Four points to note while locking into a home loan  

Hamsini Karthik |BL Research Bureau | Updated on: Mar 05, 2022

Banks may gradually hike the home loan rates this year; take maximum advantage of favourable interest rates 

Two months back if you had approached a bank for a home loan and had a credit score of 800 and above, you’d be the king walking away with a rate as low as 6.5 per cent. Today you might still sign up for the loan at 6.5 per cent, but that would come through only after some negotiations. That’s because at one end, leading banks such as SBI and HDFC Bank are gradually hiking their deposit rates after a two-year hiatus. So on the other end, tightening of lending rates is bound to happen. It’s still a divided house on how soon the Reserve Bank of India will hike its repo rate. But as potential home loan borrowers, now is the time to be alert. With over half of fresh lending in the last year benchmarked to the repo rate, any increase in the future will not only make your home buying activity more expensive, but could also add to the volatility of your outflows. Here’s what you should do to make the best of these low interest rates.

Don’t wait too long

As home buyers one of the biggest mistakes is to wait for a more affordable price point to zero-in on the purchase. If you are buying your second or the third house, its okay to play the waiting game. But if it’s a top item on your priority list and you’re going to avail a home loan to purchase the house, don’t be complacent and put off the decision for long. You may miss out these rock bottom interest rates.Every 10 basis points increase in interest rate can impact your EMI (equated monthly instalments) by Rs 100 annually on a Rs one lakh loan. So, on a Rs 1 crore loan, the impact is Rs 10,000.

A combination of 800 plus credit score and some negotiation skills could land you at a home loan rate of 6.4 – 6.75 per cent now. Always approach the home branch or the designated relationship manager to negotiate on the terms of loan. A cold call to the lender’s call centre may not work.

Negotiate some fixed tenure

As a thumb rule, most banks link home loans to repo rates and hence home loans are mostly variable in nature. On a quarterly basis, the home loan rate can be repriced if the repo rate changes. The central bank’s current regime is nudging banks to immediately pass on the repo rates. In an increasing rate scenario, this can add to the cash flow uncertainties of the borrower. But this has now become an inherent risk while availing a home loan.

To some extent the uncertainties in the initial years may be mitigated if the lender is open to time-bound fixed rate interest which provides flexibility to lock-in the interest rate in the initial years (usually 2 – 3 years) after which they are floating rates. In a 15-year home loan, EMIs in the initial five year have a higher weightage of interest payment and a time-bound fixed rate could help plan the outflows vis-à-vis floating rate loans.

Usually, NBFCs allow borrowers to opt for time-bound fixed rate home loans. Banks, by default and mandate, offer only floating rates. However, if the property value is in excess of Rs 2 – 3 crore and the loan value is over Rs 1.5 crore, banks may warm up to the idea. Private banks are more amenable to negotiations compared to public sector banks, though their rates are steeper by 25 –35 basis points.

Use the LTV wisely

LTV or loan-to-value is the loan amount the bank will sanction against the value of the property. Most banks sanction loans 60 – 65 per cent of property value, while NBFCs sanction as high as 75 per cent. Therefore, there’s always a component of your own funds which will come into play. Dip into your savings, only to the extent of own funds you should deploy towards the property.

For instance, if you are buying an apartment for Rs 1.50 crore, the minimum own funds that banks would ask you to bring in works to Rs 60 lakh. But assume you have about a crore of rupees as savings. Hold back the Rs 40 lakh. This can help you pre-pay or part pay the loan outstanding and when home loan rates climb up. If you’ve eaten into the savings right away, the buffer to cushion you in an increasing interest rate scenario will be limited.

Top it up well

This would be particularly useful for those buying a second-hand property or a new property on a warm-shell basis and planning for structural changes like expanding a room, changing the flooring of the house or installing a modular kitchen. Usually much of these are undertaken from the savings or monthly earnings. So, the budget tends to be limited and only a part of the planned work gets done. Instead, make the best use of low home loan rates. Lenders, especially private banks and NBFCs are open to the idea of top-up loans.

Some banks bunch it up along with the primary home loan and charge a marginally higher (10 - 15 basis points) interest rate or segregate the top-up requirement as a separate loan and charge a rate higher than the home loan rate but lower than personal loans, which is the most expensive with at 10 - 12 per cent rate of interest. But either ways, use this option right at the time of taking the home loan. You freeze your add-on requirements also at low rates.

Avail it right at the time of buying the property even if interest rate may increase by 10 – 15 basis points. Incurring this cost may work more economical than digging into your savings in the longer term.

Published on March 05, 2022
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