What Is A Capped Home Loan?
Every home loan borrower has to choose between the uncertainty of rising interest rates, and the finality of a fixed interest rate home loan. How about a home loan that provides the benefits of lower interest rates while not allowing borrowing costs to rise? Does this sound too good to be true?
A 'capped home loan' will offer you the best of both worlds. A capped home loan is a loan with a cap on the interest rate. MakaanIQ explains what capped home loans are.
What is a capped home loan?
Capped home loans are also known as semi-variable home loans. A capped home loan prevents the home loan interest rate from rising above the specified rate. If home loan interest rates fall, however, applicants can benefit from declining interest rates. In a capped home loan, the interest rate is specified along with a term that can vary from one to three years.
How does this work?
Capped home loans work pretty much like any other home loan. The processing fee is within the normal range. Capped home loans are extended for a maximum tenure period of 30 years. You will be expected to pay your equated monthly instalments at a fixed date every month.
The only difference lies in the capping of interest rates. The interest rates under capped home loans will not exceed the capped rate (i.e. decided by the lender) even if loan interest rates rise during this period (i.e. the period/ceiling set for the capped interest rate).
On the other hand, if it is a capped home loan, your monthly instalments will decline when market interest rates decline. Capped home loans protect you from rising interest rates in the loan market.
Features of capped home loans
Capped Rate Period
Capped home loans do not remain capped during the entire loan tenure. In other words, they have a fixed interest ceiling for a specified period, which mostly ranges between one to three years. So, when you apply for a capped home loan, you must choose loans with a capped period that fits in well with your financial situation. If you are applying for a home loan when market lending rates are fluctuating the most (or are expected to rise), you can go for the capped home loan with the maximum capped period/ceiling. You can also choose the lender who provides the most flexibility and choices in the capping of interest rates due to fluctuations and uncertainty in lending rates.
Savings on Pre-payment
This is the biggest advantage of a capped home loan. While others pay a higher Equated Monthly Instalment (EMI) when interest rates rise, you can make extra payments toward the principal amount and get rid of the liability faster. In fact, if you are sure of having lump sum money in the future (could be through promotion, bonus, high return on investment, higher rental income etc.), a capped home loan will be an ideal option for you to save on monthly interest payment. However, you must make sure that there are no pre-payment or additional payment penalty/charges involved.
Normal Loan Charges/ Fees
The processing fee and other charges in capped home loans are similar to those of normal home loans. The difference is only in the capping of interest rates. Do not assume that you may not need to pay processing fees, stamp duty, registration fee, legal and technical costs etc. in capped home loans. You must study the market really well to choose the lender that gives you the best deal.
What are the possible pros and cons of capped home loans?
- You will be charged a lower interest rate if you pre-pay a certain amount, even if lending rates are high in the market
- Capped home loans are assumed to be cheaper than fixed rate home loans
- Capped home loans are protected from lending rates unexpectedly rising
- Very few lenders offer capped home loans
It is possible that capped interest rates will be higher than the standard variable rate in the market