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With the entry of commercial banks in the home loan segment, the borrower is spoiled for choice. How does one pick the best home loan and decide whom to take it from? Here is what you need to know:
In the event of a composite home loan to self construct a house on a plot, your choices will be limited. There are only a few lenders offering such loans. However, private banks like HDFC and ICICI, are quite aggressive in this segment.
The location of a property is important as all lenders are not active everywhere. In case the property you have decided upon is at a place away from your work, it is would be more convenient to select a lender who has branches in both locations.
Credit history and records
It will be slightly difficult to obtain a loan in case your credit history or score is not up to the mark. However, all doors aren’t closed. There are still certain housing finance companies that are willing to offer home loans in such a scenario. However, it will come at a higher rate of interest with a higher margin requirement.
In order to enhance your eligibility, certain banks offer home loans for up to 30 years. This is generally not available with housing finance companies. You need to keep the probability and your intention of repayment, before selecting a lender.
When you prepay a home loan, there may be a prepayment penalty. This would depend on various factors, such as whether the loan was under a floating rate or whether the repayment was made with another home loan, or was it paid from your own resources. Banks do not charge prepayment penalties in case the loan was taken on a floating rate. However, the housing finance companies do not charge a prepayment penalty if the loan is being repaid from your own resources, whether it’s a fixed rate or a floating rate.
Changes in interest rate
The interest rates charged by a bank are more transparent than those charged by housing finance companies which lend under the Retail Prime Lending Rate (RPLR). In case of banks, the lending is above or at the base rate so the borrower knows the premium against the best of borrowers of the banks as the banks can not lend below the base rate. The housing finance companies price the housing loans as discount to the RPLR. Thus, the rates charged are not transparent.
Moreover, the frequency of change in the rate offered by banks is higher as they are required to review their base rate every quarter. Housing finance companies are under no such requirement. In fact, they are quicker to increase the lending rates during an upward interest cycle but are not so prompt in giving the benefit of declining rates to existing customers.
Generally, private sector banks are faster than state-owned lenders in processing home loan applications. So, the urgency to get the funds will also determine the lender, even if you have to pay a marginally higher rate.
(The author is a taxation and home finance expert, with 30 years’ experience.)