[ecis2016.org] We list some of the factors that borrowers must consider, while choosing a bank for a home loan
With loans currently priced below the 7% level, it might be an ideal time for home buyers and investors to purchase real estate. Property prices have also seen a correction, as compared to the rates five years ago. Moreover, India’s prime residential markets have large numbers of ready homes across categories, providing buyers with ample choice. Those who are contemplating a property purchase with the help of a housing loan, must select the lender carefully, to ensure that you get a good deal throughout the loan tenure.
You are reading: How to choose the right bank for a home loan?
Check the interest rate and other charges on the home loan
Borrowers’ first instinct, is to pick the bank that offers the lowest interest rate, as even a slight change in interest reflects prominently on the monthly repayment. Comparing rates to find the best lender would, however, amount to looking at your home loan only from a partial point of view. Banks tend to levy various other charges on home loans, in the form of processing fee, technical assessment and documentation fee. The borrower could be asked to pay 25 basis points to 200 basis points of the loan amount, towards these charges, which considerably increase the overall cost of the loan. When you check interest rates, also try to find out if the bank is offering any waiver on these charges. Go for a combination that seems the most cost-effective.
(100 basis points is equal to one percentage point.)
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Does the bank offer incentives for borrowers with good credit scores?
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While the borrower’s credit score has always been a key determinant of how much loan they are eligible for, your credit score also ensures the rate of interest that the bank would charge from you. Lenders like Bank of Baroda charge interest on the loan, based on the borrower’s risk profile. Bank of Baroda, for instance, currently offers its home loans at 6.85%. However, this rate is available only to those applicants who have a credit score of 760 and above. Hence, a borrower with an impressive credit score, may be able to avail of cheaper home loans by selecting a bank that offers such facilities.
Is your bank quick in rate transmission?
This has been a major complaint of borrowers and the RBI. Even though banks are quick to increase home loan interest rates, as soon as there is any upward movement in the repo rate (the rate at which the RBI lends credit to them), they refuse to show the same urgency when it comes to passing on the rate cut benefits. It is for this reason that the banking regulator first introduced the marginal cost of funds-based lending rates in 2016 and then replaced that benchmark with the repo-rate linked regime. While rate transmission is now much faster, especially since the central bank has brought the repo rate to 4% keeping in view the difficulties posed by the Coronavirus crisis, some banks still continue to shy away from passing on the benefits to the customers.
When selecting your lender, find out how swift they have been in the past, in aligning their interest rates with the RBI’s rates. This would be one way to ensure that you will be able to reap the benefits of policy changes throughout your loan tenure.
Is your lender trustworthy?
Akin to picking a trustworthy builder while buying your home, you also have to pick a lender with a good market reputation. When a developer falters, as has been demonstrated in the cases of Amrapali, Jaypee and Unitech, the buyer invariably suffers. The same could be said about his lender. If your bank goes down because of any wrongdoings, the case would most probably have an impact on you, as well. This is evident from the recent fiasco at the Punjab and Maharashtra Co-operative (PMC) Bank.
It is also important to get an understanding about the financial standing of the lender. These numbers are typically available in the public domain.
What kind of after-sales service does the bank offer?
Buyers must also evaluate and judge a bank, based on its after-sales services, considering that the approval of your home loan application is just the start of a long-term relationship with the bank.
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For example, to claim tax deductions, you will have to get an interest certificate from your bank every year. This document has to be submitted with your employer, to claim the deductions. While some banks have it sent to your email ID, others would want you to visit a branch to get a printed copy. Banks may also not be proactive, in conveying policy changes that may lower one’s loan liability. Find out how forthcoming your bank is on this front, before selecting a lender.
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Read the home loan terms and conditions carefully
Most banks these days promise to approve your home loan application quickly. In most cases, you could apply online, along with all the documents and the lender would disburse the home loan within a week. Even though this helps buyers to close the deal quickly, especially if he has already selected a property, this proposition is not without its demerits. In your over-eagerness to get the loan as soon as possible, you may not read the terms and conditions carefully. Rushing into a home loan also lowers your chances of considering other lenders.
Even though the RBI has forbidden banks from charging a penalty on home loan prepayment, if it is based on a floating interest rate, financial institutions are free to charge a penalty, in case you try to transfer the home loan to another lender. This is one point that you must discuss with the bank, before borrowing credit from them. In case the loan has been taken at a fixed rate of interest, the bank typically reserves the right to change the rates later, since the loan agreement is subject to re-setting and the money market clause.
How to negotiate while taking a housing loan
You would be surprised to know the benefits you could get from the bank, by negotiating for your home loan, especially in these testing times when demand is quite low and financial institutions are willing to be more forthcoming. You could convince the banks to offer you some waiver in the processing free or other fringe charges that they typically impose. You can use a good credit score to get yourself some relaxation in home loan interest, as well.
Documents you need to submit with the bank for a home loan
Almost all banks demand similar documents to process your home loan request. These include:
- Passport size photos
- Proof of identity: Voter ID card, passport, Aadhaar card, driving licence, ration card, utility bills.
- Proof of address: Passport, Aadhaar card, driving licence, ration card, utility bills.
- Proof of income: Statements of bank account, income tax returns, PAN details, employment certificate.
- Property documents: Agreement to sale, builder-buyer agreement, sale deed, non-encumbrance certificate, property tax payment receipts, etc.
FAQs
What are the major banks giving home loans in India?
SBI, HDFC Bank, ICICI Bank, PNB and Bank of Baroda are some of the largest banks in India offering home loans at affordable rates.
Are banks and HFC different?
While banks come directly under the ambit of the RBI, the banking regulator oversees operations of housing finance companies (HFCs) mostly as a monitoring agency.
Are HDFC and HDFC Bank different entities?
While both the companies are part of the same group, they are different entities and are, thus, governed differently. While HDFC is a HFC, HDFC Bank is a financial institution.
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