Home loans are the stairway to the dream home. And that is why Regrob is dedicated to the task of finding you the perfect home loan deal which provides maximum benefits at minimum cost. So let us continue with the task and tell you how to face increased interest rates and come out victorious. You have got nothing to fear, because you have us on your side.
As discussed by us earlier, there are two types of interest options on home loans- floating interest rates and fixed interest rates. The name makes it amply clear. A fixed rate means the rate of interest on the loan is pre decided and will remain constant throughout the term of the loan. Whereas a floating rate of interest means it is subject to changes with respect to change in market conditions.
When the interest rate is fixed, there is no worry of an increased interest rates during the life of the loan. You will pay the interest at a pre-determined rate and life will be simple for you. Once decided, no changes. But let us come to the floating interest rate case now. Why is the idea of a floating interest rate attractive? For the reasons mentioned below.
1) It is the most beneficial option during a period of low inflation. Why? Simply because low inflation means low rates of interest, and that means less interest payments for you. Hurray!
2) At the time of taking loan, the initial rate of interest is lower by 1-1.5% in case of a floating interest rate as compared to a fixed interest rate.
3) There is no pre-payment penalty on a floating home loan, unlike a fixed one where there is a penalty if you decide to make a pre-payment.
4) There is an option to lower interest rate (Reducing Mark up or Increasing Discount) in future by paying conversion fees. We will discuss this in more detail, we know you are curious already.
All these reasons sound like music to our ears. A floating interest rate seems like the best option. But what happens when increased interest rates of home loan? What strategy to follow so that your finances do not go haywire?
If your EMI already forms a large portion of your income, and the rate hike makes it impossible for you to shell out bigger bucks every month in form of EMI, then you can choose to increase the tenure of your loan, and let the EMI amount stay constant. Yes, you can do that and you are sorted! The bank will inform the borrower whether he / she can have the option to let equated monthly installments stay constant and increase tenure or vice-versa when the interest rate changes.
This should form a part of the terms and conditions of the loan sanctioned. So make sure to know the procedure in this regard when taking a home loan with a floating rate of interest. However, if the hike is reasonable enough that you can afford the larger EMI payments, then we suggest you keep the tenure of loan intact and pay the higher EMI. It will pinch you at first, but is a better decision in the long run.Click here to read about home loan at zero percent interest rate
Let’s move on to the next option available to you, which is to lower interest rate by paying a conversion fee. If the interest rate hike on your home loan is giving you sleepless nights, it may be time to de-stress. And what might that be? A number of banks and HFCs reduce the interest rate on floating rate loans for a fee. There is also the option of shifting the loan account to a lender offering a lower rate.
Make sure that your money is not wasted on expenses that you can avoid. See if you can compromise on a few expenses. Use the internet to re-work on your budget. You can also seek an expert’s advice.
You can get the rate reset at a lower level if you are being charged more than what new customers are paying. While some banks charge 25-50 basis points, or bps, of the outstanding loan amount for this, many calculate the fee on the basis of the difference between the rate you are paying and the market rate. Yes, this is for real! HDFC charges half the difference between your home loan rate and the market rate.
For example, if a customer is being charged 12.5 per cent and the rate for new customers is 10.5 per cent, HDFC will charge 1 per cent. It is a one-time payment. However, Banks may refuse to reset the rate for customers with a history of default. And what happens after the conversion? While the paperwork is minimal, the new rate, too, is subject to changes. For example, if the Reserve Bank of India, or RBI, raises policy rates, banks will in all likelihood pass on that to you. However, a rate cut will bring benefits. In short, the new rate will also be floating. So in all, you are going to benefit with this scheme.Click here to read about home loan transfer or refinancing option
Let us now talk about the option of shifting the loan account to a lender offering a lower rate. Since many banks now do not charge pre-payment penalty, one can think of transferring the loan to another bank. However, for this, you must take into consideration things such as processing fee payable to the new bank. Many banks charge 0.5 per cent of the loan amount as processing fee, while some charge a flat Rs 5,000-10,000. Transferring a loan will also involve a lot of documentation. But if the money being saved is a plus, who’s complaining?
We hope these suggestions will help you in times of when increased interest rates. Head to Regrob for more. We have the solution to all your problems!
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