Sunday, August 08, 2010

Home Loan Switching Charges & Floating Interest Rate

Why do they exist in the first place? They conflict with the basics of capitalistic society. The basic idea of capitalism is free trade. I want a product or service and I will pay for it. The fair price is decided by market forces. If someone else provides the same product or service at a cheaper price, I would like to buy from other player. Home Loan Switching charges create a barrier in making such a choice. If this was allowed we would see lot of Home Loan Switching and perhaps better interest rates. Basically make the market fair at least.

Floating Interest Rate is another faux. It is decided by the bank. It can vary from customer to customer. It looks nice to negotiate 8% at the start of home loan, but three months down the line bank is free to make it 11%.  If it were a function of loan amount or duration, I would understand it, but making it an arbitrary measure which is solely control by bank is as stupid as banking can be or as smart as banking can be, depending upon how you look at it.

Come to think of it, I don't like the concept of loan at all. Yes I know how good it is because it lets you buy house and stuff and it will take you long time to save enough money if you do it without loan, etc. The place I am coming from is not their should be no loans, but loans of different variety. Investment is a better word. This is how I believe this should work.

  1. Banks can invest in my home.
  2. They get a share of the house. To start with it could be 80%-90% depending upon the "investment amount" 
  3. If I sell the house before construction is complete or at any point in time decided by me, bank get money proportional to their share in the house.
  4. I can always buy back home shares from the bank by paying money to the bank any time I want and as much as I want.  The price for share depends on the current price of the property.
  5. Until the time I pay back the full amount, bank gets the percentage share of the rental income I get or I can get from the property.

This approach solves few problems.

  1. No interest.
  2. Banks take higher risks and get higher returns and so do I.
  3. Unless sold, the real value of the property is rental. That is all that I have to pay to the bank (as per their percentage)
  4. If at any point, I feel that the property is not working out for me, I can easily sell it off and bank will help me with this, so that both me and bank can have comfortable exits. If the property rates crash, banks suffer as much as me.
  5. Property rates will be reasonable. If the value of property is 10 lakhs, banks don't care it you buy it at 15 or 20 or 50 lakhs. The more the better, because they get more money. When banks end up owning 90% of the property, they will work with the builder to get better prices for the customer.
Hope government makes it a regulation or someone with enough money decided to do it this way. Their is lot to do to make this habitable.

Related - Where is money? and Frequency of choice and Reinventing money

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