A home loan is one of the most important and biggest loans that you will apply for during your lifetime. It is also a major enabler for innumerable people when it comes to purchasing their dream homes and establishing future security for their loved ones. If you are thinking of applying for a home loan anytime soon, you should keep a few important things in mind.
Firstly, the lending institution may revise or tweak the interest rate spread in case the customer’s credit score changes during the tenor of the loan. Some borrowers often think that the credit score matters only while they are availing of a home loan. However, this is where they make a mistake. After the RBI (Reserve Bank of India) directed lending institutions to link floating rate loan rates to an external benchmark such as the repo rate, many banks have linked the credit score of the home loan borrower to the credit risk premium. This means that if a floating rate home loan, linked to an external benchmark, is being serviced and there is a fall in the credit score during the tenor of the loan, the lender can increase the loan rate that is applicable until there is definite improvement in the credit score.
Lenders usually have regulations established for working out the risk premium in case the credit score of the home loan borrower is more than 750 points. With changes in the credit score, there are subsequent changes in the risk premium as well. In case you have obtained a home loan, any financial indiscipline such as skipping a payment on your credit card or missing a loan repayment date may lead to a higher home loan EMI. As a result, you should make sure that you pay all your dues in a timely manner in order to keep your credit score at the same threshold. Keep checking your credit score on a periodic basis for staying in the loop as well.
Some other things that you must be aware of
As per the guidelines of the Reserve Bank of India (RBI), banks do not have permission to charge for prepayments on home loans. However, this guideline is only applicable to home loans with floating rates of interest and not in case of fixed rate home loans. In case you have a fixed rate based home loan, the lender may charge between 0.5-2% of the outstanding home loan amount in case you make a prepayment. In case you are planning to take a home loan, make sure that you take an informed decision about floating and fixed rate home loans post careful analysis.
Your bank may pitch a home loan insurance product that is bundled with the home loan during the process of loan approval. Yet, purchasing this insurance product may be a costly proposition for you. While taking a home loan, the borrower should always look to safeguard his/her life and protect dependents from future financial hurdles in case of any unfortunate mishap during the tenor of the loan. Yet, life coverage can be obtained by buying a term insurance plan which will be more affordable than bundled insurance plans with home loans. Hence, if you are applying for a home loan and want to get life insurance, check out term plans instead of opting for the bundled products offered by the bank. It is not compulsory to get these bundled insurance products.
A home loan is one of the biggest avenues for saving on taxes and co-borrowers of home loans can also get several tax benefits. Yet, many borrowers are still not aware of the fact that they are required to be co-owners or co-borrowers of the property for this purpose. The ownership of property is a vital criterion for availing of tax benefits on the home loan. If you are not one of the property owners, you can only scale up the borrowing limit or eligibility as a co-borrower without getting tax benefits. Potential applicants for home loans will naturally feel happy whenever the lending rate comes down. However, there are various aspects along with interest rates that should be taken into account while choosing any loan offering.
As a potential home loan borrower, you should take into account the associated charges under the loan and see whether there are any tie-ups between your builder and lender. In case there are such ties, this may help in lowering or waiving off at least some of the additional charges. You also need to know fully about the eligibility criteria of the lender along with the features of the loan and the overall flexibility of switching your lending institution if required. The applicable rate of interest on the loan is worked out on the basis of various aspects including the income, age, credit score, gender and occupation of the applicant in tandem with the loan tenor, amount and other factors. You should always check for each of these aspects prior to inking the home loan agreement. Do not simply take the plunge only on the basis of attractive rates of interest offered by the bank.