Purchasing a house is one of the biggest investments that a person makes in his/her lifetime. Since it involves a huge sum of money, most people require financing to buy a home. In India, home loans are one of the most popular ways to finance a home purchase. However, before opting for a home loan, it is important to understand the pros and cons associated with it.
Pros and cons of opting for a home loan: In India, taking a home loan from a bank has its own advantages and dis-advantages.
Pros:
- Affordability: Home loans offered by banks in India come with affordable interest rates, which makes it easier for borrowers to repay the loan amount over a longer period.
- Tax benefits: As mentioned earlier, home loans provide tax benefits to borrowers under section 80C and section 24 of the Income Tax Act, 1961.
- EMI payments: Opting for a home loan from a bank provides the borrower with the convenience of EMI payments, which allows them to repay the loan in a systematic and organized manner.
Cons:
- Long-term commitment: Taking a home loan is a long-term commitment, which means that the borrower will be repaying the loan amount for a longer period.
- Risk of default: Defaulting on a home loan can have serious consequences, which include the possibility of losing the property.
- Impact on credit score: Defaulting on a home loan can have a negative impact on the borrower’s credit score, which can affect their ability to get loans in the future.
How to select the bank from where the home loan should be taken?
When selecting a bank to take a home loan from, there are several factors that should be considered. These include:
- Interest rates: The interest rates offered by the bank should be competitive and affordable.
- Loan amount: The bank should be able to provide the required loan amount.
- Processing fees: The processing fees charged by the bank should be reasonable.
- Loan tenure: The bank should offer a suitable loan tenure that allows the borrower to repay the loan comfortably.
- Reputation: The reputation of the bank should be considered before opting for a home loan.
Prepaying the loan or investing surplus funds?
If a borrower has surplus funds available, they can either prepay the loan or invest the surplus funds. Prepaying the loan has several advantages, which include:
- Reducing the interest burden: Prepaying the loan reduces the interest burden and helps the borrower save money in the long run.
- Reducing the loan tenure: Prepaying the loan reduces the loan tenure, which means that the borrower will be able to repay the loan faster.
- Improved credit score: Prepaying the loan improves the borrower’s credit score.
However, investing the surplus funds can also provide good returns, which can be used to repay the loan in the future. Whether to prepay the loan or invest the surplus funds depends on the borrower’s financial goals and risk appetite.
On prepayment, whether the EMI should be reduced or the tenure?
If a borrower decides to prepay the loan, they can either reduce the EMI or the tenure. Choosing between these two options depends on the borrower’s financial situation and goals.
Reducing the EMI: If a borrower chooses to reduce the EMI, the loan tenure remains the same, but the borrower pays a lower EMI. This can be beneficial for borrowers who want to reduce their monthly outflow and have a stable income.
Reducing the tenure: If a borrower chooses to reduce the loan tenure, the EMI remains the same, but the borrower repays the loan faster. This can be beneficial for borrowers who want to repay the loan quickly and save on interest costs.
Recent Reserve Bank of India (RBI) Guidelines on Home Loans
As per the recent RBI guidelines, the lender banks granting EMI-based floating rate loans are instructed to consider borrowers’ repayment capacity to account for potential fluctuations in the external benchmark rate, allowing for adjustments in EMI amounts or loan tenor. To address consumer grievances stemming from rising interest rates, these lenders must establish a policy framework. This framework mandates clear communication with borrowers regarding the potential impact of benchmark rate changes on their loans, offering the option to switch to a fixed rate, adjust EMI or tenor, or make prepayments without foreclosure charges. All associated charges must be transparently disclosed, and lenders must prevent negative amortization in floating rate loans. Quarterly statements must be provided to borrowers, detailing key loan information. These instructions apply to various instalment-based loans and must be implemented for both new and existing loans by December 31, 2023, with existing borrowers informed of their options.
Conclusion:
The current economic scenario in India is favourable for home loans. The government has launched several schemes to promote affordable housing, which has made home loans more accessible and affordable for borrowers. Moreover, banks are offering competitive interest rates on home loans, which has further made it easier for borrowers to finance their home purchase. The recent RBI guidelines encourages more and more individuals to apply for them and to get all the lenders on the same page in terms of rules and regulations.
In conclusion, opting for a home loan from a bank in India has its own advantages and disadvantages. Borrowers should carefully consider their financial situation, goals, and risk appetite before opting for a home loan. When selecting a bank to take a home loan from, borrowers should consider several factors such as interest rates, loan amount, processing fees, loan tenure, and reputation of the bank. Lastly, whether to prepay the loan or invest surplus funds depends on the borrower’s financial goals and risk appetite, and choosing between reducing the EMI or the tenure also depends on the borrower’s financial situation and goals.
