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The unfamiliar world of home financing

  • Published at 08:09 am December 18th, 2019
Home Investment
Representational photo Collected

Like almost all things in life, a bit of patience and knowledge can help find solutions to any unfamiliar or unconventional situation

Contrary to popularbelief, the road to a home loan, and its subsequent repayment, need not be precarious, arduous or paved by misfortune. 

Like almost all things in life, a bit of patience and knowledge can help find solutions to any unfamiliar or unconventional situation. 

So why should the aspects related to home financing be any different? Regardless of how complex the entire home loan concept may seem, there is no doubt that it has its meritsand is why so many people borrow money from banks or non-banking financial institutions (NBFI) to make up the difference between their savings and the actual cost of the desired property.

Missing deadlines

One of the first worries that come to the mind of a would-be home loan taker is repayment–more precisely, what happens if they miss a few payment dates. “Would the loan provider auction off the property?”“Missing how many deadlines would prompt the loan provider to take an action?”

Knowing the answers to such questions are quite important since theycan have great sway over a prospective home loan borrower. While these worries are justified, rarely do loan providers take such a drastic action unless there are serious negative signs.

In most cases, missing one or two repayment deadlines will not warrant any major action, and if three consecutive deadlines are missed, the first notice letter is usually sent to the borrower,notifying them about the situation. 

In specific scenarios, if the loan taker has good credit or relationship with the bank or NBFI, the notice may be delivered after missing six consecutive deadlines – only after which the loan provider usually sends people to investigate the reason behind it.

And if it is determined after the investigation that the borrower cannot follow through on repayment, then, and only then, does the bank or NBFI auction off the property in question. 

However, even in the midst of such an unfortunate tragedy,there is a sliver of positivity though. If a property is auctioned off by the bank and the amount it fetches exceeds the owed amount –the exceeded amount will be handed over to the loan taker.

Suppository costs

Ironically, before someone can borrow money from a financial institution, they need to make a few payments to them – and this is applicable for home loans too. 

Many prospective home loan takers often overlook or forget about these charges which, although nowhere near as high as the loan amount itself, can rack up quite a bit of money. These additional charges range froma one-time payment to repeating payments.

One of the first and most important suppository costs someone has to pay when taking a loan is the one-time processing fee. 

The fee is levied by the bank to cover the expenses for items such as document collection, credit analysis, verification, etc. It is a non-refundable fee, meaning that it is charged regardless of the loan being approved or not.

Home loan processing fees usually range from 1% to 1.5% of the total loan amount. 

However, in some instances, for example,clients of Bproperty, loan takers can enjoy a reduced processing fee or have it completely waived off. 

This is especially beneficial if the loan amount is high.And along with the processing fee, there are two other additional charges that a borrower needs to pay –VAT, which is 15% of the processing fee, and a stamp charge.

Insurance premiumis another charge that a home loan taker must also bear. 

Although, unlike the processing fee or VAT, insurance needs to be renewed every year until the entire loan is repaid. 

This insurance covers the property against natural disasters as well as floods. 

Furthermore, the insurance amount has to be at least 110% of the loan amount. And finally, there is also a charge for early loan settlement.

Settling early

People – be it a would-be home loan taker or not – wonder if settling early is an option.Well, the option is certainly there. No one really wants to carry on with a loan unless they have to. 

Almost everyone would rather pay up and settle any outstanding loan so the cloud of a home loan does not linger over their head. But as mentioned, there is a charge for partial prepayment of the loan. The amount, though, varies from bank to bank.

For some banks, as well as the situation, the early settlement charge is about 1% of the settled amount with an addition of 15%. But in most cases, that charge tends to be 2% plus VAT –with employees of the institutions sometimes getting a marked down charge.

Keep in mind though that a certain period of time needs to pass before someone can avail the early settlement option –which also varies from bank to bank, with some banks enabling this option after only two years have gone by.

Floating vs fixed

Last, but certainly not least – the thing most people have difficulty understanding and deciding on –choosing the most appropriate type of interest for themselves. 

The terms “floating interest rate” and “fixed interest rate” can be quite perplexing – even to finance graduates. Sure, they have read about it a few times, but rarely do they understand the mechanics of it all – let alone general people. 

Essentially, this type of interest rate determines how much interest a borrower would have to pay during the tenure of the loan. The core difference between them is whether the interest would remain the same throughout its lifetime or change according to the market and the economy.

Fixed interest rates” are somewhat easy to understand –due to its name. 

The interest rate in this type is constant and remains unaffected by outside conditions. 

As a result, if a person takes a home loan at 11% interest rate,their payment and interestwill be the same for the entire duration of the loan.

While in the case of “floating interest rates”, the interest may change periodically – depending on the market. A floating or variable interest rate can be either a blessing or a curse to the burrower. 

Any fluctuation in the market will affect your payable interest amount. So, for example, if your starting interest rate was 11% and during the next adjustment the market rate increases to 15%, you would have to pay an extra 4% on your starting interest amount.

But,if the market rate moves down, so does your payable amount, which is a win for you.

Due to the wavering nature of floating interest rates, many choose to go with a fixed interest rate – which is usually higher than the starting interest rate of its counterpart. 

But in return, the borrower is protecting themselves against any changes in the market.However, most loan providing institutions offer both floating and fixed interest rate home loans as options.

A loan is, undoubtedly, an important tool in the quest to buy a home. It has merits–the most important being providing necessary funding – as well as disadvantages, and there are no reasons why unfamiliarity with the concept should prevent anyone from utilizing it. 

The terms and regulations of home loans are unlike anything else, but once paid attention to, they can become quite clear.

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