Search the Internet          Tips  Sites: Finance, Investment

Home loan seekers: Choose the right lender

Harsh Roongta

So you've decided to buy a house, but are confused about whom you should choose as your home loan provider. You've probably amassed many brochures, and received all sorts of conflicting advice from friends, relatives and associates about the relative merits and demerits of various lenders.

You've seen rates like 10.75 per cent per annum tossed around but are unable to understand why monthly instalments at those rates are still more or less the same to instalments of housing finance companies charging much higher interest rates.

In the midst of all this swirl, you might also hear about the perils of pre-payment charges, EMI changes during the loan tenure, etc.

Unless you are a financial genius (and sometimes even that might not help!), choosing your home loan lender is a really tough decision. This article provides a few guidelines to help you with your decision.

First of all, you must realise that a lender should not be and cannot be preferred on the basis of interest rates alone. There are other factors, equally if not more important to be considered:

Housing finance companies/banks calculate your loan eligibility differently. Some lenders, for example, are very comfortable with self-employed persons and their loan eligibility calculations reflect that; some of them have special schemes for salaried classes drawing salaries above a certain value. In quite a few cases, the loan amount a lender is willing to consider will override cost and other considerations.

The approval of your property is an important consideration when choosing your lender. If you are buying a new property, then other things remaining equal, it makes sense to choose a lender who has pre-approved that property.

In case of re-sale property, it may be good idea to show the draft documentation of the property to a potential lender before confirming your choice.

Some lenders do not fund "under-construction" property. And some banks are uncomfortable making part payments on self-constructed property. All these factors needed to be taken into account before choosing your lender.

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 offerings not be conversant with home loan procedures?

Unfortunately, it's a glaring problem in case of some nationalised banks for whom home loans is only one of the activities (although a very important one) they undertake. While the bank itself will have lots of experts who know the product inside out, this expertise is rarely available at the local branch level, 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 instalment figure for each 100,000 of amount lent, for the same loan tenure. Please ensure that at least one offer is from a lender who works on a monthly rest basis (or as they put it, on a daily rest basis).

The other factors to take into account are the upfront fees payable (by whatever name called). They could also 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 per cent fee, he normally assumes it adds 0.12 per cent (which is 1.8 per cent divided by 15 years) to the stated interest cost. In truth, it adds about 0.35 per cent 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. That thumb rule is: (2 x upfront cost as percentage of loan amount/tenure of loan) plus 0.05 per cent. In the above example, this would work out to (2 x 1.80 per cent/15) + 0.05 per cent = 0.29 per cent. 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 a lender who doesn't charge a prepayment charge.

The author is managing director, Apnaloan.com

Powered by

ALSO READ:
Home loans and the salaried class
Get your basics on home loans right
Real estate prices may not appreciate soon
How to cover your home loan
Insure your dream house
Realty check for house hunters
How smaller housing finance firms stay afloat
The Rediff Budget Special
Money