Negotiating the best home loan
It is possible to get the best possible home loan with the most competitive interest rate if you plan well in advance, and have time on your side.
Congratulations! You have almost finalized a home that you liked. Let’s assume a few things – you have done your homework, you know you are eligible to get the loan you need; now is the time to get the best possible loan, at the lowest possible interest rate.
In India, we do not have what is known as a ‘good faith estimate’. In the US, banks give a document called the ‘good faith estimate’. A good faith estimate lists out all the important terms and conditions of the loan. It includes the interest rate, tenure, emi, and all the costs associated with the loan. This helps consumers compare offers from multiple banks. The best part is, the format, language, etc. are the same. It is a very easy apples-to-apples comparison between two home loans.
No such luck here, right? We are on our own. Heck, many a times, the bank will ask for additional documents during the processing period.
Choosing the best home loan
Fortunately, there are just a few terms that are negotiable in India. Read on, and I will tell you what you can negotiate on.
In any negotiation, you should have something of value to offer – in this case, your business. The best way to do this is to ensure that the banks know they are competing with others, and that they have to earn your business. Work with 2-4 banks to get pre-approved. There are ways to do this without any cost, but even if you have to, the money spent will be well worth it. The sanction letter will include the loan amount, tenure, and the interest rate.
Now comes the most important part – ensure that the loan officers have “invested” enough time on your loan. The more time they have put in, the more important it is for them to close your loan! Ask them question, call them, ask them to meet with you – do whatever you need to, to keep the loan officers engaged! Now, they have a vested interested in getting the loan approved or all their effort is lost! You have just made your business more valuable to the loan officer!
Pick the best terms from each of the pre-approvals, and use it to negotiate the terms you want with the bank you prefer. Keep in mind that the idea is to get the best possible combination of the terms. Picking the best individual terms may not be possible.
While you take your time to decide, you will also negotiate with the loan officers and keep them interested.
Now, let’s look at the key terms where the banks have some room to negotiate.
Amount to be financed – This is going to be a tough one as most banks have a maximum they can finance. For example, a bank may finance the amount that results into an emi that is no more than 75% of your take home salary. If you have another property that is rented out, you could ask the bank to include the rent as an income. You could also play with the tenure – increasing the tenure will lower your emi (but it will increase the total interest paid). There could be another bank that finances 80% of the value of the home. In this case, you have a better possibility to negotiate as the value can be increased by including the cost of registration, VAT, and service tax into the valuation of the home. You could also ask the bank to include the cost of furnishing.
Interest Rate – This one is the easiest to negotiate. First, you should learn how the various interest rates work. There is something known as the ‘base rate’. This is the ‘best’ or the lowest rate that the bank will charge for any kind of loan. This is the lowest you can negotiate with that bank. Each bank has its own base rate. The base rate can change at any time. The second component is the ‘margin’. The interest rate that the bank offers you is the sum of their base rate and the margin. Since the base rate is non-negotiable, you should try to negotiate the margin down to 0%. This is the best case scenario, which may not be practical. For example, if the base rate is 10.25% and the margin is .5%, the rate offered to you will be 10.75%. Ask the bank to reduce the margin to, say 0.1%. Many banks will reduce the margin if asked. If another bank offers you 9.75% base rate, with a margin of 1%, for the home loan at 10.75%, you are better off negotiating with the 2nd bank.
Tenure – The tenure of the loan may not be negotiable on its own. Each bank has a maximum age up to which they will loan money. However, you could use the tenure in combination of other terms to achieve the best combination.
Expenses – Loan processing expenses are easy to negotiate. The loan officer has the maximum runway with these expenses. The expenses will include a lot of items – from photo copying charges to property appraisal, to mortgage charges. First thing to do is, get in writing ALL the expenses that the bank expects you to pay. This may take a while as most people do not ask for this. The loan officer may not have the list handy. Once you have this from several banks, start asking questions about the purpose of these charges. Some banks charge a small flat fee from its elite clients. Easiest way is to get that status. Another way is to just ask the loan officer to figure out a way to eliminate some of the charges –don’t request, just ask. Tell them, you will not pay for insurance, property valuations etc. If you have a mortgage broker you are working with, ask him to use one property appraisal across all the banks.
Keep in mind, getting a personal insurance is a good idea, just not from the bank though.
Documentation – Some banks ask for a lot of documentation for no apparent reasons. Some documentation makes sense, but when it gets out of hand, pit one bank against another. Do not hesitate to just say, no. One bank asked me for the original handover letter from the builder. I kept deferring it. The banker figured out a way to get the cheque issued to the builder without the handover letter.
Use a Mortgage Broker – An experienced broker who works with multiple banks is a huge asset. Mortgage brokers get paid by the banks on closing the loan. They know the tricks of the trade as they negotiate loans day in, and day out. For more on mortgage brokers, read this.
During the entire process, keep in mind, you are the client. Be professional, but be firm about what you want. Remember, there is no harm in asking, the worst that can happen is, the bank will say ‘no’.