While availing a loan from a bank – whether it’s a floating or a fixed rate loan — one should get all the relevant details cleared from the bank. Along with the loan application form, banks are also required to provide full information about the interest rates applicable during the tenor of the loan.
The bank should also inform the borrower about the fees and charges payable for processing (whether a floating or fixed rate loan), penalty rate of interest for delayed payments, conversion charges for switching loans from floating to fixed rates, existence of any interest reset clause, time by which a decision on the application will be conveyed to the applicant and any other matters which will affect the interest of a borrower.
“Home loan reset clause refers to the particular clause in your home loan agreement stating the period after which your fixed rate home loan will get converted to a floating rate loan,” says Naveen Kukreja – CEO & Co-founder, Paisabazzar.com
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How does a reset clause apply?
An interest rate reset clause simply means that when applied, it allows a bank to review the rates and reset them at the end of a specified period of time – based on the interest rates prevailing at that time.
“The reset clause applies to home loan borrowers opting for mixed rate home loans. Under the mixed rate system, your interest rates will remain fixed for a teaser period, usually for the first 2–4 years of your tenure, after which your loan gets converted to a floating rate regime. Remember that the fixed rate levied during the teaser period will be 10–20 bps higher than the floating rates prevalent at the time of the loan sanction. Similarly, borrowers should be prepared for regular increase or decrease in their EMIs during the post teaser period, depending on the prevalent interest rates,” says Kukreja.
Even your floating rate charged during the post-teaser period might be different from a borrower opting for floating rate loan with the same date of loan sanction. Borrowers should carefully go through the charges and rates of mixed rate home loans and compare them with the floating rate loans before deciding the type of interest rate,” he says.
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One should also know the following aspects before opting for a floating interest rate:
The base rate mentioned by the bank to which the floating rate of interest is associated with.
The agreement clauses which specify a minimum interest rate clause.
The reset dates mentioned by the banks, if any, like January 1, April 1, July 1, etc.
Whether the margin can be changed during the tenure specified in the loan or not.