Here's a dummy's guide to the home loan fee maze
So you have done a comparison study and found out about who is offering the best home loan interest rates. Great! Does that mean you can go in for the big purchase now? No! Have you looked at all the ‘other charges’? Well, read ahead to know more about the various fees applicable on home loans.
The sum of all the ‘other charges’ is a significant amount; large enough to burn a big hole in your pocket. Education and awareness are the keys to avoid getting ripped off in real estate transactions.
Ignoring the fee bit while focusing merely on interest rates can cost you dearly. Institutions incur charges while processing the loan and they have to make up for it somewhere. So if a lender is waiving off the fees then the interest rate will be definitely higher. While you are shopping for a home loan, do consider the various fees mentioned below for comparison.
1. Application fee
This fee is collected towards processing of your loan application. This fee is collected upfront irrespective of whether your loan is sanctioned or not.
The application fee amount is non-refundable.
In case you happen to change your mind after going in for a loan application from an institution, the loan application fee will be the minimum cost you will have to bear.
So make sure you have completed your research and have finalised the lender before going in for the loan application.
2. Processing fee
This fee has to be paid upfront along with the loan application. Processing fee is non-refundable. However, many banks offer the option of paying a part of this fee along with the loan application and clear the balance fee before disbursal of the loan.
Depending on the organisation this fee can either be a flat fee or a percentage of the loan. It is up to the lender to provide a relief on this fee.
Your negotiating skills can definitely help here to have this fee waived or minimised.
3. Mortgage deed fee
Mortgage deed charge is one of the major charges you need to cough up when you opt for a home loan. It is generally a percentage of the home loan and forms a major chunk of the total fee amount you need to pay for availing the loan.
Some institutions waive off this charge to make the home loan product more attractive. Before you make this as an evaluation factor to choose the lender, check for the interest rates or any other charges wherein this may be compensated.
4. Legal fee
Institutions generally appoint external lawyers to verify the legal status of the property. The fees charged by the lawyers for this activity are passed on by the institutions to the clients. However, if the said property has already been legally approved by the institution then this charge is not applicable.
You must check with the institution to find out if the project wherein you are investing has already been approved by them. That way you can save up on the legal fee.
5. Prepayment penalty
When a borrower pays the entire or a part of the outstanding loan before the due date, it is termed as prepayment.
Prepayment results in an interest rate loss for the lender.
Hence, a penalty is charged to cover this loss to some extent. These charges vary according to the lender and the type of loan availed.
However, the Reserve Bank of India has directed all banks not to charge 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 per cent of the prepaid amount. So in case you have home loan pre-payment in mind this factor must be considered.
Also, while evaluating check if going in for a floating rate of interest is more feasible for you.
6. Commitment fee
Some institutions levy a commitment fee in case the loan is not availed within a stipulated period of time after it is processed and sanctioned. It is the fee charged by a lender to a borrower for an undisbursed loan.
For example, in case of a construction linked loan, the project completion stages are crucial for disbursal. The lender keeps this line of credit open for you but charges a specific amount so that you can avail it in the future.
This fee is typically charged as a percentage of the difference, between amount sanctioned and amount disbursed.
It is important for borrowers to be aware of the above charges. Also, knowing the average charges helps from being over charged.
As a parting piece of advice, we would say ask questions. Understand what the fee is about and why you are being charged for it. Also, negotiate and demand for lower fees. Good luck with home loan shopping!
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.