Homeownership continues to be a milestone aspiration for many Indians. Choosing the right home loan is crucial for turning that dream into reality. But today, finding the right home loan is more than just the interest rate. Lenders now offer more customisation than ever, allowing you to choose how your loan is priced, to how you repay it. With the many options available, choosing the right one may feel overwhelming. This guide will help you understand the choices you have, so you can pick a home loan that works for you.  

Who should you borrow from - Bank or NBFC/HFC

Banks are tightly regulated by the RBI and offer lower interest rates, especially if you have good credit. Repo rate cuts are passed on to borrowers faster, and loan-related charges are usually more transparent. However, banks are usually slower to process loans, have strict paperwork requirements, and may be less flexible if your credit score isn’t great.

Non-banking financial companies (NBFCs) and housing finance companies (HFCs) tend to be more flexible in their offerings, especially for self-employed or low-credit-score borrowers. Loans are disbursed faster, and customer service is often more responsive. But interest rates tend to be higher, with delays in passing on rate cuts. Over the long run, this can cost you more. 

If your credit score is strong and you prefer stability, go with a bank. If you need faster service or more relaxed criteria, an NBFC or HFC may be better. 

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How much certainty do you need - Floating vs Fixed Rate

A floating rate loan moves with the market. As the RBI changes its repo rate, your loan rate can fluctuate, and so can your EMI. Rate cuts are usually passed on to borrowers within 3 months. The base spread stays fixed, adding transparency. The only flip side is that your EMI can go up if rates increase. 

A fixed-rate loan locks your interest rate for the full tenure, giving predictability and protecting you from future rate hikes. But rates for these loans again tend to be higher, often with steep prepayment charges.

If you expect rates to stay stable or fall, floating rates may save you money. But if you are budgeting on a tight margin or expect rates to rise, a fixed rate can offer peace of mind.

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How do you want to repay - Term Loan vs Overdraft?

A term loan is the standard option where you pay a fixed EMI for a set period, usually 10 to 30 years. It’s simple, predictable, and often comes with lower interest than other formats. But your EMI is fixed, and prepayments may attract charges.

An overdraft loan, offered mostly by banks, links your loan to a savings account. Any surplus deposited in the savings account goes towards reducing your loan interest. You can withdraw it later if needed, making this a flexible option, especially if your income fluctuates.  However, interest rates on overdrafts are typically 0.5–1 per cent higher. Also, there’s no Sec 80C tax benefit on the principal repaid.

If you have a strong credit score and prefer stability, a bank loan is ideal, while NBFCs or HFCs work better for quicker approvals or more flexible eligibility. Choose a floating rate loan if you expect interest rates to remain stable or fall, but opt for a fixed rate if you're on a tight budget or anticipate a rate hike. A term loan suits those with a steady income and predictable cash flow. If your earnings are irregular or seasonal, an overdraft loan offers the flexibility to reduce interest by parking surplus funds when available.

When it comes to home loans, there’s no one-size-fits-all loan. There are various factors at play that you must consider, like how steady your income is, how much rate risk you can bear, and whether you prefer simplicity or flexibility. Always read the fine print and ask questions. A well-chosen home loan can bring you significant savings in the long run. 

(The author is the CEO at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)