How to Select a Home Loan

How to Select a Home Loan
By Vaibav Aggarwal

Over the past it was easy to choose the home loan as borrowers used to prefer floating rates as these are few percentage points below the fixed rates.

But from few months the property prices have gone up and the rising inflation has added to the dilemma of the potential borrowers. Besides, the interest rates on home loans are also on rise due to various factors, this lead to utter confusion in the minds of the borrowers.

Home loan borrowers in state of confusion

There has been an addition in potential borrowers who are earning good salaries but have confusion in their minds whether they should take a loan now or wait for some more time. Earlier borrowers used to hook on to floating rates, but in the recent times are mulled over migrating to fixed rates. In fact, currently the fixed rates are high around 13 to 14 percent.

The question arise here wouldn’t it be better to wait till the rates dip and go fixed at lower rates? Whether the fixed rates are truly fixed or fixed for three years? What in case the lender raises the rate after you refinance? Do I have to repay to the lender till I retire from service? Whether to switch from floating to fixed, at the next rate slide?

Uncontrolled inflation adds to hike in interest rates

Rising inflation has worked as fuel in fire. Previously the rates which were not showing signs of increase got a boost from uncontrolled inflation. The blame for this should be put on worldwide inflation or the soaring oil prices; however inflation touched a 13-year high of 11.42 percent in the last week of June.

An immediate blow came when the Reserve Bank of India (RBI) recently increased the cash reserve ratio (CRR) and the repo rate by 0.5 percent. In turn leading banks immediately passed on the burden of hike to the borrowers.

Selecting the right lender

One of the most important point on which almost every borrower does not pay much deed is selecting a lender carefully. Selecting the right lender is the most critical, yet often overlooked step, in the process of choosing a home loan option. Firstly search for a bank offering the cheapest rate. Compare the charges which they take in the form of various fees. Make certain that the home loan lender has a reputed reputation as a good lender to take loan from.

Some lenders offer low rates only to new borrowers but do not pass this benefit to the existing borrowers. Discuss with other people and find out during the past few years how many times has the lender increased rates and how many times the lender has passed this advantage by lowering interest rates of borrowers.

Floating rates

Do a proper search of fees and penalties. If you’re planning to take a long tenure loan, search for lenders who do not charge prepayment penalties or foreclosure charges. Borrowers may prefer to repay loan from time to time when they get any bonus.

Penalty on prepayment is yet another pinch on your pocket. Yes, the lender has quickly passed on the burden of rate hike to the borrowers. After all banks are business entities and not charity institutions. Yes a true floating rate loan fluctuates both ways.

Steps for controlling inflation

Long discussions have been done on controlling inflation. In case the fixed rate is only slightly higher than floating, then you can explore the option. And if you can turn over with sleepless nights and can afford to go with fixed, then choice is obvious.

In fact fixed rates aren’t really fixed. The lender has attached all sorts of clauses to the fixed rate that gives him one-sided power to push up your fixed rates. Carefully study these clauses as not all fixed rates are ‘pure’ fixed rates.

Hopefully the borrowers get some relief soon from inflation and will be able to see slide in the rates, at which point they can consider of switching to a fixed rate.

Vaibhav Aggarwal is an expert Auther on RupeeTimes who writes about personal finance related terms like Home Loans, car loan, credit cards and fixed deposits.

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