Thanks to the RBI’s downward revision of policy rates by 50 basis points and nudge from the government, several banks have reduced their lending rates. Consequently, home loans have become cheaper, which may prompt home-seekers to start looking for a house of their dreams. Similarly, it is time for existing home loan borrowers to review their strategy and tweak it, if required. Here are a few points you need to bear in mind at the time of taking a fresh loan or evaluating your existing loan structure:
Fixed or floating?
While some banks have done away with fixed-rate loans, others continue to offer such schemes. Many loan-seekers tend to settle for fixed rate loans to eliminate the stress involved. In the current scenario, however, where the interest rates seem to be in the softening mode, it’s best to opt for floating-rate loans. This apart, the differential between the floating and fixed rates -up to 2 percentage points, depending on the lender – justifies the choosing the former.
Don’t focus on the rates alone
No doubt, lending rate is a critical factor for choosing a lender. However, the lender offering the lowest rate need not necessarily be the ideal choice. For instance, if the lender’s assessment of your eligibility results in sanctioning of a loan amount that falls short of your requirements, the lower interest rate will not mean much. This apart, you also need to factor in charges like processing fee, inspection and valuation charges that banks levy while comparing the offerings.
Insure your property
Every home loan contract requires the borrower to insure his/her mortgaged house against fire and other natural calamities. However, not many borrowers take this clause seriously, which could prove to be a costly mistake. For, in such cases, the bank reserves the right to insure the house by debiting the borrower’s account and charge interest for the same. Besides, it is in your own interest to insure the property – in case it is destroyed due to a natural calamity, you will be left with a home loan despite being deprived of a shelter.
Don’t hesitate to switch
This suggestion is relevant for existing borrowers, if their bank has been stubborn with respect to revision of lending rates. With the RBI abolishing pre-payment penalty, the negotiating power of the average borrower has gone up. So, if your bank has been unwilling to reduce rates despite others doing so, it may be time to speak to your bank. And, expressing the intention to switch to other lenders can be a powerful tool. Just ensure that the savings on interest payable justifies the cost involved in switching. Take into account the processing fee, valuation fee and the drudgery of going through the entire procedure before making a decision.
Keep communicating with your bank
Any lender approves your loan application on the basis of your current financial situation. Hence, if there is a change in relevant circumstances, particularly employment status, the banks are interested in being informed. So, be it job loss, retirement or switch, ensure that your bank is kept in the loop. Also, applicability of the clause notwithstanding, banks typically revise the repayment schedule upon negotiations with the borrower.