In August, lending institutions, such as State Bank of India (SBI) and Housing Development Finance Corp. Ltd, lowered home loan interest rates marginally for new borrowers. But that is not the only cost that you incur. With regards to a home loan, along with the interest cost there are few other charges as well.
Processing charge This is paid along with the application form to avail a home loan. It is typically 0.25-0.50% of the loan amount. For instance, SBI charges 0.25% of the loan amount (minimum Rs.1,000 for loans up to Rs.25 lakh, Rs.6,500 for those between Rs.25 lakh and Rs.75 lakh, and Rs.10,000 if it is above Rs.75 lakh). Processing fee is generally non-refundable even if your loan application is rejected. It is charged for various processes such as assessing loan eligibility and evaluating the property value.
Commitment fee This is levied by the lending institution on a borrower for unused credit. In case of a construction-linked loan, the loan disbursal is linked to project completion stages. The borrower may need to pay a charge for accessing the loan in the future from the lender. For instance, for home loans or even loan against property, Kotak Mahindra Bank Ltd charges 2% as commitment fee on loan amount sanctioned less the amount disbursed.
Prepayment penalty When a borrower pays the entire or a part of the outstanding loan before the due date, it is termed as prepayment. When you prepay, the lender losses out the opportunity to charge interest on this amount. So to cover this loss to some extent, the lender charges a penalty. It varies across lenders, and often from loan to loan. However, the Reserve Bank of India, on 5 June 2012, directed all banks not to charge foreclosure charges/prepayment penalty on home loans that are on floating interest rate basis. For fixed rate home loans, however, there is a prepayment penalty charged at a flat rate, which is typically around 2% of the prepaid amount. For instance, Axis Bank Ltd and Punjab National Bank charge 2%.
Miscellaneous costs Other than these, there are various other fees and charges that you might have to pay. These include legal assistance of a lawyer for inspection of the original property paper at the seller’s place, registration of the mortgage deed and so on.
What should you do? While applying for a loan, ask the lender about the various fees. Sometimes several components are clubbed into one fee. Also, just like the interest rate, most of these charges are negotiable. You can ask the bank to waive some of the fees. Make sure that the bank is not agreeing to reduce one fee while raising another or lower the interest rate while raising the fees. Once you are satisfied with the terms you have negotiated, obtain a written offer letter from the lender and keep a copy.