Banks don't tell you this about home loans.

Owning a home is one of the biggest achievements most of us aim for.

Putting a roof over your family’s head gives a sense of pride and fulfillment.

And for most of us, a home loan is the vehicle that takes us there.

So what are home loans?

When you go to a bank for a home loan, they assess your creditworthiness. They check if you have the income and assets to own a home 10 or 20 years down the line.

If you are capable, they allow you to own that house now.

And in return, you pay the bank interest.

It is as simple as that!

For most of us, home loan is the largest liability.?

And we need to save saving every possible rupee.

So let’s break it down and see what the banks don’t want you to know.

Home loans are made up of 3 parts,

1. Term and Value of the Loan
2. Interest rate
3. Charges

Term and value of the loan.

The term and value of the loan determine the size of your EMI.

Here’s a thumb rule.

Make sure the term of your loan is the longest possible.

And

The loan value is as high as possible.

There are two reasons for this:?

First, with a long tenure, you have a lower EMI. Lower EMI can help you save or invest in other assets, helping you to prepay your loan in the future.

Second, let’s say you can afford a loan value of 80% of the house, but you negotiate with the bank and get the loan approved for 90%. You can then use this surplus to prepay the loan in the future.

Prepayment directly deducts the principal amount, which can reduce the total interest on your loan significantly.?

?

Always find ways to prepay.

Interest rate.

The rate of a home loan contains two parts:

1) The repo rate?

2) The bank’s margin.

The repo rate is what RBI charges banks on loans. Think of it as a cost to the bank.

What the bank charges the consumer over its cost is the bank's margin.?

E.g. for an 8.5% loan, 6.5% is the repo rate and the bank charges a margin of 2% above it.

Now here’s what banks don’t tell you.

During an environment where repo rates are low (RBI tweaks them every quarter), margins are higher.?

Eg if the repo rate is 5%, banks can charge you 2.5%, making a total interest of 7.5%, which is still an attractive rate for the consumer.

But when the repo rate is high, let’s say 7%, the banks have to reduce their margin to 2.5% because they won’t be able to attract customers at a total interest rate of 9.5%.

But here's a catch.

They only reduce the margin for new loans, not the existing ones!?

They leave it to the customer to visit the branch every quarter, enquire about the current margin, and go through the process of reducing it.

Book a free consultation with us and we will help you reduce your next EMI.

https://www.gettingwisertogether.com/wisefinancesolutions

Charges

Banks ask for several charges, but here’s the truth.

Processing fees: Most traditional banks will ask you for a 1% processing fee. But we have come to a digital era and this fee can be brought down to 0. You just have to negotiate harder.

The bank is not doing you a favor by giving you a loan, it’s their business. As a consumer, you have to know which bank is the cheapest for you.

Pre-payment and Foreclosure charges: These also have to be 0. If not, ask for it or change your bank.

And the most important thing.

Make sure your sanction letter is in line with your negotiations.

DM me if you have any questions about it, always happy to help.

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