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Saturday, October 18, 2008

How to select a Home Loan?

Until some months ago, selecting a home loan was child's play. Floating rates that were a few percentage points below the fixed rates were the obvious pick of the borrower.

Spiraling inflation and rising property prices have plunged the prospective borrowers in a dilemma. Adding to this confusion is the constant increase in the interest rates on home loans.

New borrowers wonder if they should take a loan now or wait for some more time. Borrowers hooked on to floating rates, contemplate migrating to fixed rates. However, the fixed rates are currently high - to the tune of 13 to 14 percent.

Wouldn't it be better to wait till the rates dip and go fixed at lower rates? Were the fixed rates truly fixed or fixed for three years? What if the lender increases the rate after you refinance? Will I have to repay to the lender till I retire from service? Should I switch from floating to fixed, at the next rate slide?

Inflation has added fuel to fire. The rates that were showing no signs of reining in got a boost from unbridled inflation. Blame it on worldwide inflation or the soaring oil prices, inflation touched a 13-year high of 11.42 percent in the last week of June.

As an immediate fall-out , the Reserve Bank of India (RBI) recently increased the cash reserve ratio (CRR) and the repo rate by 0.5 percent. Leading banks were quick to pass on the burden of hike to borrowers .

Selecting home loan option
Selecting a lender: This is the most critical, yet often ignored step, in the process of choosing a home loan option. Find out if the bank offers you the cheapest rate. Look at how much they charge in the form of various fees. Ensure that the home loan lender has an established reputation as a good lender to work with.

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

Penalties: Explore fees and penalties . If you're taking a long tenure loan, scout for lenders who do not charge prepayment penalties or foreclosure charges. Borrowers may prefer repaying from time to time when they get any windfall.

A penalty for prepayment is yet another pinch on your pocket. True floating rates: Yes, the lender has promptly passed on the burden of rate hike to the borrowers.

Banks after all are business entities and not charity institutions. But a true floating rate loan fluctuates both ways.

How many times has the lender passed the benefit of lower rates to the borrower? Are his floating rates truly floating? Are the rates offered to existing customers at par with those offered to new ones?

The debate continues. The dilemma persists. "Had I fixed my loan four years ago, I would not be shelling out Rs 500 a day as interest towards my loan today" . If fixed rate is only slightly higher than floating, maybe you can explore the option. If you toss over with sleepless nights and can afford to go fixed, the choice is obvious.

However, fixed rates aren't truly fixed. The lender has all sorts of clauses attached to the fixed rate that gives him unilateral power to push your fixed rates upwards. Get clear about these clauses as not all fixed rates are 'pure' fixed rates.

With the general elections around the corner, the Government could take steps to curb inflation. It is possible that borrowers can see some slide in the rates, at which point they can contemplate switching to a fixed rate.

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