Buying a house is as much an emotional decision as it is a financial one. Owning a house is both a matter of pride as well as a necessity. As the common adage goes - "to have a roof over one's head" compels one to buy a house as a security. With the rising trend of nuclear families, youngsters are under tremendous pressure to purchase a house. Real estate market players, too, have a knack of playing around with a buyer’s emotions. They do not miss any possible opportunity to do so. With soaring property prices, most home buyers have to opt for a home loan.
Availing a home loan can seem like a daunting process. It involves so many facets such as identifying the right bank, securing a good interest rate, being informed about the varied fees, extensive documentation and procedures it entails, and so on. Atulya, a 30-year old Digital Designer, was under pressure from his parents to buy a place of his own, as security, hedge against uncertainty. After the much needed research, he was shocked to know that the home loan Equated Monthly Instalment (EMI) would not be the only expense incurred on the loan.
He will have to bear the burden of at least 10 other expenses. Availing of a home loan is not only a very long and taxing process, but it also includes multiple costs, albeit hidden.
Below are 11 costs associated with a home loan:
- Processing Fee
This is the fee charged for processing your loan. It is around 0.5% - 1% of your loan amount. The percentage that is charged depends on the borrower’s profile, income, and type of loan.
- Legal Fee
Some banks and financial institutions charge this fee to scrutinise legal documents such as sale agreements, etc. Some corporations might include this cost into the processing fee.
- Technical Valuation Charges
Your lender will carefully scrutinise the property that you intend to buy. They will send an expert, could be a bank employee or an architect or an engineer, who will visit the site to ensure legality and fair value of the project. They evaluate your property on a number of criteria such as age of the building, quality of construction, etc. The technical valuation charge is an upfront payment, before sanctioning the loan.
- Documentation Fee
Some lenders also charge documentation fee separately or under the processing fee category. This charge is for maintaining your documents such as loan agreement, ECS mandate, etc. Some lenders may charge around Rs 500- 2000 towards the documentation fee.
- Franking Fee
Franking is the process of confirming the payment of stamp duty. So, when you pay stamp duty for the sale of agreement or purchase of loan, an authorised bank or a franking agency may stamp your document to certify stamp duty payment. Franking charges differ from state to state and can be in the range of 0.1% – 0.2% of your loan amount.
- Notary Fee
If you are an NRI, then you and your Power of Attorney’s (POA) KYC details need to be notarised by the Indian Embassy or a local notary available abroad.
- Cheque/ ECS Dishonour Charges
If at any point of time you dishonour your EMI, the lender will charge you for it. This charge may vary from Rs 250 per instalment or some percentage of your recovery amount. This will not only add to the expenses, but will also affect your credit score .
- Loan Pre-payment Fee
When you pre-pay your loan, the bank loses out on the opportunity to earn from your interest payment. Hence, to indirectly recover the cost, the bank might charge you a penalty. However, the Reserve Bank of India has abolished this charge for floating-rate home loans. Pre-payment charges are still applicable on fixed rate loan or loans availed under special schemes and if the payment is sourced through third party.
This charge may vary from lender to lender and the type of loan as well.
- Document Retrieval Charges
Document retrieval charges are charges levied at the time of loan closure/ pre-closure of loan. This is a cost for transferring your original documents from central repository to the borrower.
Your loan and property documents are kept in safe custody at a central repository. Suppose you availed of a home loan at the bank’s branch in Pune and its central repository is at Mumbai, then the loan and property documents are kept at Mumbai. At the time of your loan closure, the bank will transfer your documents from Mumbai back to Pune, and hence this document retrieval cost is charged to you. - Charges for Statement of Account
One annual account statement of your loan account is free, but in case you need another statement then the bank might charge you upto Rs 500 for statement generation.
- Balance Transfer/ Resale Home Loans
If you decide to transfer your balance amount from one bank to another or from one loan scheme to another, you will be charged with a transfer fee.
Also during the loan application process, say you opted for a floating rate loan and now you want to change it to a fixed rate loan or vice-a- versa, you will be charged this fee.
To Sum-up
Surely, the charges linked to the home loan were many, but this did not stop Atulya from buying a house. With proper planning and information, he converted his dream into a reality.
A home loan is actually one of the best ways to build up your assets using a liability. You are effectively putting down some of your own money (the down payment) and gearing the rest (i.e. someone else is paying for it upfront, you are paying it back in instalments).
Buying a property is something that all of us want to do at some point in our lives, and a home loan is the best way to do that.
Remember to insure the loan and also increase your contingency reserve to include enough liquid funds for at least 3 EMIs, for use in case of a financial emergency.
Similarly, if you are worried about your finances and do not know where to start, you can seek guidance from our experienced financial planning team.
Also read the 8 Things You Should Know About Home Loans before you begin your journey.
