BackWhat you should watch out for in a mortgage process
Here is a look at the key aspects that you need to watch out for when going for a home loan
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One of the aspects that we give least attention to is loan documentation. Considering that banks and financial institutions are under pressure to sell products and are thus coming out with special schemes, it now becomes imperative to go through the fine print. Let’s look at the key aspects that you need to watch out for while you go in for a mortgage loan.
Is fixed really fixed?
With increasing interest rates, many fixed rate loans are no longer fixed. Financial institutions have come out with an innovation of interest rates being fixed for a limited period of two-five years. The loan becomes floating after this period. Since the tenor of the loans are long term, having it fixed for a fraction of the term is not going to help. It is also a good idea to review the clauses carefully as some agreements have clauses that allow banks to reset interest rates in case of “major" events beyond the control of the institution. Such clauses bring in uncertainty to the interest rate being fixed.
Prepayment vs preclosure charges
Today, most financial institutions have a clear differentiation between preclosure and prepayment charges so as to dissuade customers from going for home loan takeovers by other institutions. They allow for partial prepayment without a charge, but charge you when you if you repay the whole amount and close the loan. In fact a leading bank allows for no prepayment charge for up to 90% of your loan. Since the equated monthly instalments (EMIs) would continue, the loan would automatically get closed in a few months. It effectively does not allow a takeover by another financial institution as the loan will continue and documents will not be released till the entire loan is repaid.
When is the interest rate fixed?
One may have gone in for a fixed rate loan only to be horrified that it does not start on the date the loan was approved. If you have a property under construction and draw down the loan in phases, it is important to understand at what point the interest rate is fixed if you are going in for a home loan. Most banks fix it on the day of the last disbursal. This does add uncertainty to the interest rates on your loan especially if the construction period is over a year.
Get the list of documents upfront
Your home loan documents are critical to you. There have been stray cases of documents getting lost by the financial institution. On the completion of the loan processing, it is a good idea to request for a list of documents if you have not been provided the same. This would be very useful if you would like the loan to be taken over at any point of time. This will also ensure that your documents do not get lost among the numerous documents of other customers of the institution.
Other considerations
The frequency of compounding is to be looked at while going in for your loan. One may find institutions that have a higher frequency of compounding as a means to get some additional interest rates in a competitive environment. If you have two loans at different frequencies of compounding, one can calculate the effective rate or convert both to one frequency so as to make it an apple to apple comparison. Financial institutions also have a frequency of reset for interest rates. This ensures that even though the base rate is changed in between, the reset will happen as per this clause.
If one expects interest rates to come down quickly, then a lower reset period is preferable. However, if you think that interest rates are expected to go up sharply, then a longer duration of reset is preferable.
Another aspect to keep in mind is the basis of calculating interest rates. Some institutions offer a daily reducing balance while others offer a monthly reducing balance. A daily reducing balance is a preferred mode as one gets the benefit of principal repayments—both through regular EMIs and prepayments on a daily reducing balance. As a borrower, remember that negotiation can have pros and cons for both the lender and the borrower. However, if the lender agrees for payment terms that seem to too good to be true, carefully go through the fine print. Study any special schemes carefully for fine print. A simple and effective way of checking out the fine print is to negotiate with 2-3 financial institutions in a transparent way and you are likely to understand the fine print better from the competitor. The next time you are looking at a mortgage loan or are planning to take over an existing loan, do pay attention to the fine print. Instead of signing a mortgage loan document without reading and suffering afterwards; reading a loan document and getting clarity on each of the terms and conditions can give you peace of mind.
Anil Rego is founder and chief executive officer, Right Horizons.
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