Buying a house means spending hours days looking for a suitable property, doing background checks and finally scouting for the best deal on a home loan (unless you have loads of money to pay for the house without taking a mortgage).
Comparing home loan interest rates of various lenders is not enough. How do you ensure that your home loan does not turn out to be too expensive over the duration of the loan?
Interest rates depend on various factors, including availability of money in the market (liquidity), inflation and monetary policies. If you opt for a floating rate loan, your home loan instalments will keep changing with fluctuations in interest rates.
In contrast, a fixed-rate loan might mean that your monthly outgo is calculated at a higher interest rate even when the market is flush with liquidity and funding is cheap. To keep your total interest outgo at the minimum, you need to know whether it is time to opt for a fixed or a floating rate loan.
THE RIGHT OPTION
Interest rate for most loans is linked to the lender's base rate, which is decided by the banks based on the Reserve Bank of India guidelines. As banks review their base rates at least once in a quarter, your interest rates may go up (or down) based on the call taken by the bank.
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In contrast to floating rates, fixed rates are expected to remain the same for the entire term of the loan. Fixed rates are generally 0.5-1.5 percentage points higher than the prevailing floating rates.
Though fixed rate loans are disbursed at a higher rate to compensate for the risk of rate fluctuations, several banks offer a fixed interest rates only for a specified duration, after which the loan rate is realigned with the prevailing market rate. For example, fixed housing loans offered by Punjab National Bank is disbursed at rates higher by a fixed margin as compared with floating rate of similar duration and remains the same for five years. The interest rate is revised every five years and the reset rate always remains higher than the prevalent floating rate by the fixed margin.
"Most banks reserve the right to change even the fixed rate at their discretion under various conditions and it may not be possible for the clients to verify this," says Vipul Patel, director, Home Loan Advisors, a mortgage advisory firm.
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