Accept it! Bargaining is in our DNA. If we are applying for home loan, even a 5 paisa negotiation would make us feel happy. For instance, the joy of getting 9.95% rate instead of 10% will be immense. But do you know you might lose on few things while bargaining?I read an interesting quote somewhere, which said: We offer three kinds of services- Good, Cheap and Fast. But you can choose only two. Good & cheap won't be fast, cheap & fast won't be good, and good & fast won't be cheap."
It felt just right. Cheap rate can't be both good and fast. So, if your lender is cheap as well as known for speedy processing, the 'goodness' in the whole transaction could be doubtful.
Following could be the hidden agendas, if you are being offered the 'cheapest' deal. Weigh your options before you choose.
1. Mandatory insurance: Though insuring yourself or property is not a bad idea, which can happen along with a home loan, I quite do not like someone keeping the insurance-purchase as a 'condition' for extending a good rate of interest to my clients. My client's credibility and the lender's willingness to offer him a good deal for acquiring his business should be a standalone cause. The client might like to buy insurance products beneficial to him along with his home loan and I will always encourage him to do so, but don’t force please.
2. Semi-fixed with pre-closure penalty: If you are being offered a good rate along with a lock-in period and exit penalty clause, it is not a decision you should make now. The market is softening, and no wonder the lender is offering you a cheaper deal to keep you 'fixed' with them for a larger tenure. You will end up losing if you compare the floating rates and find in future that they have gone down. Don't let your fear of 'what if the rates increase after this' come in play, especially when you are dealing through an advisory firm. They will advise in time.
3. Company to be co-applicant: Never agree to this clause if you are a businessman (self-employed). Some banks purposely add your company as co-applicant so that your loan comes under non-individual category and they can penalise you during pre-closure. Offering a cheap rate might just be a stunt to capture your business.
4. Semi-fixed with larger margin after auto-switch to floating: Suppose a bank's base rate is 9.5% and they are offering you a semi-fixed loan for two years at 10% with a margin of 50bps. So, this will become floating at the expiry of 24 months. Sounds good? But do not forget to check whether the margin will remain 50bps after 24 months or will it increase. Mostly these offers will have clauses like extra margin upon auto-conversion to floating rate. It means your rate will auto increase even if the base remains same.
5. Monthly reducing rate: A monthly reducing rate disallows your loan to re-amortise the principle-interest breakup the very next day you partially prepay. It waits till your standard EMI payment date comes and hence takes additional interest from the date of your partial prepayment till the EMI date, costing you more. Wherein, the daily reducing balance method adopted by banks allows you to consider your loan partially foreclosed from the very next day of your making the payment. It will make a lot of difference in future, as you are likely to do multiple part closures whenever you have excess liquidity.
6. Not tied down to base rate or similar: Having sanctity of the fluctuation on your mortgage is absolutely necessary. How are you otherwise going to gaze the trend? Base rate or similar milestones with fixed spread allows you to determine the modality of your loan with the lender and their increase or decrease is basis one centric value, without which your loan rate can keep going upwards without any reason and never get reduced. The initial offer of a cheap deal is just a hoax.
7. New lender with no track record: A new lender will always try to win borrowers with cheaper offers, more like a pre-launch deal. As we all know that at pre-launch stage, there are some approvals pending from different government authorities and to dipstick the market sentiment on the property, the builder offers some stock at a cheaper rate, which howsoever has a risk-bearing quotient. A new lender also is of similar nature and it is on your risk appetite whether you should go ahead with him/her or not.
8. Aggressive lender with no experience and probably less infra: Aggression sometimes makes a lender offer a very low rate. Without a proper vision of how they will manage their books or manage their own manpower and infrastructure, they just offer a cheap deal. I have seen this in 2004-2006. Those lenders exited mortgage market immediately after building the portfolio and hiring and leaving their employees and borrowers in a lurch with no one to fall back on.
9. Guarantor/co-applicant mandatory: Obligation to get a person to be your guarantor or making your mother/housewife with no income a co-applicant for the loan isn't a good decision to make. Sometimes lenders will insist on such offerings at a cheaper rate. You might feel like a winner then, but may not have the same feeling if something goes wrong later in the relationship or otherwise.
10. Lender not doing so good in their business: A lender who is unable to do business will try to sell their portfolio and in order to get a good pricing will want good profile borrowers in kitty. They will know that they won't be in the game for a longer time and other institute who purchases their portfolio will take decisions on your loan as per their new policy later. Better to avoid such lenders for a cheaper rate clause.
11. Lesser loan to value ratio: If you are buying a property worth Rs 20 million instead of Rs 15 million and the bank offers you Rs 10 million against a cheaper rate, it suggests that they are not willing to take exposure on you/your property. Better to avoid such offers unless you actually understand the reason for getting such low funding offer.
12. Lesser eligibility: Similarly, if you are offered lower rate for giving you lesser amount of money, in spite of your having the income eligibility, they probably do not like your profession or profile, and have some other interests in taking you in as a customer. Don't be delighted and find out why.
13. Higher processing fee: Last but most common hidden agenda that will blow your top off. When you receive your sanction letter, it will demand more fees to be paid at the time of loan disbursement. When you come out of your shock and call the sales manager demanding an explanation, the response would probably be the 'cheaper rate'. Please note that every Rs 16 you pay increases 0.25% of your rate per lakh per month and obviously paying a few thousand rupees may kill your rate advantage for next five years or more. Take help of your adviser to do the math before accepting such clause, especially if arrives unwarranted.
Do check all 'conditions' before accepting such an offer and before you lose your initial application fee!
Happy borrowing !
(This article has been contributed by Sukanya Kumar, Founder and Director of RetailLending.com.)