A home loan is most often a large, long-term loan. The repayment of a home loan usually runs over a long duration - of at least 10 years and more. It can even be over 15 years in many cases. Therefore, it is very important to choose the right home loan scheme, and plan for the various aspects that come along with it. Home loan schemes are classified based on interest rates and repayment tenure.
Choosing lender
The first factor a borrower should decide on is the bank to avail the loan from. It is not easy to change the bank later. It entails a cost to change the bank. Since a home loan is a long-term commitment, it is important to take some time and be a little selective while deciding on the bank.
It is helpful to get some feedback on the bank from its borrowers . One can also crosscheck from known sources who have borrowed from the bank. Salaried people should evaluate the available offers at the bank where they maintain their salary account. Some banks offer a lower rate for salaried employees.
Other important factors that should be considered include processing and other charges etc. It is advisable to go for the longest possible tenure as it reduces the initial EMI burden and increases the loan eligibility.
Interest rate
The rate of interest is one of the most important factors as it affects you every day. The loan schemes can be classified into two broad categories - fixed interest rate loans and floating interest rate loans. The interest charged under fixed interest rate loan schemes remains fixed for a certain term. Usually, a fixed interest rate will be significantly higher than the prevailing floating rates.
On the other hand, the interest rate changes based on the market conditions under the floating interest rate schemes. The interest rate on borrower's loan account is linked to the bank's internal benchmark rate. These benchmark rates changes based on market conditions or the Reserve Bank of India's monetary policy changes. If the benchmark rate goes up, the interest rates on loan schemes also go up and vice versa.
Some banks also offer products that are a mix of fixed and floating interest rates. There are two broad variants of these schemes. The first variant is schemes that offer a fixed interest rate for the initial few years and later follow the floating interest rate scheme prevailing then. The second variant offers a part of the loan under the fixed rate scheme and the remaining part under the floating rate scheme.
There are many other subvariants available in the market . They are tailored to suit different borrowers. Therefore, it is very important to analyse such schemes based on one's financial condition before locking into a particular scheme.
EMI components
The first few years are crucial in a home loan tenure. During the initial period, the EMI covers a large portion of interest and a small portion of the principal component. Also, it may not be easy to prepay a part of the loan during the initial years of the loan tenure due to other financial commitments .