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All About Home Loan Fees and Charges

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  • Highlights

  • Floating vs Fixed Interest Rate Home Loan

  • Pro Tips for Availing Low Interest Home Loan

  • Charges on a Home Loan

A home loan is one of the biggest financial commitments an individual takes on during a lifetime. Its long tenor also ensures that a considerable time of your life is spent servicing the loan. Owing to this, a majority of home loan borrowers are on the lookout for new ways to reduce their subsequent equated monthly installments (EMIs). But before jumping into ‘how to secure a low interest home loan’, a borrower must be aware of the following:

Floating vs Fixed Interest Rate Home Loan

Fixed Interest Rate Loan

In a fixed rate home loan, the rate of interest is decided before a borrower takes the loan. If borrowers choose this option, then they will have fixed EMIs for entirely of their loan tenor. The interest rate is unlikely to change even when there are fluctuations in the market interest rates (repo rate changes). Hence, borrowers can easily calculate the sum of money they are liable to pay in advance as EMI and accordingly plan the finances. However, this also means that the rate of interest at which the borrower repays the loan is likely to be higher than the floating interest rate.

Floating Interest Rate Loan

In a floating rate home loan, the rate of interest changes with changes in the repo rate. If the Reserve Bank of India’s repo rate goes up, then the home loan interest rate for any individual borrower will also increase. Similarly, if the repo rate drops, an individual borrower's home loan rate will also come down. 

The floating rates change during specific periods, for instance, it can be once in three months, based on the conditions laid down by the chosen lending institution. This is popular as 'reset' and the lending institution will let borrowers know about the frequency of the reset in the home loan application. Whenever the home loan interest rate changes, either the home loan tenor or the EMI also changes.

Floating vs Fixed Interest Rate Home Loan: Key Differences Explained

  • The major difference is that the home loan interest levied on a fixed-rate loan is significantly higher than a floating-rate home loan. A borrower must be aware of this when opting for it.
  • If borrowers believe that the home loan interest rates are low at the time of the home loan application, then they may choose to opt for a fixed interest rate home loan so that they can enjoy a low rate for the entire loan tenor. But if the borrower perceives that the interest cycle of the home loan may encounter ups and downs during the loan tenor, then they may opt for a floating rate home loan to benefit from the changing rate cycle.
  • Another major difference is that floating rate home loans have zero prepayment penalties. This indicates that if borrowers suddenly encounter a windfall, like a festival bonus or some form of inheritance, they can pre-pay their home loan (fully or in part) without penalties. But in the case of a fixed rate home loan, they may be charged a prepayment penalty if they choose to pay off the loan before it matures.

Pro Tips for Availing Low Interest Home Loan

Every borrower tries to get a home loan at a low interest rate. One can successfully do so by following a few tips

Be Aware of Home Loan Interest Plans

Banks usually offer three types of home loan interest plans – fixed, floating, and Flexi interest. It is a good idea to know these thoroughly. A borrower can take the advice of an expert before choosing a home loan interest plan.

Try Availing of the Loan from a Known Lender

A borrower must try to avail of a loan from a bank or a lender where they have an existing account as there are chances of it providing a home loan to regular customers at low interest rates.

A Borrower Must Borrow Only the Amount They Need

The loan amount you want to seek also plays a role in determining the interest rate offered to you. Often a high loan amount may mean a high interest rate, and a borrower must plan accordingly.

Charges on a Home Loan That Borrowers May Not Know

  1. Application Fees: Typically covers preliminary expenses of a lending institution for verification.
  2. Processing Fees: Usually covers the cost of credit appraisal. The fee is calculated based on the borrower’s profile, the type of loan, and income.
  3. Franking Fees on the Home Loan Agreement: Some states like Karnataka and Maharashtra, for instance, tend to levy fees on the home loan amount.
  4. Indemnity Cost: A borrower has to indemnify the lender for certain risks, for example, if the builder encounters a delay in getting approval or the property tax is due and/or yet to be completely paid by the seller.
  5. Fire Insurance Fees: Most lending institutions that are into bank assurance generally insist on these fees.

The table gives a list of banks in India offering low processing fees:

Home Loan Fees and Charges Guide

Here’s a list of lenders that offer low home loan processing fees:

Banks(Min) Processing Fee (Min. in %) Processing Fee Amount
SBI Home Loan 0.4% Rs.10,000
HDFC Home Loan 0.5% Rs.3,000
ICICI Home Loan 0.5% Rs.2,000
Axis Home Loan 1% Rs.10,000
LIC Home Loan - Rs.10,000
Union Bank of India 0.5% Rs.15,000
South Indian Bank Home Loan 0.5% Rs.5,000

The Final Word

A borrower must note that the processing fee for home loan is not refundable. Most home loan fees and charges are one-time payments and part of the home loan application process. The processing fee for a home loan, however, is not at all fixed. It depends on factors like the types and amount of loan and repayment behavior of the borrower.

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