The basics of housing loans
Did some research for housing loans. Typically, banks finance anywhere from 80-90% of the price of the house, and also allow top up loans for registration, lease rent, parking etc. Basically, there are three kinds of loans
1. Fixed Rate - The bank and you agree upfront on some current interest rate, and this rate is supposed to stay the same irrespective of market conditions throughout the tenure of the loan. This kind of a loan can be advantageous if you expect the rates to rise in the future. However, most banks keep a money market clause, which enables them to change the rates if there is a big swing in the rates. Downward revision..well, appears tough
2. Floating rate - Interest rate can be downward or upward revised based on market conditions. With most banks, especially the private ones, downward revision is a very painful task, you keep ringing the call centre and they would do their best to delay the rate change(downward revision). Upward revision, well, you dont need to guess how smooth it can be ;) However, if the market rates remain unpredictable, floating rate loans appear more attractive. Floating rates are also usually lower than the fixed rates.
3. Floating with home saver - Interest rate clause same as floating rate above, but you get an account in which you can keep parking money. The money parked is struck off against the principal amount outstanding, and interest calculated on the remaining amount. You have the flexibility to take out the money, and the outstanding prinicipal and interest is calcultaed as per the duration the money stayed in the bank. Rates however are higher than the normal floating loan, as there is a price to liquidity attached.
Some catches, things to watch out for:
1) Most home loan representatives will try to sell the home saver option, if any such option exists. They will show interesting graphs of how home saver with higher interest rate still works out cheaper than a normal floating rate loan. The calculations they show reveal that if you keep even a small amount of money parked in your home saver account, you radically reduce the interest payable and hence the term of the loan (keeping the emi constant). However, what they feel to demonstrate is that if you part-pay the same amount in the normal floating loan, how much you can save. If you are an individual looking to part pay, and liquidity is not that critical for you, a normal loan works out much cheaper than the home saver. However, for a person who needs liquidity and is not looking to part pay the loan, home saver with higher rate, although more expensive, is the way to go.
2) Processing fee can generally get waived off if you can bargain well with the rep, the higher the amount, the more the cut got by the representative and the easier it is to waive off the processing fee.
3) Check for pre-emi. This is a concept by some banks, where the emi doesnt start immediately on loan disbursement, but a few months after it. Till the time emi starts, one has to pay simple interest on the loan amount, which is NOT offset against the loan.
4) Check for the time it takes for loan disbursement. Once you surrender the papers to the representative, you may need to run after him to make sure that you meet the builder's deadlines. Keep sufficient buffers for last minute surprises.
5) Check the top up options. Some banks do not finance lease rent, club membership etc.
6) Go for a as small a tenure as you can afford. The lesser the tenure, the lesser interest in actual amounts that you pay, though the rate remains the same.
1. Fixed Rate - The bank and you agree upfront on some current interest rate, and this rate is supposed to stay the same irrespective of market conditions throughout the tenure of the loan. This kind of a loan can be advantageous if you expect the rates to rise in the future. However, most banks keep a money market clause, which enables them to change the rates if there is a big swing in the rates. Downward revision..well, appears tough
2. Floating rate - Interest rate can be downward or upward revised based on market conditions. With most banks, especially the private ones, downward revision is a very painful task, you keep ringing the call centre and they would do their best to delay the rate change(downward revision). Upward revision, well, you dont need to guess how smooth it can be ;) However, if the market rates remain unpredictable, floating rate loans appear more attractive. Floating rates are also usually lower than the fixed rates.
3. Floating with home saver - Interest rate clause same as floating rate above, but you get an account in which you can keep parking money. The money parked is struck off against the principal amount outstanding, and interest calculated on the remaining amount. You have the flexibility to take out the money, and the outstanding prinicipal and interest is calcultaed as per the duration the money stayed in the bank. Rates however are higher than the normal floating loan, as there is a price to liquidity attached.
Some catches, things to watch out for:
1) Most home loan representatives will try to sell the home saver option, if any such option exists. They will show interesting graphs of how home saver with higher interest rate still works out cheaper than a normal floating rate loan. The calculations they show reveal that if you keep even a small amount of money parked in your home saver account, you radically reduce the interest payable and hence the term of the loan (keeping the emi constant). However, what they feel to demonstrate is that if you part-pay the same amount in the normal floating loan, how much you can save. If you are an individual looking to part pay, and liquidity is not that critical for you, a normal loan works out much cheaper than the home saver. However, for a person who needs liquidity and is not looking to part pay the loan, home saver with higher rate, although more expensive, is the way to go.
2) Processing fee can generally get waived off if you can bargain well with the rep, the higher the amount, the more the cut got by the representative and the easier it is to waive off the processing fee.
3) Check for pre-emi. This is a concept by some banks, where the emi doesnt start immediately on loan disbursement, but a few months after it. Till the time emi starts, one has to pay simple interest on the loan amount, which is NOT offset against the loan.
4) Check for the time it takes for loan disbursement. Once you surrender the papers to the representative, you may need to run after him to make sure that you meet the builder's deadlines. Keep sufficient buffers for last minute surprises.
5) Check the top up options. Some banks do not finance lease rent, club membership etc.
6) Go for a as small a tenure as you can afford. The lesser the tenure, the lesser interest in actual amounts that you pay, though the rate remains the same.
posted by Sonal at 4:39 PM
2 Comments:
Excellent info for 1st time home buyers.. It isamazing how many people decide to buy and NEVER research financing before shopping.
Thanks
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