One can always see one or the other advertisements popping up, stating that the home loan interest rate charges have gone down to as low as 8.5%, which indeed they have gone down, and there could be no better time than this to make investments in a property against home loans. But before making any decision, one needs to remember that interest rates are not everything a borrower needs to pay, and there are numerous other additional charges which have to be paid that are associated with a home loan.
Additional expenses correlated with home loans are:
- Processing or operational fee:
The operational fee is charged with the final loan amount to the borrower. It is usually a small percentage of the home loan amount charged, ranging from 0.5% to 2.5% of the principal home loan amount. This proportion adds up to the home loan interest amount.
Taking an example: If a borrower is approved of a home loan of Rs. 1,00,00,000; the processing fee which the borrower will have to pay would range between Rs. 50,000 to Rs. 2,50,000. Which adds up a significantly heavy amount to an already heavy loan amount.
A good part about this is that most borrowers do not notice this heavy amount as it is a one-time payment included in the home loan EMI.
Another disheartening and risky factor associated with this fee is that even if the loan gets disapproved due to any factor, the individual would still have to incur a heavy loss as it would be necessary to still pay the operational fee.
This is why it is necessary to evaluate all the factors and then only apply for the home loan when confident.
Thereby people can also get home loan interest rate at a nominal range.
- Prepayment or foreclosure expense
Prepayment is defined when an amount greater than the actual due home loan EMI is paid. The amount paid is only a little extra than the actual EMI applicable, which means that the home loan remains unpaid completely.
Foreclosure is defined only when the home loan amount is completely paid off, even before the maturity date. Earlier, lenders used to charge a percentage of the home loan on early payments or foreclosure payments. Recently, the RBI has announced to eliminate these charges. Though, these are still applicable to the fixed home loan interest rate.
- Executive charges
For approving a home loan, banks and financial institutions have to go through a procedure that involves a lot of document work, legal checks, examinations, and other related chores. It just needs a lot of money, labour and time. To meet up with these little expenses, banks charge administrative fees. These fees could either be a part of the loan or a flat fee charged equally for all, which is applicable for the preliminary period of the loan process. This is also a one time charge; non-refundable fee. It is not refunded in case the loan gets disapproved.
- Swap Charges
At the time when the loan is disbursed for the final step, the borrower is required to furnish either the post-dated cheques (PDCs) or ECS which are a mandatory part of the loan repayment process. The PDCs and ECS pedagogy are specific to individual accounts. In any case, if the borrower decides to change his or her bank account, or apply for the closing of a repayment loan, the borrower will be required to submit new PDCs and ECS. These are the cases where swap charges are imposed. Every time an individual makes such a decision, a new PDC or ECS has to be filed along with the payment of additional swap charges.
- Late payment charges:
This is the most common charge levied on the borrowers. In cases, where the borrowers fail to pay the regular equated monthly instalment within the expected tenure, the lender imposes a late payment penalty on the overdue sum. The late payment charge usually varies from 2% to 4% of the total outstanding principal amount. This late payment charge is imposed every time a consumer ceases to function his/ her EMI payment within the given time.
Though the amount of charges is quite insignificant when compared and contrasted against the actual home loan amount, it still affects the borrower in the long run. It negatively impacts a borrower’s credit score and adds up to a declining history of the credit report. A poor credit score makes it a very difficult job to apply for loans and credit cards for future uses.