Festive Season Home Loans: Don't Let A Lower EMI Fool You

Buying a house during the festive season has its attractions. Developers come up with payment schemes, banks advertise lower home loan rates, and some lenders even waive processing fees. For families who have been putting off a purchase, these offers can provide the nudge they need to start looking for a property.

But before rushing to book a house, borrowers should spend some time looking at the home loan being offered. The EMI shown in an advertisement may look affordable, but that alone does not tell you whether the loan is worth taking.

A lender can bring down the monthly instalment by stretching the repayment period. The advertised rate may also come with eligibility conditions, while other charges could add to the cost. What looks like a good deal today may turn out to be an expensive borrowing decision over the next 20 or 25 years.

A Smaller EMI, But A Bigger Interest Bill

Consider a Rs 50 lakh home loan at an annual interest rate of 8.5 per cent. For a 20-year repayment period, the EMI comes to approximately Rs 43,391. If the borrower opts for 25 years, the monthly payment drops to around Rs 40,261.

The difference is a little over Rs 3,100 a month. For a family juggling household expenses, school fees and other loan repayments, that saving can be tempting.

But look at the total interest paid. On the 20-year loan, it comes to around Rs 54.1 lakh. By extending the repayment period to 25 years, the borrower ends up paying nearly Rs 70.8 lakh in interest. That is an additional Rs 16.7 lakh for the same loan amount.

The lower EMI may make the monthly budget look better, but the borrower pays for it over a much longer period. Those who can manage the higher instalment should consider a shorter tenure. However, there is little point in choosing a high EMI if it leaves no money for savings or emergencies.

Will The Attractive Rate Last?

Festive loan advertisements tend to put the interest rate right up front. What borrowers should find out is whether they will actually get that rate and how long it will apply.

Lenders generally take several factors into account, including the applicant's credit score, income, employment and loan amount. A rate advertised by a bank may not be available to every applicant. Even a small difference in the rate can add up over a long repayment period.

Those taking floating-rate loans should be particularly careful. The interest rate can change when the lender's external benchmark changes. If rates move up, the borrower may have to pay a higher EMI or continue paying for a longer period.

Before accepting the offer, ask the bank which benchmark the loan is linked to, what spread it is charging and how often the rate is reviewed. Also find out what happens to the repayment schedule if interest rates rise. It is better to settle these questions now than be surprised by a higher repayment later.

Don't Get Carried Away By A Processing Fee Waiver

A zero processing fee sounds attractive, particularly when buyers are already spending a considerable amount on the down payment, stamp duty and registration. But this saving should be seen in perspective.

There are other expenses involved in taking a home loan. Legal checks, property valuation, documentation and administrative charges may still have to be paid. The amount and nature of these charges differ from one lender to another.

A borrower may find that one bank is offering a lower interest rate but charging a processing fee, while another is waiving the fee but quoting a slightly higher rate. The second offer may save money at the beginning, but the higher interest rate could cost more over the years.

Get both lenders to provide a written estimate of the total charges. A comparison of the EMI, interest payable and upfront expenses will give you a much better idea of which offer is cheaper.

Think Twice Before Accepting Loan-Linked Insurance

When a home loan is sanctioned, borrowers may also be offered insurance to cover the outstanding loan in specified circumstances. Some lenders may suggest property insurance as well.

There is nothing wrong with taking insurance, but don't sign up without checking the details. Find out whether the policy is compulsory or optional, what it covers, how long the protection lasts and what exclusions apply.

The premium also deserves attention. If the lender adds it to the home loan instead of asking the borrower to pay separately, interest will be charged on that amount as well. This pushes up the actual cost of borrowing.

Borrowers should compare available policies and decide how much cover they need. Buying insurance simply because it has been offered across the loan desk may not be the best decision.

Don't Borrow The Maximum Amount The Bank Offers

A bank's loan eligibility calculation may suggest that a borrower can afford a particular amount. But the household's monthly budget may tell a different story.

Buying a house costs much more than the EMI that appears in the loan calculation. There are several other expenses to deal with, including stamp duty, registration, furniture, interiors and shifting. Even after moving in, the bills don't stop. Maintenance charges and property tax become part of the monthly or annual household budget.

The burden can be heavier if the house is still being built. A buyer may find themselves paying rent for their current home while also paying pre-EMIs or making instalments to the builder. Managing both can put considerable pressure on monthly finances.

Before taking a loan, buyers need to look at what will be left in their hands after paying the EMI. There should still be enough to meet everyday expenses, children's education and medical needs. Using up all available savings for the down payment is best avoided. An emergency fund can prove invaluable if an unexpected expense or loss of income comes along.

Look Beyond The Festive Discount

Festive offers can help borrowers save money, but not every offer will suit every homebuyer. A lower interest rate, a genuine fee waiver or better repayment terms can make a difference. The trick is to work out the savings instead of taking the lender's word for it.

Speak to at least two or three banks, compare their written offers and check the rules on prepayment and foreclosure. Existing borrowers can also ask their lenders for a rate reduction. If another bank is offering better terms, a balance transfer may be worth considering after accounting for the associated costs.

Buying a house is a major financial decision. The home loan should be examined just as carefully as the property, its location and the builder's credentials.

A lower EMI may make the festive purchase seem more affordable. But what matters is how much you will have paid the bank by the time the loan is finally cleared.