Choosing the best option of home loan

Today the economic structure of the society has changed. The youngsters working with MNCs are earning good package. As the incomes have increased people are looking for different options for investments. Investing in a property either buying home or land is one of the best options being looked upon as loan for this is being offered by almost every bank.

Although every bank is offering multitude housing loan options, but one has to be very careful and choose the one that best suits your financial profile otherwise you might end up paying a heavy price. Here some steps which will help you in choosing the most suitable home loan scheme.

First is the Eligibility: Your income level decides the loan amount. The loan can be taken individually if your income level is up to the mark otherwise you can go for a joint loan with your spouse or some specified relatives who have a means of income.

The one thing to know is bank might sanction more amount of loan than you have applied for on the basis of your current income if you choose a loan with a longer term. Though the eligibility will generally be the same across all institutions, study the variations carefully.

The Time span: Before applying for the loan do your homework about the most attractive rates. Normally, banks offer home loans for a five, ten- or 15-year period. The interest rate depend is in relation to the time period of the loan repayment i.e. interest rate for a five-year loan may be one to two percentage points lower than ten-year or a fifteen-year loan. But you cannot to go for five year loan depending on this sole criterion.

You have to choose the time period very carefully if the period is too short; you might end up spending a more-than-comfortable portion of your income on repayment of principal and interest and be left with little for your living expenses. Apart from this you might face financial crisis incase unforeseen expenses crop up. In case you choose to repay over too long a term, you will be still paying the installments of home loan at a time when other financial obligations, such as your child’s higher education, may need to be met.

Fixed or floating rates which is best?

The most important question must be answered before taking loan. Fixed interest is always a bit higher than floating interest. But that is the premium you pay for maintaining the same repayment amount, month after month, year after year, irrespective of the interest rate fluctuations that may occur.

In today’s scenario where there has been a rapid change in the interest rate this would seem ideal. You must ask your banker if the fixed rate is really fixed or whether it will be reviewed, say, once every two or three years.

Although fluctuating rate loans are cheaper but they come marked with uncertainty. For, instance, if you had taken a housing loan three years ago when interest rates were benevolent, today your monthly installments might hit the roof unless you have extended the tenure to stick to the same amount.

But this might be temporary. In case the rates go below the fixed rate in another two years, you will be able to save something for yourself.

Knowing the long-term nature of the loan, a long-term view on interest rate movement should guide your choice.

Repayment Options

Pay attention to the repayment options available before choosing a scheme. Some banks offer a step-up facility under which you can pay a lower EMI (equated monthly installment) in the initial years and gradually increase your payments corresponding to growth in your income.

In this you also get an option to step up the EMI whenever you feel you can increase the repayment amount. Some banks also give loan to buy a property under construction, in this case some banks give option to decide on how much you want to pay back till the property is ready; the interest element being the minimum required to be paid.

This in turn helps you begin the repayments as soon as possible and finish the repayment within a schedule. Also, check with the banks whether they have option of pre-paying loan at any point if you have a lump sum on hand. Never forget to compare the charges for exercising any of these options across lending institutions.

Tax benefits on loans

Both principal as well as interest payments carry tax benefits.

Under section 80C, the tax benefit on principal amount up to a maximum of Rs 1 lakh along with other savings such as insurance premium and PPF, and on interest payments up to Rs 1.5 lakh (subject to various provisions in the Act) as a deduction from Income from house property.