Tagged: Floating Rate

ATM :: What does a reset clause in a home loan agreement mean?

While availing a loan from a bank – whether it’s a floating or a fixed rate loan — one should get all the relevant details cleared from the bank. Along with the loan application form, banks are also required to provide full information about the interest rates applicable during the tenor of the loan.
By: Navneet Dubey | Published: March 20, 2017 5:20 PM | The Financial Express

ATM

While availing a loan from a bank – whether it’s a floating or a fixed rate loan — one should get all the relevant details cleared from the bank. Along with the loan application form, banks are also required to provide full information about the interest rates applicable during the tenor of the loan.

The bank should also inform the borrower about the fees and charges payable for processing (whether a floating or fixed rate loan), penalty rate of interest for delayed payments, conversion charges for switching loans from floating to fixed rates, existence of any interest reset clause, time by which a decision on the application will be conveyed to the applicant and any other matters which will affect the interest of a borrower.

“Home loan reset clause refers to the particular clause in your home loan agreement stating the period after which your fixed rate home loan will get converted to a floating rate loan,” says Naveen Kukreja – CEO & Co-founder, Paisabazzar.com

How does a reset clause apply?
An interest rate reset clause simply means that when applied, it allows a bank to review the rates and reset them at the end of a specified period of time – based on the interest rates prevailing at that time.

“The reset clause applies to home loan borrowers opting for mixed rate home loans. Under the mixed rate system, your interest rates will remain fixed for a teaser period, usually for the first 2–4 years of your tenure, after which your loan gets converted to a floating rate regime. Remember that the fixed rate levied during the teaser period will be 10–20 bps higher than the floating rates prevalent at the time of the loan sanction. Similarly, borrowers should be prepared for regular increase or decrease in their EMIs during the post teaser period, depending on the prevalent interest rates,” says Kukreja.

Even your floating rate charged during the post-teaser period might be different from a borrower opting for floating rate loan with the same date of loan sanction. Borrowers should carefully go through the charges and rates of mixed rate home loans and compare them with the floating rate loans before deciding the type of interest rate,” he says.

One should also know the following aspects before opting for a floating interest rate:

  • The base rate mentioned by the bank to which the floating rate of interest is associated with.
  • The agreement clauses which specify a minimum interest rate clause.
  • The reset dates mentioned by the banks, if any, like January 1, April 1, July 1, etc.
  • Whether the margin can be changed during the tenure specified in the loan or not.

Source : https://goo.gl/GEP3ye

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ATM :: Is your home loan rate really fixed?

RAJIV RAJ | FEB 8, 2016, 03.50 PM | Business Insider

ATM

One of the primary concerns while taking a loan is the rate at which the loan is being offered as the loan rates help in selecting the lender to a great extent. The borrower is also concerned whether the loan is extended at a fixed rate or a floating rate.

Fixed Rate loan are loans where the rates remain constant throughout the loan period, while in floating rate loans, the rates are linked to market conditions and may change periodically.

Floating rates may be linked to the base rate, inflation or other parameters; each bank may select its own methodology to fix this base rate. These rates have to be declared by the bank each quarter.

Common sense says if you expect the rates to rise then you borrow at a fixed rate so that you can lock in your loan at a lower rate and if the rates are expected to fall then you borrow at floating rates so that you can benefit from the falling rates.

Are Rates Really Fixed for the Loan Tenure?

Fixed and floating rates have their advantages and disadvantages. Fixed loan rates are generally priced higher than the floating rate loans. Most banks have the Force Majeure (superior force/ chance occurrence/unavoidable accident) clause in the fixed loan agreement; as per this clause the bank may change the rates as it deems to be suitable depending on the market conditions or as per its internal policies.

Banks may specify a period of 3 to 5 years after which they are allowed to change the interest rate. Some banks fix a regular interval of 3 to 5 years after which they will review the rates. This means that every 3-5 years, the rates are reviewed while some may do it if the conditions so warrant. Most banks, however, keep this clause in the agreement to keep themselves safe.

When the applicant signs the loan agreement, he/she may overlook this clause that allows a bank the discretion the revise the loan rate. If you plan to take a fixed loan rate @ 11% while choosing to overlook the floating rate loan @ 10.% thinking that you will be paying the same EMI throughout the term as the interest rate will not change then you need think again.

When a borrower chooses a fixed rate loan he or she is choosing a loan that is more expensive (when compared to floating rate loans) as he or she is looking for the certainty that comes with it. The borrower presumes that he/she will be able to plan his finances better as the EMI remains constant. Thus if the rates are revised (generally in the upward direction) he/she may be left unprepared to bear the additional burden per month. Not only does the borrower feels cheated the primary reason for taking an expensive loan is defeated but he/she may also have to make considerable modifications to his/her monthly budget to pay the higher installments.

What Should the Borrower Do?

While as a borrower you may feel cheated if you are caught unaware with an increased EMI burden, the lender cannot be faulted. They put the clause in the loan agreement, whether fine print or in bold the clause is there. As a borrower it is your responsibility to read and understand all aspects before signing the agreement.

So if you are taking a loan or planning to take one, check about the reset clause in the agreement and be prepared for the additional burden that you may have to shoulder during the loan tenure. Though it may be rare but there might be financial institutions that may offer loans that are truly fixed without any reset clause; so if you are really sure that you want only fixed rate loan you could opt for them.

Either ways it’s better to be sure about what you are signing. Whether it’s a floating or a fixed rate loan; each has its advantages. Be sure about other terms and conditions too.

(Rajiv Raj is the Director and Co-Founder of http://www.creditvidya.com)

Source : http://goo.gl/XNRh2w

ATM :: 10 Secrets on how to get a perfect home loan

India Infoline News Service | Mumbai | June 10, 2015 11:00 IST
Find out a competitive rate and focus on the other aspects of the loan. Cheapest is not the best deal. I keep repeating it in my various comments. Look beyond it.

ATM

There are as many as 50+ lenders in India who will be willing to give you a Home Loan. But whom should you choose? Pretty easy, if you follow the simple path & do not get distracted by what your colleagues say or go by your friends’ experiences. Also remember that a credit card service with the same lender could be way different than their mortgage. So, do not tread the easy way of taking it from whosoever arrives first.

Here are the 10 most important things you should ask to know whether it is your match:

Do not chase the cheapest rate of interest. Find out a competitive rate and focus on the other aspects of the loan. Cheapest is not the best deal. I keep repeating it in my various comments. Look beyond it.

Choose a floating rate of interest over Fixed, even if fixed has an attractive rate offer. There will be twists in fixed products. Many of you miss to note that there’s a foreclosure penalty applicable within the fixed term. And moreover the margin changes after the fixed period is over, if the offer rate was for teaser period.

Make sure you opt for a lender who offers daily reducing balance and not monthly. It will not make any difference unless you plan a partial repayment. In a monthly reducing balance plan, even if you partially close an amount in between two EMI dates, they consider the repayment only from the next EMI date, thus making you pay interest even on the repaid sum for those days! You will not know, but it will cost you heavy.

Do not get biased by your previous experience with another product, or what your friends & colleagues preach, or your relatives feel for. This is finance, a pure mathematical product. No emotions attached. Do your maths & decide. You experience with the lender’s credit card or your colleague’s irritation with a lender or your uncle’s comfort with certain type of lending institutes mean nothing to you. It’s your loan.

Read all online remarks, which you will anyways do. But 99% of them are otherwise motivated. You will find that those who are badmouthing a lender probably uses dummy ID-s like kingpin, lisahayden, bigboy, greatguns etc. funny ones. You can take their comments as seriously as their identity suggests.

Your wealth manager, bank relationship manager, chartered accountant, tax-planner and your finance controller or CFO in office are great. Take their help to get guided to the right mortgage broker. Since you trust them, their reference will matter. But, don’t let anyone else handle the transaction, negotiation with lenders etc. unless you find the right mortgage adviser. Mortgage is a specialised product. Ever heard a heart surgeon treating patients for skin rashes? Similarly, a mortgage broker selling mutual fund and insurance will be as good as a real estate broker selling tour-tickets and running an STD shop with photocopy machine! Chose the best in industry.

Try opting for a new-age product which saves you money. Standard vanilla home loan are cliche’ and won’t work for most of my clients who has surplus funds and taking the loan for tax-savings or waiting another property to be sold and pay off the loan. These days, borrowers have various requirement rather than just borrowing for the need of money. Borrowers may not identify it, but a mortgage adviser must & counsel accordingly.

Look at the service perspective carefully; you are getting into a long-term relationship. Don’t jump on the first lender approaching you or the lowest rate of interest or may be, what your friend’s father suggests. You will need a lot of services like- tax certificates, provisional amortisation, list of documents, part closure services, reduction in the tenure/EMI upon partial repayment. There will definitely be requirement of change of address if you are gong to continue the loan for long term. You might shift city or even country. Do not compromise on the aspect of post-sales service.

Always ask for a comparison between at least 6 major lenders from your mortgage adviser. And, again….. do not decide on basis of the lowest rate. Look at the base rate, the margin offered, whether any other product is being pushed, how many times the lender has reduced rate in past two years, what is the maximum tenure offered, and how is the eligibility calculated and most importantly whether your property or similar has been funded by this lender earlier.

Time taken for processing the loan. This may sound unimportant, but my noting it last, doesn’t indicate that at all. When the builder start sending you delay-penalty notices or the seller withdraws from the deal or increases the sale value, trust me, this becomes the top priority on the chart. What will be the point of checking out so many lenders and settle for the one who can only offer, but can not execute?

If you can look beyond cheap interest-rate, you will see an ocean of options. There is a difference between ‘price’ and ‘value’. Identify the need first.

Source: http://goo.gl/bSqWa8

ATM :: What the RBI rate cut means for investors as well as borrowers

Narendra Nathan | ET Bureau Jan 19, 2015, 08.00AM IST | Economic Times
ATM
RBI surprised the street by cutting the repo rate from 8% to 7.75%. Though small, this ‘between-the-meetings cut’ has given the signal that the RBI is confident of achieving its inflation targets and the focus is shifting towards growth. Since the RBI has always wanted policy action to be consistent with long term rate stance, this cut heralds the start of a new ‘rate cut cycle’. Now the only questions are ‘how much’ and ‘by when’ these rate cuts will happen. Since most experts (see box) see measured rate cuts, how is it going to impact you?

Investments: The Sensex and Nifty jumped by 729 and 259 points respectively on 15 January, when the rate cut was announced. Stocks from rate sensitive sectors rallied. While the bank Nifty hit a new high, the realty index jumped more than 8%. A lower rate increases purchasing power and therefore, is good for most other sectors as well.

Debt investments can be classified according to how the impact of this cut will be felt. The first part, where the market forces decide the price of bonds, has already rallied based on the expectations of a rate cut after the budget.

The 10-year yield came down by a further 10 bps on Thursday. Most experts are predicting a further fall in the 10-year yield. Long term gilt funds and long term tax free bonds should generate double digit returns in 2015 as well.

The second part includes bank FDs and RDs, where the rates are fixed by the banks. Since this rate has not yet fallen, it still provides a good opportunity to lock in at higher rates. Go for FD if you have enough liquidity; else start an RD.

Loans: To protect their margins, banks first cut the rates on FDs and RDs before reaching for the loan rates. In the recent past, banks have refused to bring their base rates below the 10% mark, despite significant deceleration in loan growth.

Though banks may do some token cuts to pacify the RBI, no major cut in lending rates are expected. Borrowers may have to wait for a few more months for the arrival of the “achhe din”.

Since demand for automobiles is weak, the first rate war may start in the auto loan segment. This reduction is possible without tinkering with the base rates because the interest rates on most auto loans are at a significant premium to the base rates. Bargain hard to get a better deal on auto loans.

Since home loan rates are only slightly above the base rates, the reduction will be in line with the reduction in base rates. One should not expect more than 25 bps reduction in home loan rates. This reduction will be only for borrowers who have availed the ‘floating rate’.

However, overall home loans rates are going to come down significantly in 2015. Borrowers who can afford to should wait for better rates. The same applies to those who want to shift between lenders now. Wait for a few quarters, let the borrowing rates stabilise at lower levels and then make the move towards the lowest lenders.

Source: http://goo.gl/xFZ1z8