks are sensitive about the number of dependents
you have. Higher number of dependants implies lower repayment capacity.
Apart from your financial strength your profile also affects how much the bank may
agree to lend. For instance, people with a stable source of income find it relatively easier
to get loan than say a self-employed with erratic earnings. Your age defines how many
earning years you have and therefore your re-payment capacity vis-a-vis the tenure of the
loan. Usually, loan tenures do not go beyond your retirement age, unless you've a
younger co-applicant. The co-applicant cannot be a minor, but should not be above a
certain age as well. Banks have their set rules on this to minimize ownership dispute.
Also, having a co-applicant allows you to get a higher loan as the income of the coborrower is clubbed while considering the eligibility. The value of the property is also
considered before sanctioning the loan. Banks usually cap the loan amount at 70-80%
value of the property.
2. Your loan type: As you already know, there are two types of home loans based on the
interest rate-fixed and floating. As the name suggest, a fixed rate loan is where the
interest rate doesn't change with market fluctuations. Usually, this rate is 1-2.5 percentage
points higher than the floating rate home loan. Floating interest loan, on the other hand,
varies according to the market conditions.
The clause varies from bank to bank and is invoked either after a fixed period or a sharp
spike in interest rates. So the EMIs also move up and down with change in base rate.

Though a fixed interest rate may seem more attractive in a high interest regime, experts
advise otherwise for various reasons. First, the fixed nature of the interest itself is a
disadvantage in a long-tenure loan like home loan where rates are bound to come down
some time even if they are high at present.
In that case, the borrower has to repay the same amount every time even if the rates
reduce. Moreover, fixed rate loans come with the 'reset clause', that says it is subject to
revision. Though the nature of the clause varies from bank to bank it is usually invoked
either after a fixed period or a sharp spike in interest rates. Therefore, a floating rate
makes more sense unless if the economy promises a sharp rise in interest rates in the near
3. The fine print: a home loan agreement is a legal document and therefore often
incomprehensible. However there can be quite a few devils hiding in the details. You may
think a 'default' is only if you do not pay the EMI. However, there are some banks who
define default as when the borrower expires, gets a divorced (in case joint-loans), or the
borrower is/are involved in any civil litigation or criminal offence.
Also, some banks have a security clause that makes that entitles the bank to demand
additional security along with your loan amount in case property prices fall. If you fail to
pay up, you'll be marked as a defaulter.
Be careful about the add-on charges and penalties. It's not just the interest that you pay.
There are additional charges such as administrative and service charges or processing
fees. Also, there are penalties like on pre-payment of the loan. Consider these when
comparing the deals offered by various lenders.
4. Negotiate the rate: Whichever option you choose, do not forget that you can negotiate
on the interest rate. If you have a clean record in your credit history for payments done on
time, use it to negotiate loan amount and the rate. Every bank wants good business and a
high credit score gives you bargaining power. Also, try to purchase the loan at the end of
the month. Banks have their monthly targets and may be more flexible as they do not
want to lose business.
5. Longer tenure means costlier loan: The RBI has been hawkish in its monetary policy
for quite some time now. An increase in the base rates means the banks have also been
increasing their floating home loan rates. For the borrower it means a higher EMI. Many
can't afford such rise and often request the bank to re-adjust (increase) the loan tenure to
bring down the monthly outgo. While it can be a temporary relief if you are in a desperate
situation, in the long term you actually end up paying more.
Consider a situation where you've taken a loan of Rs 30 lakh at 10.5% for tenure of 20
years. Your EMI will come at Rs 29,951 and the total interest you'll have to pay on it will
be Rs 41,88,240. In a home loan of long tenures, you usually pay more interest than your
principle amount.

Now, say after two years of paying the EMI the bank increases the rate by 0.5% to 11%.
Since the interest component is very high in the initial years you would have paid Rs
6,20,460 by the end of first two years while the principle would have reduced by Rs
98,373 only leaving you with an outstanding balance of Rs 29,01,627. At 11% for the
remaining 18 years the EMI comes at Rs 30,904. But you decide to extend the tenure by
two years and bring the EMI back to Rs 29,950. The total interest now payable on the readjusted loan will be Rs 42,86,373, that is, Rs 98,153 more than the initial interest
payble. Plus you have already paid Rs 6,20,460 interest. So, the long-term effect is that
you end up paying Rs 7,18, 613 more (Rs 6,20,460+ Rs 98,153 ).
6. You can switch lenders: Taking a loan from a bank doesn't mean you are stuck with it
forever. In extreme situations or in case you are getting a significantly better deal from
another lender, you can always switch. Most banks don't have any pre-payment penalty
anymore on floating rate loans. Therefore, processing fee is the only additional cost you
have to bear. Try negotiating on this as well or at least ask for a reduction if not a full