Festival offers on home loans: Avoid teaser rates that reset after months

Compare offers from various lenders on criteria like interest rates, processing charges, tenure, discounts, repayment flexibility

Last year, Rajesh Arora (name changed on request), a 40-year-old Noida-based businessman, took a loan during the festival season because the interest rate being offered appeared attractive. However, what he realised later was that the low interest rate was applicable for only a year, after which the rate moved up.

During the festival season, the demand for home loans typically rises as many families look to acquire a new house. 

This year is no different, with the market abuzz with several enticing housing loan offers.
 

According to a report by Omniscience Capital, a smallcase manager, the Indian housing finance market grew by around 25 per cent annually between FY22 and FY24. 
 

It is further projected to expand at a compound annual growth rate (CAGR) of 15-20 per cent until 2030.
 

Borrowers need to examine home loan offers closely on several parameters to avoid Arora’s fate.     
 

What’s being offered? 
 

One of the most common offers during the festival season is a partial or full waiver of processing fees. 
 

“This can lead to savings of Rs 10,000-50,000, depending on the loan size,” says Adhil Shetty, chief executive officer, BankBazaar.com. 
 

Another popular offer is a special interest rate. “Lenders lower the spread, reducing the loan cost by 5-10 basis points. However, the reduction is usually time-bound, and the lender may reset the spread after that interval,” says Shetty. 
 

Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor and founder, SahajMoney.com, highlights that apart from zero legal and valuation charges, lenders offer loan-to-value (LTV) ratios as high as 90 per cent.

Real and superficial benefits 
 

Experts stress the importance of opting for stable and transparent loan terms. 

“Offers with lower spreads over marginal cost of funds-based lending rates (MCLR) or repo-linked loan rates (RLLR) are preferable to teaser loans, where the spread increases after 1-2 years,” says Kumar. 
 

Another point Kumar highlights is that many of these special offers may be available only to borrowers with high credit scores, and not to everyone. Shetty adds that many of these offers may be available only to fresh loan applicants, and not those looking to refinance (there can be exceptions to this).  
 

A reduction in interest rate, especially from banks, is a more meaningful offer than a waiver of processing fee. 

“Bank discounts typically persist for the entire loan tenure, meaning a discount of just 10-50 basis points (bps) can lead to substantial long-term savings,” says Aditya Mishra, an independent expert on home loans.  In contrast, processing fee waivers are one-time benefits that might not provide the same financial advantage.
 

Choosing the right lender 
 

When selecting a lender, it’s essential to compare not just the offers but the overall loan terms—interest rate discount, processing charge, loan tenure, loan-to-value ratio (LTV) and repayment terms. 
 

Borrowers should also be aware of hidden or invisible interest costs arising from the way banks calculate interest. Public sector banks typically use the daily reducing method, while private banks favour the monthly reducing method. 
 

“The daily reducing method implies that if a borrower pays an equated monthly instalment (EMI) on the 10th of the month, the principal portion of the payment is reduced from the balance within 24 hours. Consequently, interest is calculated on the reduced balance from the 11th onward,” says Mishra. In contrast, private banks’ monthly reducing method means that even if the EMI is paid on the 10th, the principal is not reduced until the end of the month. This leads to additional interest on the higher principal for an extra 20 days. “Over a loan tenure of 15 to 20 years, the monthly reducing method can lead to significantly higher interest payment,” says Mishra. 
 

Tips for borrowers 
 

Experts advise starting the loan search with lenders that borrowers already have existing relationships with, whether for deposits, loans, or credit cards. “One should also compare loan features across different lenders on financial marketplaces,” says Ratan Chaudhary, head of home loans, Paisabazaar. 
 

When choosing the loan tenure, borrowers should consider how much EMI they can afford and how it aligns with their other financial goals. “Shorter tenures lead to lower interest payments but higher EMIs, and vice versa,” says Chaudhary. 

Avoid overextending your home purchase budget just because a higher loan amount is available. “Don’t let your total EMIs exceed 35 per cent of your take-home income,” says Kumar.
 

Carefully review the loan’s terms and conditions. Go with a lender that offers greater flexibility on prepayment. “Some lenders set a low threshold for prepayments but limit the number of times you can prepay in a year. Others allow monthly prepayments but have a higher threshold,” says Shetty. 
 

Besides a comfortable EMI, have adequate financial backup. “Missing payments due to job loss or financial emergencies can result in penalties, a lower credit score, and difficulty in securing future loans,” says Chaudhary. 

The writer is a Mumbai-based independent journalist