Home Loan Terms, Home Loan Interest Rate | How can 2 home loans differ with the same interest rate? Understand before buying a home, how can 2 home loans with the same interest rate differ? Understand before buying a home
Understand the rules properly before taking a home loan (pic – istock)
- One has to be very careful while taking a home loan.
- Even a small difference in interest rates can make a big difference in the payoff.
- At present, many banks are offering home loans at an interest rate of less than 8%.
Home loan interest rates have been at their lowest levels in decades and even some banks are offering floating rate loans at 6.65% per annum. At present, there are at least 15 banks whose floating interest rates are starting below the 7% level and there are at least 8 banks offering home loans below 8%. If you compare this with the trends of February, 2019, you will find that at that time the floating home loan interest rate was 8.65% p.a. and most of the banks at that time offer home loan interest rates in the range of 8.80% to 9.50% p.a. Were were Thus, if you have the required margin funds, a good credit score and ample repayment capacity, then this is actually the best time to fulfill your home buying dream. In fact, you may find that more than one bank is offering the same applicable rate of interest. Because of which we have discussed this topic through this article:-
How do you choose between two lenders or loan products offering the same interest rate?
You have to be very careful while choosing your home loan lender as even a small variation in the interest rates applicable on these long term financing facilities with a tenure of up to 30 years can make a big difference in your interest payout . So, to help a well thought out decision, let us discuss how the two home loan products can be different even though the interest rates are similar initially.
Difference in underlying benchmark
In October, 2019, Reserve Bank of India directed all banks to link their floating rate home loans with external benchmarks like repo rate, treasury bill yield, MIBOR etc., so that borrowers can get immediate benefit of rate reduction . While most of the banks decided to link their rates with the repo rate of RBI, there were also some banks which decided to link their loans with other benchmarks like MIBOR, 6-month CD rate etc. Therefore, while choosing a loan product, one must know the underlying external benchmark along with the applicable interest rate. If the loan products of the bank are linked to the repo rate, then whenever there is a change in the repo rate by the central bank, the interest rates will see immediate and the same proportion (ratio) change, thus giving the borrower the benefit of the interest rate. There will be ease and transparency in understanding the trends. But it may be that if the loan product of the bank is benchmarked differently, then things may prove to be different. Repo rate is stable and predictable as compared to T-Bills or CDs, whereas T-Bills or CDs can be more volatile due to mismatch in demand and supply. On the other hand, home loans taken before October 2019 are benchmarked with internal benchmarks such as MCLR or base lending rate, which can be reset less frequently and with less transparency than the repo-linked rate. Therefore, you must understand the difference in the loan benchmarking system between two loan products that offer similar interest rates.
Risk premium to be charged by each bank may vary
Risk premiums are charged by banks in addition to their underlying external benchmark-based lending rates (EBLR). Each bank fixes its EBLR after adding the required spread on the underlying benchmark (repo rate in most cases). This means that if the current repo rate is 4% and the bank’s spread is 2.6%, then the bank’s EBLR will be 6.6%. Now the Credit Risk Premium (CRP) can also be charged by banks in addition to their EBLR to determine the interest rate for the borrower. The risk premium depends on the borrower’s credit score, loan amount, LTV, loan tenure etc. Also, sometimes this credit risk premium increases when the borrower’s credit score drops drastically during the loan tenure, and can result in higher interest rates and higher EMIs. However, some banks’ credit score slabs may be more conservative than others when calculating their credit risk premium. Therefore, you would prefer a bank that considers a broader slab for credit rating assessment and charges the least premium if the credit score drops to the lower slab, even if their interest rate remains the same. Keeps maintained.
Premature payment can be considered in different ways
When you prepay your home loan, you need to adhere to the lender’s norms. Most of the lenders stipulate that you make a prepayment payment at least equal to your EMI. Some want you to pay up to 200% prepayment. During the entire tenure of the loan, you will have to pay higher interest on prematurely higher requirement loans. This is because you may not be able to pay the small amount ahead of time and you will have to wait until you have enough liquidity to make the required payments, and this waiting results in paying higher interest as compared to other loans where you can pay smaller amounts. You can pay the amount and avoid interest on that amount.
Service quality also varies
Home loan is a long relationship with a lender. It usually takes several years to pay off. Therefore, ease of payment and account management should also be considered. There can be a huge difference between two lending banks offering the same rate in terms of quality of customer service, digitization, ease of access, and branch proximity. For example, one lender may allow you to manage your account entirely with netbanking and another lender may decide that you need to visit the branch for various purposes. During the pandemic, digitized services, which you can access from home, are preferred.
Other loan charges may also vary
Banks also charge processing fees, document charges, legal fees, etc. on their home loans. These charges may vary from bank to bank. If interest rates are the same between two banks, then you should compare loan products based on processing fees, late payment fees, and other charges etc. and you would like to choose a bank that charges the lowest on the loan . You can also evaluate your options on the basis of ease of loan processing, customer experience, responsive customer care, transparency etc.
Lastly, when you compare home loans, you should ideally choose a lender that charges a low spread over its benchmark, or in other words, one that has a low operating cost. This will give you the facility of uniform spread for at least 3 years; Later, if the bank increases its spread, you can switch your loan to another lender.
(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)
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