Home Loans

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.

1.    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.

2.    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.

3.    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.

4.    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. However, 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.