How to Choose home loan?

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Getting the right home loan involves more than just seeking cheaper rate. Loan seekers need to consider other factors like processing fees, prepayment charges, flexibility in rates and services provided by the lender. Though the lower interest rate is a big attraction, the loan seekers should also compare other parameters to know the true cost of the loan.

Being short of experience, generally the first time homebuyers and loan seekers don’t realize that what suits them now may not suit them at a later stage. Home loan being a long time commitment, it is very essential that they fully understand the characteristics of the loan to determine whether it will be beneficial in the long run.

Normally banks finances up to 80% (90% for loan amount below Rs. 20 lacs) of the agreement value of the loan. Hence the down payment has to be 10% - 20% of the agreement value of the property. The down payment can go up for resale flats which are independently valued by the valuers of the lending institute and usually their valuation is lower than the actual cost. In addition to 10% or 20% the borrower will have to fully fund the cost of stamp duty and registration charges, as banks do not finance them any longer.

Usually lenders offer lower interest rate for loan amount below Rs. 75 lacs and in fact most of the PSU banks offer floating rate home loan at their base rate itself which is the lowest rate they can offer to consumers. The current floating rate of interest (March 2014) for loan amount up to Rs. 75 lacs is around 10.25% - 10.75% pa with State Bank of India being one of the lowest at 10.15% pa. Similarly the pure or true fixed interest rate that remains fixed for the entire tenure of loan offered by Axis Bank and ICICI Bank is 11.75% pa for any loan amount.

There are mainly two types of home loan interest rates i.e. Fixed rate and Floating rate. Within these types there are few features that will vary but they generally describe themselves.

Fixed Interest Rate- A true 'fixed' interest rate is one that remains constant during the entire tenure of the loan. Very few lenders nowadays offer truly fixed interest rates. Some of the lenders that offer pure fixed interest rates for tenure of 20 years are Axis Bank, ICICI Bank and LIC Housing Finance.

Other lenders generally offer Semi Fixed or Dual Rate of interest where the rate of interest remains fixed for particular duration of time usually ranging between 2 – 5 years, after which the loan gets converted to then prevailing floating rate of interest. Some lenders do allow borrowers to continue the fixed rate of interest for the further time span at interest rate applicable at the time of reset.

Many borrowers like Fixed Rate home loans because they feel they can plan their monthly budgets well in advance. The greatest security factor is in knowing that the EMI amount will not vary with the changes in economy. But wait there is more to it than meets the eye. Most of the lenders do have a “Money Market” clause where the lenders can at their sole discretion alter the interest rate in case of any adverse market conditions. So ideally one should take this aspect into consideration before venturing into any other long-term financial commitments.

As the saying goes “all good things comes at a price” so does the fixed rate home loan. These loans are generally priced higher by 1% – 2% than the floating rate home loan, which makes them less attractive during high interest rate regime.

The major drawback of fixed rate loans is that once the borrower is locked into it, it can be quite expensive to get out of it. If he chooses the wrong time for fixed rate, he can end up paying a lot more interest than he would otherwise had paid on floating rate. And by any chance if the borrower wishes to foreclose his loan, he may have to pay a penalty of around 2% on the outstanding loan amount if the amount prepaid is not from his own source of fund.

Floating Interest Rate – As the name implies, the rate of interest changes with the market conditions. The rate of interest is linked to either Base Rate system followed by banks or PLR system followed by housing finance companies. So whenever there are any changes in Base Rate or PLR, the rate of interest on home loan also undergoes change, which can be either upward or downward.

Hence, the borrower needs to periodically review his loan account to ensure that whenever there is a reduction in Base Rate / PLR, corresponding changes happen in his home loan interest rate. However it is a known fact that lenders are hesitant to reduce Base Rate & PLR when interest rates fall and hence consumer rarely get benefit of fall in market interest rates as quickly as they should get logically.

Currently it is most sought home loan product in the market primarily because of its lower interest rate compare to Fixed Rate loans and can be prepaid any time during the tenure without paying any penalty. The variable nature of this product itself becomes a draw back sometimes as the borrower cannot preplan his budget and in rare cases upward revision in interest rate can throw the entire budget out of gear.

Fixed or Floating Loan, whatever the decision, a point to note is that what may sound ideal for one borrower may not be right for another. So one has to be realistic on what he needs.

Last but not the least, get in touch with as many lenders as possible before you finalize the lender and get them to make loan offers to you. You can try and negotiate with them for waiver or reduction in processing fee. Remember that all terms and conditions of a housing loan are negotiable if you have good credit score.

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