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21 May, 2022
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5 Questions To Answer Before Applying For A Central Bank Home Loan

Taking a home loan not only helps one realize the dream of purchasing a house of their own but also provides tax benefits through sections 80C and 24b. And since most home loans involve bigger loan amounts and longer tenures, any mistake or incorrect decision can have adverse long term implications on the borrower’s finances. Therefore, we explain to you five unmissable questions to ask yourself when taking a Central bank of India home loan.

What type of interest rate is suitable for you-Fixed, hybrid or floating?

While taking a home loan, the borrower needs to decide the type of interest rate to be levied on the loan, fixed, hybrid or flexible. The fixed interest rate remains the same throughout the entire tenure of the loan, irrespective of the market fluctuations. However, keep in mind that some lenders provide fixed rates only for a certain portion of the tenure instead of the entire tenure. 

On the other hand, flexible rates of Central bank of India home loans are tied to the marginal cost of lending rate (MCLR) that is based upon the repo rate set by the RBI. And since the RBI keeps reviewing this rate periodically, the banks also need to change their MCLR or RLLR accordingly, as their cost of borrowing reduces/rises upon any change in repo rate. 

If the borrower wants a fixed EMI per month without the risk of any change in it due to market fluctuations, the option of a fixed-rate loan may be considered. However, remember that in future, if the interest rates fall, the borrower won’t be able to avail the benefit of lower EMIs and would have to keep repaying the loan at the fixed rate. There are even hybrid rate loans offered by some lenders, which include the fixed rate for some initial years, and the then flexible rate gets applied.

Whereas, with a floating rate, even though a rise in MCLR or RLLR would imply an expected rise in the existing interest rate on the reset date, this rise can be offset through prepayment or by opting for a home loan balance transfer. Also, remember that while servicing the home loan as per your home loan eligibility, the borrower may switch from floating to fixed rate and vice versa; however, rate switching charges would be levied by the concerned lender.

Which loan repayment tenure should you choose -Shorter or Longer?

The amount of EMI which you would be required to repay per month is highly dependent upon the loan tenure you choose, the loan amount and the applicable interest rate on the home loan. Therefore, it’s important to choose your loan tenure wisely. As the Central bank of India home loan mostly involves huge loan amounts, opting for a shorter tenure would imply higher EMIs, which may overstress your monthly budget and leave less room for liquidity. 

Therefore, even if you are financially capable of paying higher EMIs per month as per your Home Loan Eligibility, it’s still advisable to opt for a longer tenure since it will not only pump liquidity into your monthly finances but also allow you to instead invest the extra amount(which you could have repaid in the form of higher EMI) over a period of about 7-10 years (preferably in mutual fund SIPs) and subsequently prepay or foreclose the home loan after accumulating the required corpus.

Therefore, a long tenure would provide you not one but twin benefits, first in the form of a lower EMI amount, and secondly, it would allow you to not overstretch your otherwise long tenure (as long as 30 years) by prepaying/foreclosing it in about 10-15 years.

Which mode and options of repayment are suitable for you?

With lots of lenders coming up and providing home loans at competitive rates after factoring in borrowers’ home loan eligibility, homebuyers have been benefiting from this cutthroat competition. To attract borrowers, lenders are inventing and providing new types of home loans, various fresh modes as well as options of repayment to offer utmost convenience to prospective borrowers. These include repayment options such as step-up/ step down EMIs, providing an initial holiday (moratorium) period of usually up to 3 months etc. 

Apart from such repayment options, the borrower also needs to choose a suitable mode of EMI repayment. Most lenders like the Central bank of India home loan are also offering different modes of repayment, such as Electronic clearing service (ECS)/Standing Instruction(SI), wherein EMIs would be automatically deducted on the preset date per month, or the facility of postdates cheques (PDCs), However,  ECS is the preferred mode, since its hassle-free, faster and has minimal chances of errors and there’s no need to replace the cheques whenever the EMI changes in future.

How to choose the right lender?

Another vital decision while availing of a home loan as per your home loan eligibility is choosing the right lender according to your loan requirements. Make sure you do not weigh the suitability of various lenders based upon just the interest rate offered but also upon other parameters such as required loan amount, tenure, various charges and fees, along with the eligibility criterion of the lender. Borrowers may visit online financial marketplaces to choose the most suitable lender for their home loan since these platforms assist in matching the right lender for each borrower, along with various online tools such as loan eligibility and EMI amount calculator.

Are you on the right path to crack the best home loan deal?

With the relatively big-ticket size and long repayment tenures stretching up to 15-30 years for Central bank of India home loans, all these above-mentioned decisions hold the key to getting the right home loan deal that does not adversely impact your financial health and enables hassle-free repayment. Given that even a slight difference in home loan interest rates can result in a substantial difference in its overall interest cost, ensure to factor in the parameters that affect the home loan Interest rates applicable for your home loan eligibility criterion, such as your credit score, tenure, income, loan amount, job profile etc. This would assist in getting a suitable home loan deal with the lowest interest cost as per your eligibility and requirement. Apart from this, make sure to timely repay the home loan EMIs and make prepayments during tenure whenever you have surplus funds. Doing so would assist in further lowering the overall interest cost.

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