NBFCs fix interest rates as per prime lending rates whereas banks apply floating rates directly linked to Marginal Cost-of-funds based Lending Rate (MCLR). A borrower can skip lengthy paperwork when applying at an NBFC, unlike banks who usually take time to process a housing loan.
A close honest look at one’s financial health in terms of income capacity, existing liabilities and home-buying budget can help make the right borrowing decision.
Pay attention to the following clauses in your loan agreement:
Various charges on the loan: Lenders levy various charges such as processing fees, admin fees, document handling changes, etc to process the loan application that add to the cost of borrowing. Go through each of these charges and take a copy of the schedule for future reference as they are subject to change based on regulator guidelines. Hence, borrowers can refer to the company’s website for the latest charges applicable on their loan account;
Interest spread clause: Interest is charged with reference to lenders’ internal benchmarking i.e. Retail Prime Lending Rate (RPLR) based on the borrower’s risk profile. Spread is the difference between borrowing rates and lending rates of banks. There may be a reset clause that allows the lender to reset the spread of the loan; a change in the spread can change the rate of interest at which the borrower repays the loan. Hence, pay close attention when the lender revises the spread and under what conditions;
Prepayment/foreclosure clause: These charges are governed by certain regulatory guidelines based on the type of interest opted for. Before signing the loan agreement, borrowers should refer to the schedule of charges to understand the terms and conditions related to prepayment or foreclosure of the loan;
Clauses related to default: Default will be considered while the borrower is not making payment of interest or principal for a certain period. The loan agreement mentions various clauses related to loan default, which the borrower should go through thoroughly;
Disbursement schedule: Normally for under-construction properties, lenders disburse loans linked to the construction stage. This will define the timelines for subsequent disbursements to ensure the builder gets timely and enough payment from the lender to complete the borrower’s property. To avoid any confusion between the lender, borrower and builder, the disbursement schedule should be understood thoroughly and agreed upon by the builder as well.
The central bank decides on repo rate revisions every couple of months based on the state of the Indian economy. Keeping a close watch on these interest rate movements allows borrowers to gauge whether they are being charged fairly by their home loan lenders, thereby allowing them to negotiate or transfer their home loan account.
Insuring your home against fire, natural calamities, and other such risks is critical. Apart from property insurance, lenders may offer life and medical insurance to ensure regular loan repayment in case of a casualty in the family.
Not securing your liabilities is a risk, which most borrowers do not recognise. It is highly recommended to take insurance cover.