If you are hunting for a housing loan, you are certain to try and get the best deal on interest rate. But you are certain to be equally careless about the fine prints when it comes to signing the loan agreement.
The excitement of having closed a housing loan deal blinds you to the fact that certain clauses can be a cause of concern.
Read this: "Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement. . . ."
This clause can be part of even a fixed rate housing loan and therefore, can lead to consternation.
And if you are opting for an adjustable interest rate loan, there could be a clause that reads:
"Notwithstanding anything to the contrary contained in this agreement, having regard to adjustable interest rate for the time being, the bank at its sole discretion shall be entitled to increase the EMI amount suitably if: (I) the EMI is not adequate to cover interest payments in full, and/or; (ii) the EMI results in the term of loan exceeding the retirement age or 65 years as applicable. (iii) if so required by the bank at its sole discretion for any reason whatsoever from time to time."
A senior official with a housing finance company says no lender can have an agreement that says a fixed rate can be fixed for the entire tenure of the loan of say 15 or 20 years, as otherwise it is certain to cause asset-liability mismatch.
None of the lenders' borrowings are for such longer terms and hence cannot guarantee a rate for that long a period.
In this backdrop, what is needed is transparency in the manner in which housing finance companies determine the interest rates. Most housing finance players determine the benchmark rate, or the prime lending rate (PLR), based on internal policies. It is not linked to any transparent benchmark.
IDBI Housing Finance and ING Vysya are among the few players which have linked their rates to external benchmarks. IDBI Housing Finance has linked its fixed rate loans adjustable every three years, to National Housing Bank's refinance rate.
While ING Vysya has anchored its floating rate housing loans to the Mumbai inter-bank offered rate (MIBOR), a market determined benchmark.
ICICI Bank recently withdrew the force majeure clause that excuses the lender from fulfilment of contract due to unforeseeable course of events. This was done following protests from customers.
Housing Development Finance Corporation has introduced a third product, which is a fixed rate loan with 0.5 percentage point interest higher than normal fixed rate home loan where the rate is adjustable every three years. This higher interest factors in the risks of unforeseen events.
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