Friday, 26 August 2011
Home Loan: Interest Rates
Home Loan: Interest Rates
Interest rates on home loans depends the amount of loan you want to take. It also depends on the tenure of the loan and whether you are planning to buy a home or you want to buy a plot to construct a home. It may also depend up on the profile of an individual which includes the credit history of the individual.
Interest rates differ across various lenders. You will find most of the lender offering you either fixed rate or floating rate home loans.
Fixed rate home loans with a reset clause - These fixed rates are fixed for certain number of years. After that the rates are revised.
Fixed rate home loans without reset clause - The interest rates in these home loans are fixed for the entire tenure of loan.
Floating rate home loans - Floating rate home loans may change at any given point. In case, the rates revise, the borrower of the loan has an option to either increase/decrease the EMI or to increase/decrease the loan.
Many kinds of Home Loan rates.
Fixed Home Loan rates : In true Fixed Rate Home Loans the rates remain fixed throughout the tenure of the loan no matter what. These kind of rates are very expensive (13.50%+ for a 20 year home loan in November 2010) and are offered by a limited number of lenders in the market.
Resettable Fixed Rates : Most of the so called Fixed Rates available in the market are of this variety. Here the interest rate is fixed for a period of 2-5 years and is then reset for a further period of 2-5 years and so on. These rates are more reasonable than the true fixed rates dealt with above. You just need to be clear about the nature of fixed rate contract you are getting into.
Floating Home Loan rates (also called variable rate loans or adjustable rate loans)
For Banks : The effective rate is linked to the Bank's Base Rate. The base rate would have to be declared by the banks at least once every quarter. It is open to each bank to decide its own methodology for fixing the base rate but it is not allowed to change the methodology after selecting one methodlogy. The banks will have to document how it has arrived at the base rate and follow the same system consistently. The calculation of the base rate will be open to the RBI for review (which should at least ensure that a set system is actually followed while calculating the Base Rate). This is of course a much better stipulation than the earlier system of BPLR, where no such system was required to be documented by the bank and there was no question of any calculation that could be reviewed by RBI.
So even though composition of the base rate from the customer's perspective might continue to remain opaque still it is a better situation than the erstwhile BPLR since the regulator will ensure calculation of Base rate is done in a consistent and fair manner.
RBI has banned lending below Base rates except limited categories of loans such as employee loans, loan against its own fixed deposits, Differential Interest rate loans to SC/ST, etc..
The advantage therefore from the consumer's perspective is that when markets rate soften, obviously new borrowers will not borrow at the same rate as earlier. So if the base rate is fixed at 8%, and bank lends to corporates at Base Rate (8%) and possibly even to existing home loans seekers at Base Rates (8%). When interest rates in the market soften, the banks will be forced to reduce their Base rates as now new customers will not borrow at 8% and banks cannot lend below that rate without reducing their Base Rates. Thus banks will be forced to lower its base rate in response to market forces.
Any reduction in base rates, will automatically apply to the old customer as well as new customers without any discrimination.
Interest rates differ across various lenders. You will find most of the lender offering you either fixed rate or floating rate home loans.
Fixed rate home loans with a reset clause - These fixed rates are fixed for certain number of years. After that the rates are revised.
Fixed rate home loans without reset clause - The interest rates in these home loans are fixed for the entire tenure of loan.
Floating rate home loans - Floating rate home loans may change at any given point. In case, the rates revise, the borrower of the loan has an option to either increase/decrease the EMI or to increase/decrease the loan.
Many kinds of Home Loan rates.
Fixed Home Loan rates : In true Fixed Rate Home Loans the rates remain fixed throughout the tenure of the loan no matter what. These kind of rates are very expensive (13.50%+ for a 20 year home loan in November 2010) and are offered by a limited number of lenders in the market.
Resettable Fixed Rates : Most of the so called Fixed Rates available in the market are of this variety. Here the interest rate is fixed for a period of 2-5 years and is then reset for a further period of 2-5 years and so on. These rates are more reasonable than the true fixed rates dealt with above. You just need to be clear about the nature of fixed rate contract you are getting into.
Floating Home Loan rates (also called variable rate loans or adjustable rate loans)
For Banks : The effective rate is linked to the Bank's Base Rate. The base rate would have to be declared by the banks at least once every quarter. It is open to each bank to decide its own methodology for fixing the base rate but it is not allowed to change the methodology after selecting one methodlogy. The banks will have to document how it has arrived at the base rate and follow the same system consistently. The calculation of the base rate will be open to the RBI for review (which should at least ensure that a set system is actually followed while calculating the Base Rate). This is of course a much better stipulation than the earlier system of BPLR, where no such system was required to be documented by the bank and there was no question of any calculation that could be reviewed by RBI.
So even though composition of the base rate from the customer's perspective might continue to remain opaque still it is a better situation than the erstwhile BPLR since the regulator will ensure calculation of Base rate is done in a consistent and fair manner.
RBI has banned lending below Base rates except limited categories of loans such as employee loans, loan against its own fixed deposits, Differential Interest rate loans to SC/ST, etc..
The advantage therefore from the consumer's perspective is that when markets rate soften, obviously new borrowers will not borrow at the same rate as earlier. So if the base rate is fixed at 8%, and bank lends to corporates at Base Rate (8%) and possibly even to existing home loans seekers at Base Rates (8%). When interest rates in the market soften, the banks will be forced to reduce their Base rates as now new customers will not borrow at 8% and banks cannot lend below that rate without reducing their Base Rates. Thus banks will be forced to lower its base rate in response to market forces.
Any reduction in base rates, will automatically apply to the old customer as well as new customers without any discrimination.
