Home Loans- Ways to protect your “interest”|
Author: Prakash Natarajan
Just as crucial as choice of a home, is the choice of an appropriate `Home Loan Product`. It is just as well that the Indian financial system has a very limited choice of products. This is a blessing in disguise because the amount of confusion is directly proportionate to the variety of choices available. Wider the choice, greater the confusion.
The following are the products available to the Home Loan Customer :
1.Fixed rate of loan
2.Floating rate loan
As the term implies, a fixed rate loan is supposed to carry a fixed rate throughout the duration of the loan. However, in India, we need to examine the Home Loan Agreement to be sure that there are no reset clauses. A reset clause enables the bank to revise interest rates even in a so-called fixed rate loan. This revision could be after a specified period of time or in certain circumstances defined by the bank. This is a tad unfair to the customer because he pays a premium when he takes a fixed rate loan. Since the bank takes a risk on the interest rate, fixed rate loans are always pricier than floating rates at a given point in time. However, the customer is still well advised to take a fixed rate loan, especially if the difference in rates between a fixed rate and floating rate is not more than 1.5 %. Another advantage of a fixed rate is that the product can be customized to offer a stepped up repayment facility. This will be a loan where the EMI goes up at periodic intervals and therefore the customer gets a higher loan.
A floating rate loan is “ supposed” to be a loan where the interest rate goes up or down. The customer signs up for a loan where he could get any of the following combinations
1.Loan at RPLR (Retail Prime Lending Rate)
2.Loan at RPLR minus a spread
3.Loan at RPLR plus spread
Of the three, a loan where the loan is at RPLR is easy to understand and track. Banks have been resorting to a practice where the RPLR is only revised upwards or kept constant and almost never lowered. This results in the floating rate being a balloon, i.e it only floats upwards! For new customers, the RPLR is kept constant and the spread is lowered. This makes the floating rate product risky for the customer with practically no upside. However this is a time for customers to assert themselves and if a customer approaches the bank, the interest rate is revised downwards after payment of a fee.
There is a third alternative, which few banks suggest and very few customers demand. Customers can opt for a fixed + floating loan. This would be a loan where the option is to take a floating rate loan for 5 years and a fixed rate loan for 20 years. The fixed loan could be a loan where the installments rise gradually. This will entitle the customer to a higher loan. Also it is advisable to take a floating rate for a lesser term as floating rate loans are risky, and the sooner one is rid of this the better. Also some banks do not charge prepayment charges for a floating rate loan and the customer could benefit in case he wants to prepay a certain portion.
There is a considerable amount of saving which is possible if the customer is alert and engages his bank in a constructive dialogue. It is unfortunate but certainly true that you have to be aggressive in asserting your rights. There is a need to be alert and proactive. Most customers keep paying their EMIs without being aware of the rate of interest on their loans. Strange but true.