Home loan: it’s no simple task

In these days of high costs, one major consideration for selecting a home loan is the rate of interest and its application

Most of us are cost conscious. And rightly so. In the case of a housing loan facility, interest assumes paramount importance as the period of the loan will in most cases be ranging from 10 to 25 years, which means even a small fraction of interest can tax you substantially over a period of time. Further, the interest rate and periodicity of application can be a bit complicated, at least for the common man.

Many of those who have taken a home loan are misled by the mere rate quoted by the lender, unless they understand the periodicity of application, the lender’s right to alter the interest rate from time to time and other small prints in the agreement. For example, if a rate of 12 per cent is quoted, it looks simple on the face of it but there are other points to be taken into account. Some of these are:

Periodicity of application such as daily, weekly, monthly, quarterly is important as ‘interest begets interest,’ meaning the interest applied is automatically added to the balance in the loan account and the subsequent interest application will cover the full outstanding balance, unless you pay the interest immediately after its application.

Then, the linkage of interest to basic rate, like RBI rate, SBI rate, PLR (of the lender) etc. as the periodic revisions in interest will depend on what the linkage is. Most lenders add a clause “…percent above the …rate, rising and falling there with.” You need to be aware of the implications and be able to think of the ramifications of the selection of the type of interest. Here is where we have to study the various plans from which the best can be chosen.

Ask your friends who have taken home loans and their experience with their bank as far as interest cost of borrowing is concerned. One could also utilise the services of an investment consultant, in case the deal you propose to carry out is substantial.

The old adage, “Marry in haste and repent at leisure,” applies to the selection of home loan as well. Take your time in critically examining the various aspects. The following can be a sort of guideline:

Calculate the cost of the property you want to acquire.

Take the bare minimum loan only; remember, every pie you take need to be returned with interest.

Take the loan for a lesser period, as the changes in rate of interest over a long period cannot be gauged in advance in a volatile global scenario.

Pay as high a EMI as possible, especially when the interest rate is high from the past data and future predictions.

Prefer a bank which allows the loan account to be maintained as a running account, so that you are charged interest only on the net drawings. Cover as much of your cost as possible by getting a good bargain from the builder, such as built-up area, time taken for handing over the building after its completion, post-occupation maintenance etc.

A banker-builder tie up may be good sometimes, but not always so. Please check the offers from other banks/builders where there is no linkage.
Post-loan alertness

Don’t relax after utilising the loan. See your loan account statement at periodic intervals.

Watch the transactions, especially the charges debited in the account.

Seek the bank’s clarification on each debit, even the calculation.

Don’t trust the computerised accounting blindly. Insist on instant credits for your remittances into the account wherever possible and eligible.

Watch interest rate changes from time to time. When there is a general reduction in interest rates, think of the implications on your loan. Changing your bank when there are opportunities to avail of lower interest rate can be an option.

Some banks are planning to ‘sell’ your loans to others by the process of ‘securitisation’ for improving their liquidity. If your loan is securitized, it may fetch some benefits to the bank and it need to be passed on to you. Ask for it.

Be alert. “Every pie saved is every pie earned.”