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How
to choose your Home Loan lender
By
Harshvardhan Roongta
So
you have decided to buy your dream home but are confused about whom to take
the Home Loan from. You have collected many brochures and may be receiving
conflicting advice from friends, relatives and associates about the relative
merits and demerits of various lenders. You have seen rates like 10.75% p.a.
tossed around but are unable to understand why the monthly installments
given by the HFCs claiming to give those kinds of rates are more or less
equal to the monthly installments given by other HFCs/Banks charging much
higher rates. In between you hear about the perils of pre payment charges,
EMI changes during the loan tenure, etc. Unless you are a financial genius
(and sometimes even than) choosing your Home loan lender is always be a
tough decision. This article provides a few guidelines to help you with your
decision.
First
of all you must realize that the lender cannot be and is normally never
preferred on interest rates alone. The other factors which are equally if
not more important can be classified as under:
1)
HFCs/Banks calculate your loan eligibility differently. Some lenders for
example are very comfortable with self-employed persons and their loan
eligibility calculations reflect that whilst some of them have special
schemes for salaried classes drawing salaries above a certain value. In
quite a few cases the amount of loan the lender is willing to give will
override cost and other considerations.
2) The approval of your
property is an important consideration for choosing your lender. If you are
buying a new property than (other things remaining equal) it makes sense to
choose a lender who has pre approved that property. In case of a resell
property it might be good idea to show the draft documentation of the
property to the potential lender before confirming your choice. Some lenders
do not fund under construction property. Some banks are uncomfortable making
part payments on self-constructed property. All these factors needed to be
taken into account before choosing your lender.
3)
Familiarity of the lender with home loan procedures can be another important
consideration. I know that sounds strange - how can a lender, which
advertises its home loan offering, not be conversant with home loan
procedures? But this problem is especially glaring in the case of some
nationalized banks for whom home loans is only one of the activities
(although a very important one) that they undertake. Whilst the bank itself
will have lots of experts who know this product inside out, this expertise
is rarely available at the local branch level thus leading to avoidable
delays, especially at the disbursement stage.
Having
considered all these non-financial factors let us turn to the cost factors.
Here again the method of interest calculation can drastically change
comparisons. The biggest mistake you can make is comparing stated interest
rates. The best way to compare two offers is by checking the installment
amounts per lac of loan for the same loan tenure. Please ensure that at
least one offer is from a lender which works on a monthly rest basis (or as
they put it on a daily rest basis). The other factor to take into account is
the upfront fees payable (by whatever name called). The fees could be called
administration fee, sanction fee, legal fee, technical fee, file fee, MOF,
etc. This adds to your total effective cost of the loan. Most people take
this cost into account by dividing the percentage cost incurred over the
tenure of the loan and adding it to the interest cost. For example if the
customer is paying 1.8% fee he normally assumes it adds 0.12% (which is 1.8%
divided by 15 years) to the stated interest cost. In actual fact it adds
about 0.35% to the effective cost in this case. I have been able to
calculate this addition to effective cost with the aid of my friendly
computer. However a rule of the thumb could give you more or less the same
results. The thumb rule is that addition to effective cost of the loan due
to upfront fee is equal to:
(2
x Upfront cost as %age of loan amount/tenure of loan) plus 0.05%. In the
above example this would be (2 x 1.80%/15)+0.05%= 0.29%. This thumb rule
will hold more or less across various loan tenures.
Another
important factor you need to keep in mind is the prepayment charges, charged
by the lender. Most borrowers end up partially or fully prepaying the home
loan and hence a prepayment charge adds to your total cost. Other things
remaining equal you must choose the lender who does not charge a prepayment
charge.
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