Rajesh sounded worried when he telephoned me. I have known him for over seven years. The recently married 30-plus then came home to discuss loan details. He said he had recently visited a home loan fair and a housing finance institution (HFI) had offered him a loan at an interest rate lower by 0.25 percentage points than those offered by other institutions.
It was now over a month since he had received the sanction letter issued at the venue but he had been running around to convert the sanction into reality. The HFI seemed to be too busy to sanction his loan and in the meantime his builder had been pressuring him to complete the rest of the formalities but somehow the money was not getting sanctioned. Also, he was being asked to pay the processing fee that was higher than what other HFIs generally were charging in the industry. He was looking for some advice with respect to alternatives.
Cost attached
We have to understand that there is no such thing as a free lunch; there is always an element of cost attached that is taken directly or indirectly. Unfortunately, we make a fuss when asked directly, but if it is taken indirectly we seem not to mind at all. It is all how a product is packaged. This human trait is misused by many entities by morphing certain charges which in the end would have not made any difference.
What should one look for while taking a housing loan? Is it the interest rate alone or should you consider other factors before signing the loan documents? The following aspects are recommended to be considered while finalising a housing loan:
Interest rates (of course, this is the primary factor)
Loan processing charges
Pre-closure charges
Loan transfer charges (from HFI to HFI)
Bullet payments (periodic additional payments apart from the EMI)
Turnaround time taken in sanctioning and disbursing the loan
While each lender follows a different method of loan sanctioning and also expects you to follow rules that are designed uniquely from his point of view, it is always suggested to look around by visiting at least three or four banks or HFIs before picking one from the lot. It is worth the effort because a home loan is the longest of all loans and all sorts of care will be essential which might save you quite a chunk of money in the long run. You might be benefited in other ways also.
A few aspects have to be considered mathematically as well. Let us take the example of Rajesh who was seeking a loan of Rs.20 lakh for a period of 12 years. The comparison between two competitors was 0.25 per cent. There is a difference of Rs.295 between the two interest rates and if Rajesh chooses an 11 per cent rate of interest over a period of 12 years, he will shell out an extra amount of Rs.42,480 at the rate of Rs.3,540 a year. The question is whether it is worth it.
We can view this from two perspectives:
If the HFI that is charging 11 per cent, which is higher than its competitor, is giving a good deal by charging a processing fee that is on a par with the competitors and is not charging extra for pre-closure or when the loan is transferred to another bank and if the loan is sanctioned with the disbursement cheque within a reasonable time, then paying 0.25 per cent more makes perfect sense. If the HFI that is charging less asks you to pay a higher processing fee and also charges while you are pre-closing or transferring the loan and there is an inordinate delay in disbursing, what is that you are saving or gaining?
There are many banks and HFIs that are quite reasonable and do not charge for pre-closure (which now is a RBI directive) and also let you shift the loan to another bank or HFI without any penalty. They even allow bullet payments and disburse the loan within a reasonable time. All it needs is a little bit of research, collating data, getting opinions from friends or relatives on their experiences and your personal experience when you visited the institution and the level of interaction with the staff.
Rajesh shunned the HFI which teased him with a lower rate of interest and he did not mind forgoing an additional cost of around Rs.43,000 over the next 12 years. His decision proved to be a good one because his loan was sanctioned within a week at the new HFI that charged him 11 per cent and also offered him a better deal.
