'Rate Of Interest Is the Only Deciding Factor For a Home Loan': Myth Buster

A low rate of interest simply implies that the interest per annum charged by the lender will be lower. While this seems to be ideal, the catch lies in the term 'per annum'

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If you are planning to finalize your lender by just looking at the rate of interest (ROI), it would be like choosing your life partner by looking at their WhatsApp DP! Even if it is partially true, it is never the complete picture. A very important question to be asked here is: Does a lower rate of interest, imply lesser interest outflow? As the small star mark beside the dreamy rate of interest will tell you, there is more to this story!

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What does lower ROI imply?

A low rate of interest simply implies that the interest per annum charged by the lender will be lower. While this seems to be ideal, the catch lies in the term ‘per annum’. Since the number of years is fairly long, the amount of interest paid out over the horizon of 15-20 years might surprise you. See this example:

Let us take two lending companies A and B. Now, A is offering an INR 10 lakh loan at a rate of 9 per cent per annum for 20 years while B is charging 11 per cent for the same amount for 15 years. The seemingly obvious choice would be to go for company A since that would get you a lower EMI of INR 8,997 as against INR 11,366. However, that would cost you INR 11.59 lakh over the term (in interest alone) as against INR 10.45 lakh if you had chosen company B. So, while a lower rate of interest on a loan is a good thing, it is necessary to understand all terms and related charges and fees before choosing your lender. A lower rate of interest might not always translate into a lower interest outflow.

Now that you can read into the interest rates and what they truly mean, let me introduce you to the big picture. These are the small fees, charges and facilities which can go a long way in determining not just your financial but also your mental health for the next 15-20 years. Treat these as a checklist to finding your ideal financial partner:

Prepayment facilities

Yes! “Prepayment” is your superpower. This will help you get debt free way faster than you think. And, your interest outflow will be significantly lower. Any reduction in principal means, zero interest incurred on the amount prepaid and that is an absolute win for you.

However, some lenders may not be ‘prepayment friendly’. There could be certain roadblocks with their existing processes, they may charge a fee on prepayment or there may be restrictions around the number of such transactions carried out per financial year or their tedious prepayment process would require you to take a day’s leave to complete formalities (and a visit to the spa after).  Remember to clarify this before you choose your lender.

Pro tip: Even if you are not able to pay a lump sum amount towards your prepayment, start small. Some HFCs allow amounts as low as INR 500 every month as a prepayment. You will be surprised to see how much you can save just by paying INR 500 every month.

Customer centricity

Does your lender understand you? Often, quality of service is all that stands between a dream and actually owning a home. Always, choose partners who pride themselves on faster processes and quick turnaround time. Such lenders are also likely to be prompt with any queries and concerns in the future.

Lender’s reputation

The right lender not only gives you the financial help but also the right advice. Processes will be transparent and there won’t be any hidden charges. Make sure you understand the terms and conditions and fine prints properly.

Loan eligibility

Different financiers have different ways of measuring your eligibility for a loan. Most lenders would simply look at your income statements to assess your potential; a more skilled lender would gather more information to prepare a more wholesome profile. A better understanding of your family income could help you have a better loan eligibility.

Convenience or digital accessibility

If the lockdown has taught us anything it is the importance of digital accessibility. If couples can maintain long distance relationships through this time, there is no excuse for your lender to be unavailable digitally for statement of account, principal outstanding, make part payments, EMI reminders and access necessary documents for ITR filing, etc.

Closure charges

Suppose your bonus actually came in one go or the lottery you’ve always dreamt of becomes true today and you get so much money that you decide to be done with your entire loan in one go. Will your lender let you off the hook so easily or will they charge you for this? Find a lender who finds their happiness in yours!