Loans: five ways to select the right mortgage

Since most banks offer the same interest rate for a home loan, there are several options to consider before finalizing the deal.

At the start of 2021, the lowest home loan interest rates were around 6.75%, with a dozen other lenders offering 6.95% or less. Home loans had never been so cheap in India. It looked like rates had bottomed out. But surprisingly, the rates fell again.

Now, several lenders are clustered in the 6.50-6.75% range, with at least 20 lenders priced below 6.95%. All of these options seem attractive to borrowers. If you’re looking for your first home loan or want to refinance an existing loan, how do you differentiate between these options? Let’s look at a few ways.

What is your actual rate?
Many lenders may offer you 6.75%. But are you eligible for this rate? Or would you pay a higher rate? Each lender has an interest rate spread on loans. For example, a government bank sells home loans from 6.70 up to 7.50%. Only eligible borrowers benefit from the lower rate. Several parameters shape your interest rate: some are gender, source of income, credit score, loan size, loan-to-value ratio, and whether it is a new loan or a new one. refinancing case.

So if you were, for example, a salaried woman with a credit score of 810 taking a home loan under Rs 30 lakh with a loan value of 70%, you might be ticking all the eligibility requirements of some lenders and can thus receive a loan at their lowest rate. If your parameters differ, your final price will be calibrated upwards. For example, add 10 basis points if you were self-employed, 10 more if your loan was above Rs 75 lakh and 10 more if your credit score was below 750. In a nutshell, the more the risks of lending you are high, the higher your interest rate will increase.

What is the reference?
A benchmark rate is the lowest rate at which a lender can sell a loan. Since October 2019, most bank mortgages are indexed to the repo rate. As the repo rate has crashed – from 6.50 in 2019 to 4% in 2020 – mortgage rates have also fallen. Banks must compare themselves to an externally set rate, such as the repo rate. But NBFCs and real estate finance companies can establish internal benchmarks. In this scenario, bank mortgage rates fell faster than the others, which worked to the advantage of customers. Consequently, repo-linked lending has become the flavor of the season. Note that once the repo rate begins to increase, home loan rates will see an equal and immediate increase. The advantage, however, is total transparency of rate movements.

How much does the operation cost?
Interest is not the only cost attached to the loan. You can also compare options for processing fees, legal fees, various account operating fees, and even prepayment fees. Variable rate home loans do not incur prepayment charges. However, prepayment rules can work against the borrower. For example, two lenders charge 6.80, but one requires you to prepay at least one EMI and another requires a minimum prepayment of two EMIs. Therefore, the second loan can become more expensive in the long run by being harder to prepay.

How are the benefits?
As the home loan is a long-term relationship with your lender, choose a lender whose services appeal to you. In a pandemic, digitizing services is a necessity, and you wouldn’t want a lender calling you into a crowded branch for paperwork. You prefer that they retrieve your documents digitally or from your home. You would want them to have functioning internet services with good uptime, robust customer support, and quick responses to queries and issues. Given these services, you would have a much easier time managing your loan account.

How far is the branch?
Having your lender’s branch nearby can make a difference in your life. While the big banks have branches all over the country, smaller lenders, NBFCs, and home finance companies have a limited physical presence, and you’ll need to travel wherever they are.

The author is CEO,