Three things to keep in mind when taking out a home loan

Here, we talk about three key things to know before selecting a home loan: different types of home loan interest rates, EMI customization options for home loans, and various loan fees.

Fixed or floating

Banks or housing finance companies (HFCs) usually offer variable rate home loans. Variable rate loans are basically tied to a reference rate and the interest rate on your home loan goes up and down as interest rates change in the economy.

In line with RBI guidelines, floating rate loans issued from 1 October 2019 must be linked to an external benchmark such as the repo rate and the 3-month/6-month treasury bill yield and must be reset at least once every three months.

Therefore, in line with the RBI rate cuts over the past two or three years, bank lending rates have also fallen sharply on home loans.

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Meanwhile, a few banks/HFCs also offer fixed interest rate loans. Under this, the interest rate is fixed either for the whole term or a certain part of the term of the loan. In the case of a pure fixed loan, the EMI and the duration of the loan will be known in advance and cash outflows can be planned accordingly.

At this point, with interest rates at multi-year lows and set to rise, locking in the fixed rate mortgage seems like an obvious option. However, fixed rate loans command a high premium for the predictability of cash outflows they offer.

A review of the interest rates offered by banks/HFCs offering both variable rate and fixed rate loans shows that the latter carry a premium of 0.7 to 6 percentage points (see table).

Housing finance company HDFC which charges the lowest premium on its fixed rate loans at around 70 basis points (from 7.4% per annum) offers a dual rate system. Under this, loan rates are fixed for the first two-year period and then switch to a floating rate thereafter.

Corporate Trainer – Debt Joydeep Sen said: “While there is a very strong chance that RBI will raise the interest rate by more than 70 basis points over the next two years, this option will still not be not significantly beneficial for the borrower because floating will be applicable for the rest of the long-term mortgage.”

Thus, do your due diligence before choosing the type of loan. Even when choosing a fixed rate home loan, ask if there is a reset clause.

Choose your type of NDE

When a variable rate home loan is taken out, your EMI may change with the change in the benchmark rate.

To avoid changing the EMI amount with each reset, banks may attempt to keep the EMI amount constant but increase/decrease the term of the loan.

The choice, however, to increase/decrease the EMI amount or duration, is up to the customer.

Ratan Chaudhary, Head of Home Loans,, said, “When the interest rate increases and if the customer can afford an increase in EMI, he/she should opt for a higher EMI because the loan closes on time and the total interest charge decreases. .”

On the other hand, in the lower interest rate scenario, Chaudhary suggests that instead of choosing the lower EMI, the customer can continue to pay the old EMI amount, which helps to close the deal. ready before term of office.

Additionally, some financial institutions also offer flexible repayment options. There are progressive loans, in which the EMI is initially low and increases over the years. For example, in the case of Bajaj Housing Finance, if a loan is sanctioned for 20 years with the option to increase EMI, only interest is liable for the first two years and for the rest of the 18 years, customers must pay interest with the principal amount.

Similarly, there is also a declining balance loan in which the EMI is initially high and decreases over the years. While the phased loan option is convenient for borrowers who are early in their careers, the phased loan option can be considered by borrowers who are close to their retirement years.

Compare the prices

Before finalizing a lender, review various fees such as loan origination or processing fees, administrative fees, documentation, late payments, changing the term of the loan, switching to another set of loans during the duration of the loan, the restructuring of the loan, the passage from a fixed interest to a variable interest. rate loan and vice versa, legal fees, technical inspection fees, recurring annual service fees and document retrieval fees.

If it’s not clear, check with the bank for the annual percentage rate (APR) of the loan. The APR takes into account not only the interest rate, but also fees and certain other charges that you may be required to pay, expressed as an annual rate.

If you decide to prepay the loan or transfer the loan to another lender, note that there will be no foreclosure fees or prepayment penalties in the case of a variable rate loan. The RBI in 2012 required that no fees be charged for prepayment of home loans based on floating rates.

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