Your questions – Loans: If you plan to repay your mortgage early, opt for the variable interest rate

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If you have opted for a variable rate in your mortgage/top-up loan, there is no prepayment penalty.

By Chaitali Dutta

I am planning to take a Rs 40 lakh home loan. Should I opt for a variable rate loan? How should I prepay the loan to reduce high interest payments? —Avuraj Modiyar
Looking at the inflation rate scenario, globally as well as in India, it is likely that there will be upward pressure on the interest rate, in the future. If you plan to pay off the loan early and not run out the full original term of the loan, go with a variable rate. However, if you are young and it is your dream home that you intend to keep until retirement, go for a fixed interest rate. Here you will not be able to make partial prepayments without penalty and the effective interest rate for this will be around 150-200 basis points above a floating rate.

I have an existing loan for an apartment. Now I want to sell it and buy a bigger apartment. Do I have to repay the loan amount to sell the apartment? —Gautam Singh
In cases where a loan is outstanding and the owner wishes to liquidate the asset, the buyer first pays into the loan account to extinguish the outstanding loan. The outstanding lender’s mortgage is released in favor of the lender to the buyer (in the event that the buyer takes out the loan) or directly to the buyer once the buyer has paid all sums due to the lender as well as ‘to the salesman.

I had taken out an additional loan last year on my existing home loan. My current loan will end after two months. Can I prepay part of the top-up loan and what will be the penalty? —Pradip Kumar Doshi
If you have opted for a variable rate in your mortgage/top-up loan, there is no prepayment penalty. You can go ahead and make advance payments.

What are the processing fees for a personal loan and will the interest rate be lower at public sector banks? — Vimal Sarkar
Processing fees vary widely from bank to bank. This can also sometimes be negotiable. Regarding the interest rate, public sector banks may offer a cheaper rate, but the eligibility criteria are strict and you may get a lower loan amount. Usually, when the bank offers a liberal loan amount, it may come with a higher rate of 25 to 50 basis points.

The author is the founder, AZUKE Personal Finance Advisory (www.azukefinance.com). Send your questions to [email protected]

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