Home Loan Options | Great Cashmere
Most of the time I get emails from readers asking for details on various loan programs. Most of the questions relate to the home loan segment where readers show their appetite for a home / home loan. But the lack of proper advice and the “cumbersome” process prevents them from continuing it. Many want clarification on interest rates because they have “heard” stories of disputes over interest rates charged on home loans “in violation” of the basic loan agreement between banks and banks. borrowers. They are irritated by the “arbitrary” change in their monthly equivalent payment (EMI) which is motivated by the change in interest rates during the term of the loan.
What we are seeing is that banks do not bother to educate their borrowers on the mechanism for applying interest rates on their home loans. They don’t even bother to inform them about the change in their EMI and this has been one of the causes of the confrontation between banks and borrowers.
Today’s borrower must be very smart. He must ask the bank questions when applying for a loan. For example, if you are considering taking out a home loan, you should know that there are two options when it comes to interest rates. First, you can get a fixed rate loan. In this case, the bank grants you a loan with a fixed interest rate for a certain period. The second option is the variable rate, which means that the interest rate on your loan will change based on the interest rate cycle in the market.
We are witnessing a trend where more and more people, in particular young people, want to have access to real estate credit. They are always looking for better deals. They curiously seek advice on the best mortgage deals.
What are the basic things you should consider before choosing a home loan?
First of all, you need to decide how much financing you need. Do this taking into account your monthly income, age, other debts, and financial commitments. You should even take into account the stability of your job. The amount of your loan should not make your repayment difficult, which could lead to the debt trap.
After deciding on your loan amount, you need to decide on the loan repayment period. When your loan term is short, your Equal Monthly Down Payment (EMI) will be very high. A longer term is usually chosen to improve the borrower’s loan eligibility, but remember that the longer term is the cost of the loan. If the short-term MIL is not affordable and you want to pay off your loan as quickly as possible, consider the middle route for 10 to 15 years.
Next, it is important to consider the interest rate. You can consider a fixed interest rate or a fluctuating interest rate. The fixed interest rate remains fixed for the duration of the loan, regardless of the variation in interest. The floating rate may increase or decrease depending on the market scenario. There is also a hybrid loan combining fixed and floating loans. The borrower can lock a part under fixed and leave the rest under floating rate.
After taking advantage of the home loan facility, it is important to take out insurance for your home loan (Home Loan Protection Plan) as well as the property you purchased or built on the bank loan. Home Loan Protection Plan (HLPP) is an insurance plan in which the insurance company settles any outstanding mortgage amount with the bank in the event of the borrower’s death. In this way, a borrower can ensure that their family will not have to pay the outstanding loan amount after the borrower’s death. However, it is not mandatory to purchase home loan protection plans. As part of property insurance, you purchase coverage against risks to the property / home due to earthquake, fire, flood, storm, theft, etc.
What is the home loan overdraft facility?
This is a smart alternative for potential mortgage borrowers to reduce the overall cost of interest. It should be mentioned that large home loans with a repayment term of 20 years or more carry a portion of the interest greater than the principal amount. This is where borrowers can take the “home loan overdraft facility” route to lower the cost of interest. The borrower should opt for a home loan with an overdraft facility, also known as a “home loan interest saver or smart home loan”. Existing borrowers can also avail of this facility provided their bank provides this facility. However, they may consider transferring the loan to another bank offering this type of overdraft facility.
The modus operandi of the device is that a borrower can deposit excess funds into their mortgage overdraft account, usually in the form of a savings account or a mortgage-linked checking account. The excess fund parked in this account acts as a prepayment of the outstanding principal, thus reducing the overall interest cost of the mortgage. The borrower has the flexibility to deposit and withdraw excess funds from the overdraft account as and when required.
Notably, the home loan overdraft option can help a borrower avoid a prepayment penalty.
However, a borrower is not eligible to avail the tax benefit for the excess amount deposited in the home loan account. It should also be noted that banks offering a home loan with an overdraft facility will charge a higher interest rate compared to a normal home loan.
The interest rate on a home loan with an overdraft facility is usually a notch higher than the interest rate on a regular home loan.
Experts advise to avail the home loan overdraft facility if you have excess funds available with you. Otherwise, this type of overdraft facility will not be the right choice as it would be available at a cost.
What is the “home loan transfer” facility? How beneficial is this to borrowers?
It is the mechanism by which a borrower can transfer their mortgage account from one bank to another to get interest back on the loan. In simpler terms, a borrower is encouraged by certain “concessions” to take out a new loan from another bank to repay their existing loan.
Borrowers using the route change is not bad, but there are some riders who need to be assessed before taking a flight on the route. For example, a borrower can take a dominant position and ask their existing bank for re-pricing options, before actually transferring their loan to another bank.
The decision to change must be based on more factors than the interest rate. It’s not free. As a borrower intending to take advantage of a transfer service, you should first ask your current bank if you will have to pay a fee to terminate your existing loan or if you can convert the loan to a loan that the price is more attractive. Check if there will be a charge for such a conversion. Before moving on to the new bank whose package you plan to refinance, check out how you will be better off with the refinanced package.
It should be noted that the installment amounts and interest payments will change once there are changes in the loan package. Also compare the current repayment schedule of your current loan program with that of the new loan program you are considering and check the total amount of interest payable and other charges.
After calculating the net impact, if you find that the cost of the change is more than your savings after the transfer, the change doesn’t make sense. Another thing to consider is that the transfer fee must be paid immediately, so your post-transfer savings will come back to you over the years.
Technically speaking, loans with low amounts outstanding and a few years of repayment left are not ideal for changing. The costs involved would be higher than the expected benefits.
And last, but not the least. Try to understand the “teaser offer” meticulously. Find out why the bank you want to exchange your loan with is offering a lower interest rate. Don’t rush into a hasty decision. Remember that banks are locked into tough competition. Their profitability over the years has eroded. The only way to restore profitability is to resort to loans. So why would anyone want to give you loans at a lower interest rate and lose profits while others in the market earn a higher interest rate?