This blog is about, how you should not fall in the trap of paying huge interests for your home loan, where other borrowers are little thoughtful and act wisely.
If you know Tamil language, listen to the below You Tube (audio conversation) between a home loan customer and HDFC bank. Worth listening.
This is a painful experience of a home loan customer, who took 55L housing loan at the rate of 14.25% (in early years) and paid 94 Lakhs so far, but still a long way to go. He is shocked to know after visiting the bank, only 14L principal is reduced from the outstanding. He paid a huge price for his ignorance, by not knowing and aware about the revised low rate of interests by RBI.
How many people in India, follow RBI repo rates and act accordingly? Consider the plight of common people who don’t know about RBI, repo rate, interest rate etc. The banks will always continue to squeeze the customer by their unethical and disgraceful practices. They are not ashamed.
Housing loan interest rates are linked to RBI policy repo rate. If there is a change in repo rate, the banks will revise the interest rates accordingly. There are 2 types of interest rates, Fixed and Floating.
- Fixed rates- the EMI will remain same during the complete tenure, irrespective of change in interest rates.
- Floating rate of interest is linked to RBI repo rate, which continuously changes in effect to RBI policy.
Most of the people prefer to opt for floating rates as they are lower than fixed rates and there is also a chance of getting low rates in future. Also opting for floating rates, gives the borrower an option to save more money against high flat interests.
When you look at the last 10 years, the housing loan rates were hovering around 12.25% (2009) to as low as 7.9% (2017). A simple 100 bps (1%) raise, will impact your EMI or the tenure. But If the interest rates are lowered, the banks will never ask you to switch or do auto switch to the low rate. Because every bank loves to exploit the borrower. Their bottom line is Money. They are Loan Sharks.
It’s better to be vigilant and act if you don’t want to fall in their trap. Below are some of the key takeaways, if you want to live peaceful
- Pay at least 60% of the total deal value of the property as down payment (by savings, raising funds through gold loans, from friends and parents)
- Remaining 40-50% can be taken as loan. Follow 1 and 2, without any deviation.
- Take a home loan from a bank, where your friends, relatives are working. You will get latest updates from them
- opt for 10% increase in EMI, for every year. When your salary is revised or get a new job, you must be earning more than before. Use the additional money, to pay more EMI.
- Whenever you get incentives, additional funds through passive income, selling off few assets etc. – Do part payments
- Do a balance transfer, if you find a bank which offers low interest rate than the present one, Switch. Before that compute the cost of transfer.
- Keep a check on interest rates, visit the bank and opt for it, if you see low interest rates
- More important than all the above, pick a property which you can afford. Desire is different from affordability.
- In an average, home loan borrowers across India takes an average 8 years to completely close the loan.
- Kotak Mahindra Bank offers a lowest rate of interest and Aditya Birla and India Shelter Finance highest interest, as high as 12%
Featured Image : For Humor. Courtesy : Glasbergen.