A Home Loan at 3.99% p.a.?

I recently came across a news item that Tata Housing, a prominent realty company, has tied up with Indiabulls Home Finance to offer home loans at 3.99% p.a. The loan will offered by Indiabulls Housing Finance and the special interest rate of 3.99% p.a. applies for purchases in select projects from Tata Housing. As per the Economic Times article, the low interest rate scheme is valid until December 12, 2017 for 11 projects across 7 cities in India. At a time where home loans are being sanctioned at interest rate greater than 8% p.a., the deal sounds really attractive. After all, you get 3.5%-4% p.a. on your savings bank account. Unfortunately, there is not much information about the loan product as yet. Therefore, it is difficult to model the cash flows on a spreadsheet and work out the exact cost of loan during the entire tenure. However, there are still a few things that you should keep in mind whenever you come across such loan deals.



This May Be Way for the Builders to Make You Agree to Their Price

We all know real estate sector is in doldrums. Yes, it is not just the buyers who are struggling. The real estate companies are struggling too. Even though as an end user, we might feel that it is difficult to deal with realty developers, their lenders show them their true place when they go and ask for money. It is another matter when promoters have siphoned off the money from the projects and left the buyers in the lurch. By the way, I am not saying Tata Housing falls in the same category. 

Now back to the topic. With unsold inventory of many quarters a known fact, prospective buyers can get quite aggressive in their negotiations. In my opinion, this could be a ploy to soften you up during negotiations. This may be a method employed by Tata Housing to purchase at a price they want to sell. Essentially, since the home loan deal is so attractive, you may feel a bit hesitant to negotiate on the property prices. By the way, this is a very common persuasion/negotiation skill. And nothing wrong with that. How many times have you offered your kids a chocolate (or something) to get them to do something they wouldn’t normally do? As I have discussed in an earlier post, it is better to keep price and interest rate negotiations separate. Negotiate the property prices first and then get down to negotiating the loan interest rate.

The Teaser Loan Is Only for a Few Years

The special interest rate of 3.99% p.a. is only for the first five years of the home loan. You can expect the interest rate to jump up sharply after the first 5 years. It is quite possible that you have to pay a rate of interest (that is much higher than the regular rate of interest at the time) after 5 years. It is also possible that the low interest rate is bound by other sub-conditions too. For instance, it could for 5 years or the date of possession, whichever is earlier. In that case, you may have to pay a higher EMI much earlier than expected. And yes, you must ensure that you can pay a higher EMI too.  After all, the lower EMI rate is only for the first 5 years. After that, you will have to pay a much higher EMI. Make sure that you can afford that before you sign up.

Are There Any Restrictions on Pre-Payment?

You need to see if there are any additional restrictions of loan prepayment during the first 5 years. From the perspective of the housing finance company, they get 3.99% p.a. for the next five years. The lender would want you to have sizeable outstanding loan amount once the higher rate kicks in. Therefore, it is quite possible that there are additional restrictions of loan prepayment. It is possible that the pre-payments may be prohibited during the first 5 years.

Focus on the Other Charges Too

Many of us focus only on the interest rates while comparing home loan products. You need to consider various ancillary charges too. What if the housing finance company or the bank is charging you a very high processing fee for the loan? Since the processing fee is upfront, it can affect the cost of loan sharply. The effective cost of Rs 20 lacs loan (8% p.a., 20 years) at a processing fee of 1% (plus GST) is 8.14% p.a. while the cost of Rs 20 lacs loan (8% p.a., 20 years) at a processing fee of 2% (plus GST) is 8.27% p.a.

How Is Indiabulls Housing Finance Getting Compensated?

This may not be easy to find out. Clearly, Indiabulls Housing Finance needs to be compensated for giving a loan at such a low rate. In absence of other charges/income, it does not cover the cost of capital. It is possible that the housing finance company charges a very high rate of interest after 5 years. Another interesting aspect to know will be if Indiabulls Housing Finance is being compensated by Tata Housing in any manner (not sure if this is allowed). However, it does not affect you as a borrower. So long as you can figure out the true cost for your loan, you should be able to make  an informed decision.

Conclusion

Since the exact details are not available, it is difficult for me to comment about specific of the scheme. My inputs are not specific to this Tata Housing-Indiabulls Housing Finance tie-up. The inputs are valid for any similar scheme you encounter. As a prospective buyer and borrower, you must consider these aspects before you sign up for the offer. Go through the terms and conditions of the scheme before you make your mind. As I have mentioned many times before, in such cases, spreadsheet is your friendI believe the biggest hit to you will be when you do not negotiate on the price of the property. So, negotiate hard.



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