A bank charges various charges such as processing fees, paperwork etc. Hence, it is important to calculate the 'effective cost' before taking a home loan.
The various charges charged by banks vary from bank to bank.
Just like home buyers should consider the total cost of a house (including the base price, GST, parking charge, stamp duty, registration, brokerage, etc) before purchasing, home loan borrowers should also consider the ‘effective cost’ of a housing loan. Home loan is a commitment of 15-20 years and therefore, borrowers should consider all costs and decide accordingly.
“Banks may not tell all charges upfront. Since charges can come with different names like processing fee, legal and technical charges, stamp paper cost, GST, etc., ask them about the total costs involved with the loan,” says Aparna Ramachandra, Founder & Director, Rectifycredit. com. Banks also usually insists on insurance for the house, an additional cost you need to factor into the calculation. Some lenders offer to waive these charges, but make sure that the bank is not charging them indirectly.
Since these charges vary from bank to bank, comparing them will be difficult. A better way is to deduct these charges from your home loan amount and recalculate the effective cost. For example, assume that you are taking Rs 50 lakh home loan with a repayment period of 20 years and total charges involved are Rs 20,000. At 7% interest rate, the EMI will work out to Rs 38,765. Since you have to pay Rs 20,000 upfront, this is equal to taking a net loan of Rs 49.80 lakh. In other words, you are paying an EMI of Rs 38,765 for a net loan of Rs 49.80 lakh and its interest costs works out to be 7.05%, an additional cost of 5 bps. The comparison will become easy once you calculate this for all lenders.
Taking a home loan? Make sure your financial plan isn't hit, ask yourself these 5 questions
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You, like many others, too may be tempted to bag those decade-low interest rates on home loans and make the most of slashed real estate prices before things starting recovering and going back to normal. As much as these external factors seem appealing, the decision of taking on added debt to buy a house also depends on certain factors about you and your finances.
For many, buying a house means stretching finances to even an uncomfortable limit and stretching yourself too thin in the process. Before you apply for a hefty home loan, make sure you are standing on firm ground as far as your personal finances and goals are concerned. Ask yourself these five questions about your emergency fund, down payments, EMIs and status of other financial goals, to ensure that your home loan doesn’t end up as a noose around your neck.
You, like many others, too may be tempted to bag those decade-low interest rates on home loans and make the most of slashed real estate prices before things starting recovering and going back to norm..
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Before you even get into crunching the numbers, you need to ensure your foundations are in good shape. The emergency corpus should be big enough to cover all your expenses for the next 12 months. This should also factor in the new EMI commitments on the home loan. This is to provide immediate financial cushion in case of loss of income owing to job loss, accident or prolonged illness. Having this buffer when paying off a big home loan has proven indispensable in the last 18 months.
Before you even get into crunching the numbers, you need to ensure your foundations are in good shape. The emergency corpus should be big enough to cover all your expenses for the next 12 months. Thi..
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Banks ask borrowers to cough up 20% of the property value upfront before agreeing to sanction a loan for the remaining amount. However, you can put in a higher amount if you wish. For a property with a price tag of Rs 90 lakh, the maximum sanctioned loan will be Rs 72 lakh, which means you pay Rs 18 lakh as down payment. Additionally, you also need to pay a few lakhs towards stamp duty and GST—the latter only if going for under-construction property. Together, this outlay is a handsome sum for majority. Even so, financial advisers typically suggest going for the maximum down payment possible.
Smaller loan component not only invites lower interest rates and brings down the EMI burden, it also reduces total interest outgo and allows for faster repayment, insists Joshi. Yet, borrowers shouldn't empty entire accumulated savings into the down payment. When considering how much savings you have available for down payment, don’t forget your retirement and other critical life goals. Don’t pull out money set aside for these goals. Also factor in spends on any renovations or furnishings for your new home. Then, after providing for the cushion of emergency corpus, what is left can be ploughed into the down payment. Besides, a large down payment will become a restraint on your liquidity.
Banks ask borrowers to cough up 20% of the property value upfront before agreeing to sanction a loan for the remaining amount. However, you can put in a higher amount if you wish. For a property with..
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Budgeting for EMIs is another tricky aspect. Typically, a bank assumes that about 50% of your monthly disposable income is available for repayment. No bank will provide a loan beyond this threshold. This includes your ongoing EMI commitments, if any. “Some banks have become aggressive and are willing to go beyond 40% EMI if the borrower meets certain criteria,” points out Rohit Shah, CEO, Getting You Rich. But the lender’s internal EMI cap may not be realistic for everyone. For instance, if you earn Rs 1 lakh every month and incur expenses of Rs 60,000, then a Rs 40,000 EMI is simply unaffordable. You would be living hand-to-mouth in such a scenario. If you are buying an under-construction property, you will likely be paying rent along with your EMI. Make sure you can afford this even if the bank is willing to give you a large loan. Stretching your budget is fine up to a point—as your income will increase but EMIs won’t. But don’t go overboard.
Budgeting for EMIs is another tricky aspect. Typically, a bank assumes that about 50% of your monthly disposable income is available for repayment. No bank will provide a loan beyond this threshold. ..
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Some borrowers are simply sold on the tax benefits a home loan allows under Income Tax rules. These deductions, which effectively bring down the cost of the loan over its lifetime, often entice borrowers into hefty EMI commitments. But don't forget that these benefits accrue only up to a certain threshold. An individual is allowed deductions up to Rs 2 lakh a year towards housing loan interest payments. If paying off a 20 year home loan of Rs 75 lakh at 7% interest, the interest outgo will run much beyond Rs 2 lakh for several years. Even if opting for a joint home loan with spouse where husband and wife both can claim deduction of Rs 2 lakh each a year, the deductions fall well short of the actual interest outgo for initial few years. So do not extend the home loan EMI for tax benefits alone.
Some borrowers are simply sold on the tax benefits a home loan allows under Income Tax rules. These deductions, which effectively bring down the cost of the loan over its lifetime, often entice borro..
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For many, there is no escaping that taking on home loan EMIs will temporarily put other financial goals on the backburner. You may go several years without saving for own retirement or children’s higher studies but if you cannot make provisions for contributions towards other critical life goals, try and prioritise among these goals. Go after them selectively, such as non-negotiable targets like higher education. Alternately, you may scale down contributions for the time being. In a few years, as your income grows to allow some breathing space, start contributing towards other goals in earnest.
For many, there is no escaping that taking on home loan EMIs will temporarily put other financial goals on the backburner. You may go several years without saving for own retirement or children’s hig..
While interest rate is critical, borrowers should also consider the ease of getting loans (the processing time taken by the bank). Ask friends or relatives about their experience with various banks. It also makes sense to have a pre-approved home loan before you zero in on your dream home.
