Fixed /Floating rate:
Under a floating rate loan, the interest
rate on the loan varies from time to time depending
on the Prime Lending Rate fixed by the Reserve Bank.
This change can happen as frequently as one in six
months. If the PLR falls, you benefit as the effective
interest rate on your remaining loan falls. However,
your payments every month stay the same. The Finance
Company will refund some of your EMI cheques and effectively
compensates you by reducing the tenure of the loan.
The reverse happens if the PLR rises, much to your
disadvantage.
Choosing between fixed and
floating loans:
In the last 2-3 years the PLR has
fallen as the Indian economy had slowed down and demand
for money was low. If you expect this trend to continue,
you stand to benefit from a floating rate loan. If
interest rates begin to rise again, you can prepay
your floating rate loan and lock in to fixed rate
loan. You must them choose a floating rate loan with
no repayment charges (one is offered by HSBC). However,
if you do not want to speculate on interest rates
and need a stable loan to help planning the future,
then go for a Fixed rate loan.
Rest:
Interest rates are quotes on a daily
rest, monthly rest or annual rest basis. The annual
rest quote implies that the company gives you the
credit for the monthly principal repayments only at
the end of each year. Such loans are therefore more
expensive than a monthly /daily rest loan. The shorter
the tenure of the loan, the greater the effective
interest rate difference will be.
Processing Fee:
A one time fee which is normally
non-refundable and payable along with your initial
loan application. Rates can vary from 1-2% of the
loan amount.
Administrative Fee:
A one time fee which is normally
non-refundable and payable before your loan is disbursed.
Rates can vary from 1-2% of the loan amount.
Commitment fees:
This interest is charged if you do
not draw the sanctioned loan within a period of 6-9
months. The rate of interest is usually about 1-2%
a months.
Interest Tax:
Housing Finance companies have to
pay a tax on the interest income they receive from
you. They sometimes pass this on to the customer.
Always check with the company if the interest rate
they are quoting includes interest tax or not. This
tax normally about 2% of the interest rate charged.
Eg if the interest rate quoted is 14% then the actual
interest rate including interest tax is about 14.28%.
Prepayment charge:
Most Housing Finance companies charge
a fee for prepaying your loan before its full tenure
is over. This helps them plan their finances, at your
expense. Your earning capacity will normally increase
with age and a prepayment fee can be a big cost. This
fee also limits your ability to refinance the loan
if interest rates fall after a few years. The fee
is normally in the range of 1-2% of the prepaid amount.
Refinance Charge:
Some Housing Finance companies do
not charge you for prepayments from your own savings.
However, if you retire a loan using money borrowed
from another Finance Company, you will have to pay
a Refinance charge of 1-2% of the loan outstanding.
Down payment:
Housing finance companies would normally
give a loan up to 80-85% of the value of the property.
The remaining amount would have to paid by the buyer
(to the seller), as a down payment before he draws
on the loan.
Tenure of the loan :
Normally, loans are given for a period
of 1-15 years. Some companies also give loans up to
20 years at an additional interest cost of 0.25% -0.5%.
Most companies do not allow loans for a fraction of
a year.
Top
