The financial burdens of the borrowers rise with increase in interest rates in the market. Even home loan borrowers face the heat of increasing home loan interest rates that in turn increases the EMIs, disturbing the consumer's monthly budget.
What exactly should a borrower do at times when interest rates are anticipated to increase and widen the hole in borrower's pocket? Here are few facts that a borrower should ensure about his home loan in India.
Avoid switching from a floating to a fixed rate home loan
It is not advisable to switch from an existing flexible home loan to fixed home loan as there are hardly any banks that offer genuine fixed rate home loans in India. When the interest rate is set on a genuine fixed rate home loan, the lender cannot change the interest rate charged on your loan.
Moreover the individual has to pay a fee to change the rate from ‘floating' to ‘fixed' which is generally1.5% to 2% of the outstanding loan amount. As the fixed rate is not much less than the floating rate and an additional burden of fee to change the type of the rate will ultimately raise the EMI, which is what we are trying to minimize.
Fixed Rate Loans are in reality not fixed
People think that under a fixed rate home loan, interest rate charged by the lender will stay unchanged for the entire repayment period but it is really not the case.
It is better to note that the home loan agreement of all banks and housing finance companies include the reset clause on fixed interest rate. This clause states that the bank has a right to revise rates at the end of certain number of years and it comes into effect at the time of increase in the market interest rates. Also the banks have Force Majeure Clause in their loan agreement that allows them to unfix and raise the fixed interest rate under exceptional circumstances. However the differentiation between the ‘exceptional circumstances' is always is tough task.
Therefore to emphasize, do not go by the term ‘fixed rate' on your home loan and ensure your lender before signing in the deal.