As humans, we like things to stay predictable so that there are no last-minute unpleasant surprises. In today’s current market scenario bank interest rates have become unpredictable and floating interest rates can make you jittery if you have taken a big-ticket credit like a home loan.
If you observe the RBI repo rate history in India for the last 7 years, you will get a clearer picture of the fluctuation. Repo rates are important because banks determine their deposit and lending rates based on it. Though repo rates have shown a downward trend from 8.5% to 6.5% since Jan 2012 (see chart), there are also factors that affect floating interest rates leading to an increase in EMI amount. One among them is the MLCR or marginal cost of funds based lending rate, since April 2016 all home loans are tied to MLCR, which historically shows an uptrend.
What is a fixed interest rate home loan?
Ideally, a fixed interest rate is one that stays uniform for the entire tenure of the loan. They are not affected by fluctuations in the market and the borrower has to pay a fixed amount of EMI until the home loan is closed. Fixed rate home loans come at a premium for additional risk hedging that the bank carries out against interest rate spikes.
Generally, home loan fixed interest rates are 1%-2.5% higher than floating interest rates.
Are they truly fixed at all times?
Sadly, the answer is ‘No.’ Banks can insert a clause to protect their liability against interest rate fluctuations.
Before you sign on the dotted line, you should know that banks use something known as the reset clause so that your fixed rate home loan is no longer fixed after a certain period. Different banks have different time periods for the reset clause to trigger ranging from 2-10 years. After the reset clause comes into force, your loan will come under floating rate and impact the EMIs you will pay based on market conditions.
Don’t hesitate to ask the bank representative about such clauses before you avail the loan. The lender has an obligation to share this information with you and you are fully entitled to ask questions.
At Finserv MARKETS, we have Bajaj Finserv home loans with flexible repayment, home loan protection, balance transfer and top-up options. We thrive on transparency and there are no hidden charges or hidden clauses that may shock you in the future.
Force Majeure Clause
There’s another tricky clause that your lender can use on you with fixed interest rate loans; it’s called force majeure in legal terminology.
The definition of force majeure in law is “unforeseeable circumstances that prevent someone from fulfilling a contract.” It’s a very convenient law to shed liability but in this case, it’s the borrower who is at the wrong end of the stick.
You may get to know that this clause was in your home loan agreement only when you have to shell out more money on your EMIs. So, check for this clause because the bank can use this clause and choose not to honour the contract when the circumstances are tough.
Though force majeure clauses come into force only during high impact events or disasters, banks may use it if there are high fluctuation in interest rates, change in government regulations, or revisions in the bank’s internal policies. So again, read the fine print carefully.
You should negotiate with your bank and insist on removing these clauses to protect your financial liability in the future. If you feel that you have been duped after taking a loan, you can submit a complaint to the banking ombudsman or you can transfer your existing home loan to a Bajaj Finserv home loan on Finserv MARKETS .
A home loan on Finserv MARKETS can turn you from a tenant to a proud homeowner in a few days, if not minutes. With a Bajaj Finserv home loan on Finserv MARKETS, you can opt for loan tenure up to 25 years with zero prepayment charges. If you are a first-time applicant, you can get additional benefits of reduced EMIs and interest rates up to 6.93% under Pradhan Mantri Awas Yojana (PMAY).
Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus, when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!