The festive season in the home loan industry seems to last forever.
Incessant rate cuts, reduced or waived processing fees and added incentives in the form of free insurance policies, credit cards, et cetera in the home loans industry have proven to be a bonanza for consumers.
From the loan seekers' point of view three factors i.e. interest rates, tenure and the EMI (equated monthly instalment) are considered to be of utmost importance.
Once the loan seeker is comfortable with these areas, the process is set into motion. Taking a home loan has never been easier!
However in the euphoria to acquire that dream house, various clauses in the loan agreement are often overlooked.
These clauses have a significant bearing on areas ranging from interest rates to repayment schedules. Simple clauses pertaining to how often the housing finance company (HFC) resets interest rates in a year can make a considerable impact on floating rate loans.
Industry practices suggest that interest rates for consumers are reset only when the bank's prime lending rate (PLR) is changed. The frequency of these resets is what really matters.
Some housing finance companies (e.g. HFC X) reset their interest rates each quarter, i.e. four times a year; conversely there are others who do so only once a year (e.g. HFC Y).
In a falling interest rate environment like the present one if HFC X were to cut its PLR, then a loan holder would be benefited as they would profit from each progressive rate cut.
On the other hand if HFC Y were to reset its rates, the benefit would be accrued only to that single adjustment. Existing consumers will have to wait for one more year before the next rate cut (if any) materialises.
The above argument might suggest that opting for HFC X is the best option. But now look at the other side of the story.
Recently Reserve Bank of Australia and Bank of England have hiked their interest rates. While the causes and economic conditions behind these rate hikes can be debated, one must bear in mind that these economies had previously followed softer interest rate policies similar to the one being followed in the Indian context.
If we were to experience an upward movement in interest rates, HFC X would be the worst hit. The housing finance company would be well within its rights to reset interest rates quarter on quarter.
And HFC Y with its single reset per year policy would turn out to be a smart proposition for the loan holder.
For those who find floating rates too complex and confusing to comprehend, the solution often lies in home loans at fixed rates.
With fixed rates the element of surprise is nullified, you know the precise rate irrespective of where interest rates in the market are headed. While you would lose out in a falling interest rate environment, fixed rates should theoretically insulate you against rising rates.
Theoretically! Sadly not many fixed rate consumers are aware of a clause which HFCs at times insert in their loan agreements.
This clause permits the HFC to change the loans' repayment schedules and terms and conditions. This option might be exercised in a rising interest rate environment to safeguard the interest of the home loan company at the expense of home loan seeker by modifying the repayment schedule, terms and conditions.
As stated earlier that long list of terms and conditions often contains clauses which can have a significant bearing on your loan repayment. As consumers you need to be aware and make an informed choice accordingly.
