8 Jun, 2015, 08.00AM IST | Economic Times
Subir Mehta and his wife are both working. They have been living in a rented accommodation for the last eight years. They are now keen to purchase a house worth Rs 1 crore. They have built a kitty of Rs 30 lakh for the down-payment. They are now evaluating banks as well as housing finance companies for the loan.
Each lender has made an offer. The Mehtas have decided to go ahead with the lender offering the lowest interest rate. Should interest rate be the sole parameter on the basis of which a choice should be made? What if the lenders offer the same interest rate?
When lenders offer a loan, they take the risk on their books. Therefore, the onus of choosing well is on the lender. The borrowers can make their choice based on the product and service features. The core features of a loan are the tenor, fixed and floating components, and administrative and processing costs. The Mehtas must ensure that they review the terms and conditions of different lenders prior to narrowing down on any deal.
The amount of loan or the percentage of cost of the property that the lender may be willing to cover can vary. As borrowers, the Mehtas may be keen to minimise the monthly outgo in the form of EMIs.
The EMI varies, based on the amount of loan, tenor and interest rates. The Mehtas should see which combination works best for them and find out if any of these features can vary during the period of the loan. For example, any modification in the interest rate can modify the EMI or tenor. The interest rate might be the same across two lenders, but these specific features may be different.
Also, lenders typically use various criteria while ascertaining the loan eligibility. These primarily include the borrower’s monthly income and expenses, age, number of dependents and such.
While the Mehtas may like to maximise the amount of loan, they need to be sure that the administrative costs, and the EMI, are comfortable to bear.
The time period taken for sanctioning the loan, the paperwork involved, the legal and compliance issues, and the time for disbursal are all service issues that may vary across lenders. Therefore, the Mehtas may be better off making their choice after evaluating these aspects.
The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta