Stagnant property prices, hike in tax breaks and the reduced GST on real estate have brought a new wave of affordability empowering those looking to own their dream houses. First-time homebuyers see rate cuts and banks rolling out repo rate-linked interest rates as an enticement to act on. Cheaper loans and incentives are driving a home-buying spree, but how can first-time homebuyers make the most of it? In this article, we detail the key elements consumers should consider when shopping for a home.
Understanding Housing Loan Market in India
Rapid urbanization and the increasing trend towards nuclear families are fuelling the housing market in India, which needs over 100 million additional housing units by 2022, according to recent estimates.
A recent survey reveals that the 35-45 age group dominates the property market while the 25-35 age group is increasingly becoming active. The majority of these young buyers are first-timers and since they are without substantial savings, they look for home loans. This may push mortgage penetration, which is 28% in 2019, and is expected to rise to 40% by 2025.
Make the Most of Incentives
An important motivating factor for first-time homebuyers is the recent spate of incentives announced by the government. The Pradhan Mantri Awas Yojana provides for interest subversion ranging up to 6.5% for first-time homebuyers having an annual income of less than ₹ 18 lakh. The subsidy is applicable to a principal component not exceeding ₹ 12 lakh irrespective of the amount of home loan. Additionally, first time home buyers from economically weaker sections and the middle-income group also get a one-time subsidy of ₹ 2.35 lakhs under the Credit-Linked Subsidy Scheme.
Apart from this, the tax break on the annual home loan interest payable has been hiked from ₹ 2 lakh to ₹ 3.5 lakh subject to a housing loan ceiling of ₹ 45 lakh and for loans sanctioned before 31 March 2020. A first-time homebuyer also gets an exclusive additional annual tax deduction of ₹ 50,000 on the home loan interest.
Find a Home Loan That You Can Afford
In general, home loan rates have declined during the past 10 years, which is beneficial to homeowners. However, not all lenders offer the same rate of interest, so it is important to compare the best rates available, before applying for a home loan. To get a better sense of how much how much loans cost from various lenders, it is helpful to use free tools like ValueChampion's guide to the best home loans available in India.
Apart from the interest rate, you should also pay attention to the processing charges that financial institutions want you to pay to get the loan sanctioned. This varies from bank to bank in the range of 0.20% to 1% of the loan amount. Many institutions charge a flat fee while some offer zero-processing fee promotional offers. It is important to account for the total cost while applying for a home loan and look for any hidden charges.
When to Choose Banks over NBFCs
There are two types of institutions in India offering home loans – banks and non-banking financial companies (NBFCs). Compared to banks, NBFCs typically offer a higher amount of loan that covers stamp duty and registration charges. They are usually less stringent as banks as far as the credit score, documentation, and the eligibility of an applicant are concerned. The process is simple and quick.
However, banks generally offer loans at cheaper interests as they follow repo rate-linked or marginal cost of fund-based lending rates. They are quick to pass off the changes in rates to borrowers. Banks also tend to offer an overdraft facility that helps bring down the total cost. The surplus cost is parked in the linked account and treated as prepayment.
Banks vs NBFCs
|Loan amount||Up to 80% of the property value||Go beyond 80% loan to value ratio, covers stamp duty & registration|
|Lending rate||Lower rates, linked to repo rate & marginal cost lending rate||Higher rates, linked to prime lending rate|
|Paperwork and documentation||More stringent, multi-layer checking||Less stringent, simple, and faster|
|Approval||Multi-step process||Quicker process|
|Interest rate changes||Quick to pass benefits to borrowers||Slower to pass benefits to borrowers|
|Terms and conditions||Usually strict criteria||More flexible, simple criteria|
|Customer service||Lacks compared to NBFCs||Dedicated customer care|
|Credit score||Given utmost importance||More relaxed rules|
Pay Attention to Floating & Fixed Rates
Typically, the home loan interest is of two types – fixed and floating. A fixed interest rate is a misnomer, as it is reset after every 2 years calculating the prevailing rate of interest and always put 1% to 2% above the floating rate. Fixed rates can be advantageous when interest rates are expected to rise, as the borrower will be locked into a lower rate. On the other hand, by opting for floating interest rates, you can have the maximum benefit from the repo rate-linked interest regime adopted by banks. As the Reserve Bank of India revises its repo rate bimonthly, lenders set their floating interest rate accordingly and pass off benefits to borrowers immediately. You don't have to wait until a year or two for the reset. Between February and October 2019, repo rates have gone down by 110 points and this has its impact on the bank rates too.
How To Save Money on Home Loans
With due diligence, you can make important savings while applying for a home loan. A healthy credit score is crucial to induce a lender to lax the interest rate by a few basis points and this helps you save a significant amount of money. The option for balance transfer facility comes handy to switch your outstanding loan amount mid-way to another lender offering a lower interest rate. You may increase the down payment part and save on paying the interest amount. Making part prepayments for principal every year or once in a few years also brings down the total cost of a housing loan to a considerable extent.