Lending institutions offer borrowers to avail of pre-approved home loans even before buying the property. Such loans are helpful for buyers to worry less about the finance and secure the property as they will already have an “in-principle” home loan approval from the bank, say up to INR 20 lakh or INR 15 lakh as the case may be.
Borrowers will, however, have to decide the property they wish to purchase before the offer ends as pre-approved home loans have a validity period, which is usually up to six months. In regular home loans, banks offer to lend only after the verification of a property, lender’s repayment capacity, and other legal requirements, and there’s no validity as such.
Forbes Advisor India has put together a detailed guide on how to get a pre-approved home loan up to INR 20 lakh, what makes it attractive, check EMI, interest rates as well as charges to help borrowers get the best possible deal to purchase a house of their dream.
How do Banks Calculate EMI on Home Loans up to INR 20 lakh
On pre-approved loans, lending institutions carry-out a thorough credit check to find out the borrower’s repayment capacity. This includes checking the net monthly income, savings history, running investments, existing loans, liabilities, and importantly their cibil score. This helps the bank to calculate the maximum loan amount a borrower can receive, per se INR 20 lakh. This is, however, just an “in-principle” amount that the bank may agree.
Now let’s understand the process of calculating EMI with an example. Say, X has decided to buy a 2 BHK flat whose actual cost is INR 30 lakh. After meeting the lender’s legal and technical due diligence requirements, the bank has agreed to give X a home loan of INR 20 lakh, and the remaining cost of the house was furnished by X as down payment.
The bank has offered X a home loan at an annual interest rate of 7.2% (floating) for a tenure of 10 years. The EMI amount X will be paying on a monthly basis is calculated using the following formula:
P x R x (1+R)^N / [(1+R)^N-1]
P: Principal loan amount = INR 20,000,00
N: Loan tenure in months = 120 months
R: Interest rate per month [7.2/12/100] = 0.006
EMI= INR 20,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = INR 23,428.
Therefore, X would be paying the EMI of INR 23,428 every month for 10 years. Overall, the total payment X will be paying is INR 28,11,406, of which INR 8,11,406 would be the total interest paid on the principal borrowed sum.
Lending institutions may as well show the break up between the interest rates and principal components using a loan amortization schedule to help X examine his EMI payments. Given the aforementioned scenario, the tabular shows the first 12 EMI payments as well as the break up between interest and principal components to be paid by X.
How to Calculate Interest Rate on Home Loans up to INR 20 lakh
Remember, pre-approved loans have a floating rate of interest levied by banks. This rate of interest on home loans is, however, not the same for all borrowers. Banks does thier due diligence to scrutinize the borrower’s credit score, net monthly income, stability of jobs and sector, EMI/NMI ratio, other source of income, as well as their relationship with the bank.
As per Reserve Bank of India’s (RBI) guideline, the floating rate of interest on home loans is linked with the repo rate, and components like “reset frequency of the interest rate” and “spread over the margin” determine the rate of interest borrowers pay on home loans throughout the tenure.
The reset frequency is set by the RBI for all repo rate-linked home loans, which is to be done by banks every quarter of the calendar year. However, banks are at discretion to reset the interest rate frequency from time to time based on the prevailing repo rate of the RBI. Spread over the margin is paid over and above the RBI’s repo rate linked home loans. The spread on a home loan is decided as per the loan amount and the credit score of the borrower.
Let’s take the aforementioned scenario of pre-approved home loan of INR 20 lakh availed by X to illustrate the calculation of interest rate due to changes brought in by reset frequency. At the time X availed a home loan, the bank had offered a floating rate of interest at 7.2%. However, after two months the RBI hikes the repo rate by 50 bps. Hence, the interest rate on X’s home loan will also go up by 50 bps at 8.7%.
This rate of interest will reflect on X’s EMI between one to three months, as per the bank’s policy. Remember, banks do not inform borrowers individually about the change in their EMI rates due to the reset on interest rate. Hence, it is important for borrowers to keep informed about how interest rates are calculated on loans as well as the RBI’s monetary action on repo rate.
Related: Home Loan Interest Rates In 2023
What are the Charges on Pre-approved Home Loans
Most lending institutions levy charges separately during the processing of loans while some charges are linked as an annual percentage rate (APR). Borrowers are advised to read the offer letter to know about these charges applicable to you for availing a pre-approved home loan.
Remember, your offer letter and acceptance of pre-approved loans will contain details of “in-principle” loan amount, floating interest applied, tenure of loan and the number of EMIs, validity of the offer, and all charges to be borne by the borrower, along with terms and conditions. Some of the charges on pre-approved home loans include:
Financial Check
Banks may charge a nominal fee for carrying out due diligence to check borrower’s loan eligibility and repayment capacity based on the bank statement, net monthly income, savings, investment, existing loans, and cibil score.
Property Investigation
Banks charge a fee to conduct a thorough check on the property on their own, or may take an opinion from an advocate or technical valuers.
Property Insurance
The premium of property insurance is paid directly to the insurance provider, the amount which is levied at time of loan sanction.
Processing Fees
Processing fees are levied by most banks for disbursement of loans (usually up to 2% of the loan amount), and varies among banks.
Pre-payment or foreclosure of loans
Additional rates are levied upon the lending rate, as per lender’s policy, on home loans closed before the scheduled closing date.
Mis-payment of EMI on loans
If the borrower is irregular in paying the EMI and exceeds the due date, lending institutions will levy additional interest over and above the EMI amount, which can be up to 24% per annum on the EMI amount.
Statutory Charges
Statutory charges include stamp duty, charges paid to central, state, or such other statutory bodies.
Frequently Asked Questions (FAQs)
How can I get a home loan of INR 20 lakh?
Banks offer pre-approved home loans to borrowers upon their repayment capacity.
