How To Select A Fixed Period Low Interest Rate Home Loan

Loan borrowers have been witnessing a lot of offers pouring in from all sides. The credit crunch and its aftermath have led to a situation where several banks are reducing their interest rates for the customers. At the same time, many banks are also trying to attract more customers by making some special offers. These special offers often have some characteristics that need more attention so that the right manner of evaluation is possible in these areas. Here are a few factors that one should pay attention to in the process of choosing a special loan scheme.

Time Period of Low Rate

One of the most common ploys adopted by banks to attract investors is to offer a low rate of interest. Often this low rate of interest is not applicable for the entire duration of the loan. This point effectively reduces the attractiveness of the loan that might have been initially visible, thus it will need a reworking. If the low interest rate benefit is only for a specific period of time then this has to be considered in line with the overall period of the loan to understand the importance for the benefit. For example, if there is a concessional rate for two years out of a total loan period of 5 years then this is significant. On the other hand, a lower rate for one year out of a loan period of 15 years might not be significant. The higher the benefit of the low interest rate the better it is for the borrower.

The initial interest rate applicable to a loan offering might look low, but the important point is the rate to which it is linked once things return to normal. This could be a slightly higher or different benchmark with the end result that the customer could end up paying a larger rate of interest than the market rate when the resetting takes place. For example, if a person has a normal loan then the rate could have been 10 per cent in the first year that becomes 9.75 per cent in the next year and then 9 per cent in the following year. On the other hand, a concessional offering might give 9 per cent in the first year but then when the linking takes place this could raise straight to 10.5 per cent because the benchmark rate to which this is linked is higher. This can then reduce to 10 per cent in the third year, resulting in a situation where the borrower ends up paying a larger sum. Choosing a loan where the benchmark rate is specified and which has a better linkage with market changes is important.

Another factor that is commonly applied in case of these special schemes is that they are open for investment only for a specific period of time. There is always a date or a period mentioned for which the rate will be applicable and this means that you have to take a new loan during that period to be given the benefit. This can result in a situation where the plans of the borrower might have to change in order to get this specific benefit. So, for example, if you were looking to take a loan after 4 months to buy a car but there might be a car loan scheme on, which is open only for 2 months, then you might have to prepone your buying decision in order to take benefit of this move. Choosing a special rate home loan scheme that matches with your buying requirement will give the necessary amount of flexibility for you as a borrower.

Exit Restriction

The final factor that needs to be considered is the restriction or the cost that will have to be paid by the borrower in case of an exit from the loan scheme. Unlike normal loans where the prepayment of the loan is easier, things might not be so easy in case of the special loan schemes. This means that either there might be a higher prepayment penalty that is applicable on the loan or there might be specific period of time, say 2-3 years, till which period there might not be any opportunity to switch loans. This can be a tough condition because it will lock the buyer into the loan without any option to benefit from the changing conditions. The other thing is that there can also be a condition whereby the conditions of the loan are fixed for a certain time, which works as a disadvantage. A lower prepayment penalty plus the ability of the bank to provide exit options in case of requirements have to be present for your loan.