HOME LOANS: LOOK BEFORE YOU LEAP Seeking a loan for your dream home? PARESH KARIA gives you the nitty-gritty of various costs associated with home loans so that you can smile all the way to the bank Owning a home has been the biggest dream of a majority of Indians. Easy availability of home loans today has made it possible for us to realise this dream much earlier in our life. Taking a home loan is the most important financial decision in your life as it could change your lifestyle as well as spending and savings forever. Let us examine the various costs associated with home loans. > INTEREST The most important consideration at the time of taking a home loan is the interest one has to pay during the loan period. The interest rate will vary from lender to lender, depending on the loan amount and the profile of the borrower (salaried employee/self-employed). It could be fixed, floating or hybrid as discussed hereunder: I) FIXED RATE In this case, the interest rate is fixed for the entire tenure of the loan. The borrower has to pay a fixed EMI for the loan period and is protected against any increase in interest rate in the future. However, he will also not get the benefit of a reduction in interest rate, if any. Nowadays, lenders prefer to pass on the risk (as well as benefits) of changes in the interest rate to the borrowers. Hence, most lenders do not provide fixed rate loans or charge very high interest which makes them unattractive. II) FLOATING RATE Floating rate has now become the de facto rate for home loans. Under this, the rate of interest changes depending on changes in the general interest rate in the economy. The floating interest rate is arrived at through combination of Prime Lending Rate (or base rate) and Spread. III) PRIME LENDING RATE Prime Lending Rate (PLR) is the key lending rate of the lender to which all other rates – for home loan, car loan, personal loan, etc., are linked. The lender will increase or decrease this rate whenever it wants to change its interest rate, in general, for all types of loans. IV) SPREAD Spread, as the name suggests, is the margin which is added to or deducted from the PLR to arrive at the effective interest rate. Spread will depend on the type of loan and profile of the borrower. It usually remains fixed over the tenure of the loan. V) CHANGES IN INTEREST RATE The home loan rate changes whenever the lender changes its PLR as a response to changes in the general interest rate in the economy or otherwise. For e.g. if the current PLR is nine per cent and spread is 1.50 per cent above PLR, the effective interest rate will be 10.50 per cent. Now, if the PLR increases to 9.50 per cent, the effective interest rate will be 11 per cent. Conversely, if the PLR falls to 8.50 per cent, the effective interest rate will be 10.00 per cent. In case of a floating rate loan, since the interest rate is not fixed, the EMI or the loan tenure may vary over a period of time. VI) FIXED AND FLOATING RATE Some lenders also offer hybrid loans where the interest rate is fixed for a particular period, say three or five years and thereafter, it becomes floating. VII) SMART HOME LOANS/OVERDRAFT Some banks also provide smart home loans which are similar to overdraft facilities. You can park your surplus funds into this account, reducing your outstanding amount. Since the interest is calculated on a daily basis on the outstanding amount, this could reduce your overall cost. A cheque book is also provided so that you can withdraw from this account whenever required to the extent of your loan limit. > PROCESSING FEE A processing fee is levied for processing the loan application, which involves verifying property, identity and income documents, doing the borrower’s credit check, ascertaining the borrower’s eligibility, etc. The processing fees can be either: a flat amount ranging from Rs 5,000 to 15,000 or a percentage of the loan amount ranging from 0.50 per cent to 1.50 per cent. One will also have to pay service tax on above processing fees. Some lenders are open to negotiating the processing fees which can be reduced or even waived, depending on the relationship of the borrower with the lender, the loan amount and the borrowers’ profile. The lenders generally take a part of the processing fees in advance. This amount is not refundable even if the loan is not sanctioned. >STAMP DUTY One also has to pay stamp duty on the loan agreement. The rate of stamp duty will vary from state to state. In Maharashtra, one has to pay stamp duty at the rate of 0.20 per cent of the loan value. One can save this cost by executing the loan agreement in a state which does not levy stamp duty (or levies it at lower rate), wherever possible. > PROPERTY INSURANCE One may also have to get the property insured for availing a loan and pay premium for the same. Property insurance is not mandatory but some loan providers insist on the same ostensibly, to protect their interests in case of any eventuality. Usually, loan providers have tie-ups with insurance companies from whom such insurance can be taken by paying a one-time premium. If you do not want to incur the additional cost of getting the property insured, you may negotiate for the same with the loan provider or select a loan provider who does not insist on property insurance. > LIFE INSURANCE Some loan providers also insist on a life insurance policy being taken by the borrowers. This is not mandatorily required. Most of loan providers have tie-ups with insurance companies to cross-sell life insurance policies to home loan seekers and thereby earn commission on the same. It’s high time the RBI/NHB looked into such practices whereby the home loan seekers are forced to buy life insurance policies. > PENALTY FOR FORECLOSURE Home loan providers have now been prohibited from charging any penalty for foreclosure of floating rate loans. This step has gone a long way in making the home loan market more competitive. It has also turned out to be a boon to the borrowers who can now easily switch over to another loan provider, if they find the rates and other terms to be more favourable. However, before making such a switch over, one will have to compare the benefits with the processing fees and other charges as discussed above, which one may have to pay the new loan provider. It can be seen from above that apart from interest, there are various other costs which have to be considered before zeroing on a home loan. (The writer is a chartered accountant with over 15 years of experience in banking, financial services and real estate) SOURCE: TOI, AHMEDABAD, TIMES PROPERTY, dated: 25th August 2013
Posted on: Sun, 25 Aug 2013 12:59:06 +0000