Looking For Home Loan – Don’t Ignore these Sections
Loan schemes vary from bank to bank, but the underlying concept in all these fixed and dual rate loan products is to cap the upside of rising interest rates, which has caught the borrower’s attention.
“Some borrowers are comfortable with the concept of having a fixed commitment on their home loans. In fact, we have in the past seen borrowers go for pure fixed rates despite the rates being at least 100 bps higher,” says Renu Sud Karnad, managing director, HDFC.But, the interest rate should not be the sole factor to be considered while choosing a home loan. There are a host of clauses and factors that come into play while choosing a home loan. Calculate loan emi with Home Loan EMI Calculator
Fixed Rate Loans with Reset – Look for the reset clause in a home loan agreement, especially if you have opted for a fixed rate loan. This clause gives bank the leeway to change the interest rate at a pre-determined interval as mentioned in the agreement. “It is very difficult to predict by how much rates will rise. The period mentioned in the reset clause varies from bank to bank and broadly ranges from two years to five years.
Hence, if you are going for a fixed rate loan to protect yourself from rate hikes, go for the one with a clause that says rates could be reset after three years or more.”If the rates are reset is too frequently (say, every year) one might as well take a floating rate loan. If it is once every three years or so, it gives some visibility regarding the EMI,” says Jayant R Pai, CFP and vice-president, Parag Parikh Financial Advisory Services. “Also, the older fixed rate loans are usually tied to the BPLR. Switch to the base rate method if the bank permits it, as it is more transparent,
Force Majeure – “Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.”This is known as the force majeure clause, which again gives banks and lenders the liberty to modify the interest rates on home loans they sanction to borrowers. If you are paying a premium of 1-2% just to hedge against rising rates, such clauses can be really tricky.
“Hence, if you are taking a home loan for a short period (3-5 years) then a floating rate loan could be better, because even if the rates rise, your actual incremental outgo will not be much. For longer-term loans, you could choose a fixed rate loan if you desire to eschew the uncertainty of fluctuations in EMI. But check for these clauses and the refinancing terms in case rates fall sharply and if you want to refinance sometime in future.
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