Once people decide to avail loan to own a house, the next thing that storms their mind is choosing between fixed and floating rate of interest. These financial jargons land people in a catch 22 situation. The news media splashes reports on banks increasing interest rates in India and their impact on Equated Monthly Installment (EMI). It is always advised to opt for fixed home loan rate. In fact, many bankers also advise borrowers to go for the same.
When people select fixed rate plan, the payable rate of interest will remain unchanged over the entire tenure of the repayment period irrespective of any subsequent increase in the financial market. But, in actual practice, this is not the case. To have a better loan deal, borrowers have to demystify the nature of fixed interest rate associated with the home loans. This will enable you to make an informed decision.
All the banks include the preset clause on fixed interest rate in their home purchase loan agreement papers. So, if the borrower had taken a loan at 10.5 per cent for 15 years, it does not mean that the same rate will be applicable all across the 15 years. Recently, India’s largest public sector bank State Bank of India (SBI) has introduced a clause as per which it reserves the right to revise the fixed rate home loan after every second year. Similarly, other major players like Canara Bank and Corporation Bank also have similar provisions to revise the rates after 5-years of disbursing the loan amount.
Private sector banks and Non Banking Financial Corporations (NBFCs) are also following the same footprints and the rates too are revised from time to time. Another financial jargon associated with the home loans in India is 'Force Majeure Clause'.
While reading the loan agreement minutely, you can easily mark a statement like: “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 financial market conditions take place during the period of the repayment.” This is the Force Majeure Clause. This clause enables the lender to undertake appropriate modifications in the interest rates on home loans they sanction to their borrowers, if there is a necessity. So, the borrowers are advised to take these aspects into account before loan application.
Author Bio: For more tips on finance community for you and your family. Addi Vardhaman works as a business writer for Paisawaisa. To find financial services community, personal loans in India, www.paisawaisa.com