The Economic Times
Preeti Kulkarni guides you through the home loan maze for a hassle-free switch to a new lender who offers a lower rate of interest
With three banks, Union Bank of India, Central Bank of India and Bank of Maharashtra announcing their decision to lower home loan rates, it is almost certain that we are heading towards softening of interest rates. Some more banks may soon announce rate cuts, while some may wait for the Reserve Bank of India to slash its policy rates, before taking a final call. Needless to say, the disparate rates, in the meanwhile, are going to cause a lot of confusion among home loan customers. If you have been waiting to switch over to the lender with lower rates at the first opportunity, it may be time to act in the next few weeks. Meanwhile, you can pore over your existing loan agreement to understand the clauses to avoid complications later. Follow the same exercise with the new lender too. Here are a few points that can guide you through the maze.
FIXED & FLOATING
Some banks have completely done away with the fixed-rate schemes. However, some of them did offer fixed home loans in the past with interest rate as low as 7.5-8%. The catch, of course, was that these rates would be reset every three years and subsequently linked to the rates prevailing at that time. If you have taken such a loan a few years ago, your EMI must have zoomed to unmanageable levels by now. “In one of the cases that we’ve had to tackle at our centre, the borrower had obtained a fixed loan at an interest rate of 8%. Now, however, it has soared to 17.5%,” says VN Kulkarni, chief counsellor, Abhay Credit Counselling Centre. “Those who may have borrowed under teaser rate schemes could also be faced with situations where the rates shoot up after the initial fixed-rate period is over,” says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm. That is why it is important to scrutinise the clauses related to interest rates — remember that the loan contracts are always loaded in favour of the lender. “For instance, the bank’s terms can state that the rate can be altered in the event of major volatility in interest rates during the period of agreement. Also, at the time of rate reset, converting the fixed loan into a floating one is also at the bank’s discretion,” says Kulkarni. If the borrower is not comfortable with the new rates, s/he will have the option of paying off the entire loan after giving the requisite notice. This can be done either by pre-paying the loan or switching to another lender. Given that the interest rate cycle seems to be turning slowly, it may make sense to opt for a floating rate loan now.
Throughout the tenure of the loan, you need to constantly keep an eye on interest rate changes – not just the ones made by your lender, but also the action taken by others. “You can consider switching over to another lender if you find that only your bank/ HFC keeps increasing the rates, when others have not felt any need for a rate hike,” says Patel. Similarly, if your bank refuses to reduce rates despite other lenders doing so, you can consider home loan refinance. But you need to take into account all charges – processing fee, prepayment penalty and small-time charges, like annual fees, before finalising your strategy. “Also, they should first make an attempt to negotiate with the existing lenders for better pricing when the conversion from fixed rates to variable rates takes effect. In case such negotiation on spread/margins fails, they can move to banks/institutions offering competitive rates,” he adds. Remember, while prepayment penalty has been waived off for floating rate loans, fixed-rate loans could still attract such charges, depending on the lending bank.
PRINCIPAL COMPONENT IN EMI
This should form a very critical factor while applying for a home loan. “There are banks, especially the public sector ones, where the principal component makes up 45% of the EMI. Then there are others, where interest is a much bigger component, with principal forming a miniscule portion. Loans with this kind of EMI structure will take longer to get repaid. Every time there is a rate hike, the tenure gets extended, sometimes, even up to 30 years,” points out Kulkarni. Hence, it would be wise to study the composition of the EMIs when the amortisation schedule is handed over to you. Higher the principal component, the better it is for your finances. Even while servicing the EMIs, you need to keep an eye on your interest outgo.
KEEP THE LENDER INFORMED
While extending the loan to you, the lender takes the call on the basis of your current financial situation. “So, naturally, they would want to be updated about any material change in that status,” says Anil Kothuri, head, retail finance and CEO, Edelweiss Housing Finance. For salaried individuals, this would mean a job switch or even a job loss. “If the loan has been taken on behalf of a partnership firm and the partnership structure is modified later, i.e. say another partner comes on board afterwards, it could amount to an event of default,” he says.
INSURING YOUR PROPERTY
Typically, it is often ignored by many. However, bear in mind that you would be doing so at your own risk. Your home loan contract may say that in case you fail to insure the property or pay premiums regularly, the lender would reserve the rights to insure it by debiting your loan account. What’s more, you will be paying the interest applicable to your loan towards this premium amount, too. The sum assured has to equal to the full market value of the property. Now, if your housing society has already insured all the flats, though, you could be spared of this chore. Else, you would do well to study property insurance policies – which provide cover against fire and natural calamities - offered by various general insurers