To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A will appear every other Monday.
While taking a home loan, what questions need to be clarified, especially in the context of fixed and floating rates?
One should seek clarifications on the fees for processing the loan, prepayment charges, spread (that is, the difference between the prime lending rate and the rate
actually charged on the loan), charges for conversion from one loan rate structure to the other and the reset period clause for floating rate loans.
If one wants a home loan on a fixed rate, then one must check out whether the fixed rate is applicable for the entire period of the loan or whether it is attached with a money market clause whereby the fixed rate is changed after a certain period of time, depending on the money markets or internal policies of the lender. If possible, one can seek a copy of the agreement copy before taking a decision.
Should I go for a floating rate or fixed rate or a combination loan?
A fixed-rate loan is a hedge against rising interest rates, as the interest rate remains constant unless it comes with a money market option. Most customers prefer a floating rate loan as it gives them the advantage of paying lower interest rate — floating rates are generally priced lower.
At the moment, the difference between fixed and floating rates is around 225-250 basis points (one basis point is one-hundredth of a percentage point.) Also, they benefit when the interest rate falls. If you are a risk-averse person, you may want to consider a combination or two-in-one loan, which is part fixed and part floating in proportion to your risk-taking ability. By taking this loan, you would be protected on the fixed rate portion of the loan, which will not change if the interest rates rise, while the floating rate part would change as per market conditions.
Renu Sud Karnad is joint managing director, HDFC. Readers may write in with their queries and comments to firstname.lastname@example.org