The housing sector has seen a boom in recent years. Interest in real estate has gone up several notches. Home loans rates have never looked so good!
In such a scenario, many individuals have decided on buying a house for themselves to benefit from all-time low rates.
Individuals have various alternatives to choose from while buying a home loan. A fixed rate loan is one such option.
A fixed rate protects the borrower from a rise in home loan rates. While on the flip side, he may not benefit if the market rates were to fall. But a word of caution for borrowers -- are the fixed rates really fixed? There's more to it than meets the eye.
Fixed rate loans come with various options. We will take a closer look to understand them better.
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Most housing finance companies offer a fixed rate loan subject to review every few years. The rate is initially fixed for, say, 3 years and this is subject to review at regular intervals.
The number of years over which the rate is reviewed is a multiple of 3. The reassessment takes place depending on the prevailing interest rate scenario at that time.
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One positive for this type of loan -- in case of a rise in interest rates, borrowers are generally given the option of shifting from a fixed rate to a floating rate. Penalty charges are also waived off on such a transfer. That way, borrowers can benefit from a lower interest rate prevalent at that point in time available on floating rates.
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Some HFCs offer a fixed rate, which is fixed for the entire tenure of the loan. Since fixed rate loans could be a risky proposition for the HFC, the rate of interest will generally be a little higher than that available on a fixed rate loan that is subject to review.
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There are other subtle differences between the two types of loans. For example, the prepayment clause differs for the two types. If individuals have opted for a pure fixed rate, then they may not be allowed to prepay in excess of say, 25% of the total loan amount.
In case they want to make a prepayment in excess of this amount, then a penalty, usually 2% of the excess amount, is levied on the borrower.
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Some HFCs that offer a pure fixed rate also have certain clauses in the sale agreement. For example, a pure fixed rate will be fixed only upto a certain cut-off level of interest rate. If the prevalent market rate exceeds this cut-off, then the pure fixed rate too, is subject to change.
Which is better?
So what does this mean for prospective borrowers? To begin with, borrowers need to be inquisitive and ask a lot of questions to the HFC before finalising their choice.
They need to understand which types of home loan rates are beneficial for them. This will depend on their propensity to take risks and how well they have planned their personal finances. Also, they need to read the sale deed carefully to fully understand how their loan has been structured.
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