Over the last 18 months, the interest rate regime witnessed a historical low. However, now on cues from RBI, the interest rates have started to rise again. It is hence prudent for home buyers to lock in at current rates. Over the next 6 to 9 months, there are indicators for the rates to firm up further along with rising property prices.
Further banks are offering very attractive options, with fixed low rates for the first year and thereafter on floating interest rate. Recently, some banks have also started knocking off interest against corresponding interest due on fixed deposits, with the bank making effective cost of borrowing very low. This is a good product for those who anyway keep some FD with the bank, as a security measure.
How should the borrowers protect themselves?
Check the initial lock in period for the rates. The cheapest initial rate may not be the best if the lock in is low, since the debt outstanding in later years is what causes maximum impact.
Low processing fees. Zero pre-payment (foreclosure fees)
Check PLR history of lending bank. Quick changes signify risk to the borrower.
Check the discount rate offered over the PLR and the possible impact of each 0.5% change in PLR on the EMI. Also PLR resets should be as infrequent as possible and always on annual multiples.
Check if the proposal is for Reducing Balance or Fixed Interest. Prefer the reducing balance loan.
Offer of additional collateral like bank deposit by borrowers to reduce interest impact.
Relationship of borrower with the bank and quality of service received. Personalized approach allows for better negotiation and reasonable terms.
Complete review of documentation to avoid surprises.
