Buy a house is everyone’s dream. And for most, the purchase is funded by a home loan. Buying a house on loan not only helps you to buy your dream house but also gets you tax breaks for both the principal and interest paid on the loan. But do you know that there are hidden charges in a home loan that can add to your house purchase costs?
But as we know, no bank will approve your loans free of cost. They do take processing charges to cover their expenses of verifying your credentials, credit score, employment, income, legal charges, etc. However, there is no uniformity rate for these charges across banks and lending institutions.
Banks are free to levy additional charges on certain non-financial transactions or on certain mandatory processes that are required to approve the loan, as there are no regulations applicable for this. While many lenders clearly state the applicable charges on the loan sanction letter, many of them don’t specify the charges beforehand. There is no transparency in how these charges are fixed.
What are the hidden charges in home loan?
Hidden charges in home loan can be classified as below:
1. Charges applicable for home loan approval
2. Charges that are applicable during home loan tenure
Let us understand what are the hidden charges that are usually charged by banks and lenders:
Charges applicable for home loan approval
1. Loan Processing Charges
Usually, processing charges include application fees, administration fees, and loan processing charges. It is either charged as a fixed amount or as a percentage of the loan amount sanctioned which is usually 0.5%-1% of the loan amount.
By paying processing fees, you can get a loan sanctioned even before you finalize a property. But you have to get the loan disbursed within a stipulated time failing which your processing fees will be forfeited.
2. Credit Report Verification Charges
Many credit reporting agencies provide free credit score check per year for every individual. However, banks and lenders obtain your detailed credit report which contains the details of your repayment history of previous loans and current outstanding loan balance if any.
Your lender might approve or reject your loan application based on your credit report. Sometimes, the loan interest rates and the loan amount sanctioned is based on your credit score.
3. Documentation Charges
These charges are for preparing the loan agreement, collection of supporting documents, verification of document, getting ECS mandate activated, and other formalities.
This is usually a fixed fee in the range of Rs.1000-Rs.5000 depending on the loan amount requested.
4. Legal Charges
This charge is payable when you finalize your dream house. Your bank or lender will verify all the documents related to the property such as previous sale deeds, khaata, inheritance records, land ownership records, government records related to the land parcel, tax receipts, land conversion records, etc. from their legal advisor.
Your home loan won’t be approved unless your lender’s legal team is completely satisfied with the legal status of your property.
This is usually a fixed fee in the range of Rs.5000-Rs.20000.
5. Valuation or Technical Charges
You have finalized your dream house and it could be that you are getting it constructed or buying a villa/apartment from a developer. The contractor you have hired to construct the house or the developer from whom you are buying would have given you a quote for developing the property.
Your lender will evaluate the property and its construction cost according to the quotation given by your contractor/developer. This evaluation will be done by an expert, who will assess the ongoing land value at the property location, structure, and specifications of the property, promised amenities, etc. Your lender will approve your loan amount according to the value provided by their experts.
Charges applicable during home loan tenure
Now, let us understand the charges that are applicable during the loan tenure.
6. Conversion Fees
Assume that you have a home loan with a fixed rate of interest as 10%. During the loan tenure, your bank may offer a rate of interest of 9% to new customers. To move to this new interest rate, your bank will charge a conversion fee.
7. Copy of original documents
If you need a copy of the original sale deed from the bank during the loan tenure, banks might charge you for the same.
8. Pre-payment Charges
Pre-payment charges are applicable for fixed-rate home loans or loans availed under special schemes. However, it’s the sole discretion of the lender to levy prepayment charges or not.
9. Refinancing Charges
If you want to refinance your loan from another lender, the current lender may charge a fee for preclosing the loan. Some banks waive off this charge if you have completed a loan tenure for a given number of years.
10. Document Retrieval Charges
When you close your loan, your bank or lender has to hand over the original sale deed and other documents that are under their possession. The title deeds of your property are stored in a central repository which may or may not be in a city you reside in. You have to pay a fee to get your documents back.
What are the consequences of these hidden charges?
Hidden charges no doubt add to your loan burden. Some lenders might entice you with lower interest rates but may have higher hidden charges. Some banks/lenders may even add some of the above-listed charges to the loan amount sanctioned and recover it from the EMIs. Due to this,
a. You have to pay interest on these hidden charges as well.
b. Your loan amount sanctioned for the actual purchase will get reduced.
Contact Us to help you choose the best home loan.