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While
shopping around for a home loan, you realize that interest rates have
several shades-from fixed to floating rates and several variations in
between. There are also charges that impact the effective rate that you
are paying. Let’s unravel the home loan rate mystery and understand
various types of home loans.
- Floating Rate Loans: Interest on
these loans is linked to the prevailing market rate. Interest charges
are, therefore, subject to change at periodic intervals. Floating rate
loans are most beneficial, when interest rates are falling.
- Fixed Rate Loans: The interest
rates under a pure fixed rate loan are fixed, at the interest rate
prevailing on the date of obtaining the loan, throughout the tenure.
Interest rates do not fluctuate with a change in the market rates.
Interest rates on fixed-rate loans are typically 1%-1.5% higher than
those on floating rate loans. They are the best choice in a market
where interest rates are expected to rise considerably.
- Convertible Rate Loans: This
hybrid rate takes advantage of the fact that home loans are long-term
products and interest rates move in cycles. If you feel that you need
to go in for a loan that is fixed for, say, five years as a hedge
against rising interest rates and, if you anticipate the interest rates
will move down, after five years, you can shift to a floating rate loan
or vice versa.
- Partly fixed and partly floating rate loans:
Some housing finance companies and banks offer you the option of taking
a part of the loan amount on a fixed rate and the other part on a
floating rate.
Besides
the interest rates, there are other factors that affect the home loan
charges. These are the different ways in which home loan rates work out
to more than what you expected:
A. Processing Fees: It
is an upfront fee which is usually non refundable regardless of whether
your loan is sanctioned or not. It can be a flat fee of 1% of the loan
amount.
B. Pre-Payment fees:
A good chunk of loans are pre paid after the initial years. Banks often
charge a pre-payment fee that goes up to 2%-3.5% of the outstanding
loan amount.
C. Reducing Balance: The housing finance company charges you interest on the reducing balance of the home loan. owHHHH HHowever,
the method of calculation may differ. Some companies will have an
annual reducing balance. Some others will have a monthly reducing
balance and then there is the daily reducing balance. Daily reducing
balance is the most beneficial. However, most financiers offer monthly
reducing balance. On the annual reducing balance method, you will
continue to pay interest on amounts you repay during the coming one
year, as the interest for the year is determined on the basis of the
balance outstanding at the beginning of the year. In the case of the
daily/monthly reducing balance, your interest is calculated only on the
outstanding loan amount, which reduces every time you pay off your EMIs
or make any pre-payments. This lowers the effective rate of interest
significantly. So remember to opt for the daily/monthly calculation
method whenever possible.
D. Bargaining:
Understand that home loan rates are not etched in stone. Banks and
financiers are willing to negotiate the rates and you can get 0.5%-1%
discount on the initially quoted rates with some sharp bargaining.
Besides, you can also ask for some freebies like a waiver of processing
fee or free insurance for the property. So do your homework and shop
around before striking a deal.
Other pages on Home Loans: Points to consider
Disclaimer:
The information provided here is only for informative purposes and
nothing more. It is not in any way to be construed as authoritative.
Always consult your financial advisor before taking any decision. It is
informed to the people that this information that is provided here is
not to be acted upon. In spite of our advise, if any person acts upon
the contents of this web site and incurs a loss, they do it on their
own risk. We are not to be held responsible for any loss, incorrect
information etc.
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