Planning to Take a Home Loan? Read This First!

For most middle-class families, owning a home is one of the biggest dreams. And to fulfill that dream, taking a home loan is often the most practical path. However, it’s important not to rush into any decision with your eyes closed. Before applying for a loan, a little bit of research can go a long way. Comparing interest rates, understanding the terms, and checking for hidden charges can help you get a better deal. In the points that follow, we’ll discuss what you must absolutely keep in mind to make your home loan truly beneficial.

Know the Two Types of Interest Rates

Home loans generally come with two types of interest rates: fixed and floating. Before you apply, it’s important to understand the difference and decide which one suits you best.

A floating interest rate changes over time. It moves up or down based on market conditions and RBI policy decisions. This means your EMI could decrease when rates fall, but it could also rise when rates go up. It offers flexibility, but with some uncertainty.

A fixed interest rate, on the other hand, remains the same throughout the loan tenure. You know exactly how much you’ll pay each month. It’s a stable option but may cost a little more compared to floating rates.

If you start with a floating rate but later want to switch to a fixed rate, most banks allow this. However, they usually charge a switch-over fee, typically around 0.5% of the outstanding loan amount.

Also, if you plan to pre-close your loan or make part-payments, be aware of possible penalties. Some banks charge between 1-3% of the EMI or outstanding amount for early repayment. If your current loan has a higher interest rate, you can also consider home loan balance transfer, either within the same bank or to another bank offering better terms. But remember, this involves applying for a fresh loan and completing all documentation again.

Loan Amount and Repayment Tenure: What You Should Know

The amount you can borrow through a home loan largely depends on the value of the property and your repayment capacity.

If the property cost is up to ₹30 lakhs, whether you’re buying or building, you can get up to 90% of the total value as a loan. For example, if your home costs ₹25 lakhs, the bank may offer a loan of up to ₹22.5 lakhs. The remaining amount, ₹2.5 lakhs, must be arranged by you as a down payment.

For homes priced between ₹30 lakhs and ₹75 lakhs, most banks will finance up to 80% of the property value. And for properties valued above ₹75 lakhs, you can usually borrow up to 75%.

The maximum repayment tenure for a home loan is typically 30 years, or until the borrower reaches 70 years of age, whichever comes earlier. However, if you choose a shorter tenure, you can save a significant amount on interest payments over time.

Most banks also allow part-prepayment at any point during the loan. That means, if you have extra funds, like a bonus or a side income, you can use it to pay off a part of your loan. You can also close the loan entirely before the end of the tenure. Usually, banks do not charge prepayment or foreclosure penalties, especially for loans with floating interest rates.

Are You Eligible for a Home Loan? Let’s Understand the Basics

If you’re a salaried employee, most banks require you to have completed a minimum fixed period in your current job before considering your home loan application. This is usually 1 to 2 years, depending on the bank’s policy.

Apart from your job duration, other key factors include:

• The reputation and stability of the company or organization you work for
• Your credit score and financial discipline
• Your monthly income and existing financial obligations

For salaried individuals, most banks consider 60 years as the maximum retirement age, while for self-employed or businesspersons, it’s generally 65 years. Your age at the time of application plays a big role in deciding how much loan you’re eligible for. Younger applicants (in their 30s and 40s) tend to qualify for higher amounts and longer tenures, while older applicants may have limited eligibility.

So, if you’re planning to construct or buy your dream home, applying for a home loan sooner rather than later can give you better financial flexibility.

What All Can Be Covered Under a Home Loan?

Home loans aren’t just for buying a house. You can also take a home loan for:

• Constructing a house on your own land
• Buying a fully built home or apartment
• Purchasing a plot and constructing a house on it
• Renovating or extending an existing house
• Interior works and furnishing, like modular kitchen, wardrobes, etc.

However, if you make any changes to the original construction or renovation plan that you submitted while applying for the loan, you must take prior approval from the bank.

Also, banks usually reserve the right to inspect the property at any stage of the construction. This is to ensure that the loan is being used as intended and the progress aligns with the declared plan.

Compare, Ask, Negotiate – and Then Finalize Your Home Loan

If you want to get a home loan at a lower interest rate, don’t just settle for the first bank you approach. Instead:

• Visit multiple banks or check their websites.
• Compare both floating and fixed interest rates.
• Ask how changes in interest rates will affect your EMI and loan tenure.
• Carefully check other charges like processing fees, legal fees, and prepayment penalties.

👉 Tip: Always ask if there’s room to reduce interest rates or waive some fees. Banks may be open to negotiation.

Also, banks usually ask you to contribute 10-25% of the property cost as a margin money/down payment. This varies, so compare how much each bank demands.

Once you’re satisfied, ask the bank for a detailed offer letter with all interest rates, fees, and terms clearly mentioned. Go through the document carefully before signing the final loan agreement.

Understanding How Loan Interest Is Calculated

Banks usually calculate home loan interest using two methods: Flat rate and Reducing balance rate.

• Flat Rate: The interest is calculated on the full loan amount for the entire loan period, regardless of how much you’ve already repaid. This usually ends up being more expensive.
• Reducing Balance Rate: Interest is calculated on the outstanding balance, and it decreases every time you make a payment. This is usually more cost-effective and is recommended.

👉 Usually, banks use the flat rate to show you the interest upfront, but the reducing balance rate reflects the real cost better, as interest reduces over time. So, it’s better to choose a reducing balance rate loan with monthly interest revision. This is usually the most beneficial option in the long run.

Let’s Talk About Interest Settlement

Usually, banks calculate loan interest on an annual basis. But actually, they track interest every month, every week, even every day.

Most banks collect your monthly EMI payment, and when you pay, they adjust the interest on the principal balance at that time. This means your interest is recalculated continuously as you repay.

Even though interest is worked out monthly or daily, the bank sums it up and shows the total annual interest for your loan.

So, when you take a home loan, ask the bank if they use the reducing balance rate, that’s the fairer method. This method needs you to pay monthly interest properly calculated on the reducing balance, which lowers your interest over time.

This way, you only pay the interest you owe at each stage. It’s the best for borrowers.

A home loan is a long-term financial commitment. Taking the time to understand how it works can save you money, reduce stress, and help you make smarter choices. Don’t hesitate to ask questions, negotiate, and read every document carefully before signing.