The Hindu Business Line : How to choose your home loan

Be it tenure, interest rates, repayment flexibility or tax benefits, you need to go in for housing loans that suit your financial profile. Here are the key issues to be looked at carefully.

Parvatha Vardhini C

To own a house is every young professional’s dream. But with every bank in the street corner offering myriad housing loan options, you might end up paying a heavy price if you don’t zero in on the one that best suits your financial profile. Here’s a brief guide on how to choose a home loan scheme.

How much?

Eligibility: The loan amount directly depends on your income level. In case you don’t get the sum you need at your level of income, you can take a joint loan with your spouse or some specified relatives who have a means of income.

A fact you should remember here is that for your current income, the bank may be willing to lend you more if you choose a loan with a longer term. Although the eligibility will broadly be the same across all institutions, keep an eye on the variations.

Tenure: Do your homework on where you get the most attractive rates. Typically, banks give home loans for a five, ten- or 15-year period. The interest rate for a five-year loan may be one to two percentage points lower than ten-year or a fifteen-year loan. But this cannot be the sole criterion for choosing the five-year loan.

If the period is too short, you may end up spending a more-than-comfortable portion of your income on repayment of principal and interest and be left with little for your living expenses. Besides, you will be in a soup if some unforeseen expenses crop up. On the other hand, if you choose to repay over too long a term, you will still have to provide for repayment of an age-old home loan at a time when other financial obligations, such as your child’s higher education, may need to be met.

Fixed or floating rates?

That’s the million-dollar question. Fixed interest is always a tad higher than floating interest. But that is the premium you pay for maintaining the same repayment amount, month after month, year after year, irrespective of the interest rate fluctuations that may occur.

In today’s stiff interest rate scenario, this would seem ideal. But remember to ask your banker if the fixed rate is really fixed or whether it will be reviewed, say, once every two or three years.

True, fluctuating rate loans are cheaper but they come tagged with uncertainty. For, example, if you had taken a housing loan three years ago when interest rates were benign, your monthly instalments today would have hit the roof unless you have extended the tenure to stick to the same amount.

But this may be temporary. If the rates go below the fixed rate in another two years, you will enjoy quite a bit of savings.

Given the long-term nature of the loan, a long-term view on interest rate movement is what should guide your choice.

Flexibility in repayment

Before you choose a scheme, check the various repayment options available. Some banks offer a step-up facility under which you can pay a lower EMI (equated monthly instalment) in the initial years and gradually increase your payments corresponding to growth in your income.

There is also an option to accelerate the EMI whenever you feel you have higher disposable income. If you have obtained the loan to buy a property under construction, some banks allow you to decide on how much you want to pay back till the property is ready; the interest component being the minimum required to be paid.

This helps you begin the repayments as soon as possible and finish the repayment within a schedule. Also, check if you can pre-pay the loan at any point if you have a lumpsum on hand. But don’t forget to compare the charges for exercising any of these options across lending institutions.

Tax benefits

Please note that both principal as well as interest repayments bring tax benefits.

The former, under section 80C, up to a maximum of Rs 1 lakh along with other savings such as insurance premium and PPF, and the latter up to Rs 1.5 lakh (subject to various provisions in the Act) as a deduction from Income from house property.

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