A large segment of home buyers today pay for their homes by availing a bank loan. While searching for the best home loan provider, one must evaluate interest rates, processing fees, after sales services, loan eligibility, CIBIL scores, etc. In this article, we will provide a framework for homebuyers to choose the best home loan provider in India.
Home Loan Interest Rates
One of the most important factors in deciding the right home loan provider is interest rate. Many people choose the loan provider with the lowest of home loan interest rates. Although the approach is not wrong, there are many finer details that constitute interest rate which home buyers ought to be aware of.
The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate at which banks can lend. Banks cannot lend below this rate unless authorized by the RBI. Most interest rates on loans by public and private banks are based on MCLR. Certain exemptions from MCLR are fixed rate loans (above three years), special loan schemes by the Central Government, advances to bank employees, etc.
Floating vs Fixed Rate
Floating Interest Rate
A floating interest rate utilizes various rates set by an approved Consumer Price Index. Varying market conditions/fluctuations affect floating interest rates in India. The RBI is responsible for fixing the daily floating rate (REPO). The repayment amount will vary based on the floating interest rate. Floating rates have conversion fees. Conversion fees are paid to the bank for converting old rates to current rates. The conversion fee can usually be negotiated in a discussion with the bank officials.
Fixed Interest Rate
A fixed interest rate is a non-adjusting rate used throughout the tenure of a home loan. A fixed interest rate is set by the bank, and the rates vary bank to bank. While a fixed rate might give a lot of safety and security to the home buyer, it is also possible that the interest rates will not get changed even if floating rates are updated. It is also wise for consumers to check that the fixed interest rate is for the entire term of loan as opposed to an initial term during start of the loan.
Which Rate To Choose?
Many consumers choose floating rate over fixed rate to keep their interest rates updated with market changes. However, if one wants to choose safety and security, a fixed rate might be a better option for them. Even though they might leave some money on the table, they have more peace of mind. A thumb rule would be to choose fixed rates if the markets predict a rise in interest rates in the upcoming future.
- Loan Processing Fee: Every home loan provider charges a loan processing fee. The charge for loan processing may range from 0.5% to 2%. Some banks also charge a flat fee of up to Rs. 20,000. You may be able to negotiate on the processing fee while some banks also offer festival discounts and waivers on loan processing fee.
- Stamp Duty: An additional fee for stamp duty must be paid to register the loan with the government. Stamp duty fee varies from state to state in India. Some state governments have incentives of lower stamp duty for loans taken by women.
- Conversion Fee: There is a conversion fee that banks charge when a consumer wants to convert a floating rate to a fixed rate or vice versa. At the same time, there is conversion fees levied on consumers who want to update their floating rates when interest rates get updated.
- Insurance: An insurance can protect a loan from unforeseen perils. If something were to happen to a loanee during the term of repayment, the insurance would then cover the charges. The bank providing a home loan generally also provides insurance and may even require it as mandatory
- Pre-Payment Penalty: Some banks charge a pre payment penalty if the home buyer decides to close their home loan early. It is wise to check one’s bank loan terms to ensure that there is no pre payment penalty on their home loan.
Ready For A Home And A Loan?
Interest rates tend to be the most important factor for many when choosing the best home loan provider. However, it is important to take into consideration all other factors when one is applying for a home loan. Understanding the terms and conditions around pre-payment penalties, fixed and floating rates, and processing fees is key to finding the best home loan provider in India.