Should you refinance home loan ?
Use this home loan refinance calculator to find out if it is worthwhile to shift your home loan to another bank's cheap home loans?
Just enter the information asked for home loan refinancing and click next. It's that easy. Enter your outstanding home loan amount, fill in your EMI amount, fill number of EMIs outstanding, enter pre-payment penalty, You would get your new home loans refinance quotes.
Click here for home loan refinance calculator
Showing posts with label Home Loans. Show all posts
Showing posts with label Home Loans. Show all posts
Real Estate - A Good Investment Option
Leading a life of luxury on borrowed money may not always be the right thing to do. How prudent would it be to make an exception on home loans? Should you buy your dream house or invest in some piece of land? Is it time to invest in real estate?
Stability
Real estate is less volatile than stocks. While real estate may be less liquid, and you may have to wait indefinitely before a buyer agrees to purchase your property for the price you seek, the prices are not as volatile as the stock markets. The transition towards a correction or boom takes place gradually, giving ample time for investors to read the transition and safeguard their positions.
Price correction
The economic slowdown had an impact on this sector. The rates have come down over the past few months. Wouldn't it make a lot more sense to invest in real estate when a price correction is taking place rather than in a heated market? People with a large disposable income can explore investing in real estate for diversification of their assets. Lowering home loan interest rates and lower property prices makes it an opportunity hard to resist.
Good in recession
Some investments are considered safe in times of recession like precious metals and foreign currencies. In this list of investments that are popular during times of financial uncertainty, real estate can be included. Focus on achieving positive monthly cash flows rather than immediate appreciation. Cash flow refers to the amount of cash coming in relative to the amount going out.
Hedge against inflation
Real estate and gold are considered a hedge against forces of inflation. Inflation has led to the rupee value depreciating and property prices travelling upwards. Property investments are typically held over a long term.
Tax benefits
Home loan borrowers are eligible for tax deductions on their interest and principal repayments subject to a certain limit. Further, you can use the rental income from the property to make a portion of the EMI repayments.
Good returns in long term
Investments in property has always proved to be stable and yielded good returns over the long term. With lesser risk and probability of higher returns, this is a much favoured investment option.
Stimulus packages announced by the government are expected to show good results and bolster the economy. Cement, a key construction material, has indicated a growth of 12 percent in May.
This is enough indicator of vigorous economic activity. Borrow as little as possible and consider investing in property.
StabilityReal estate is less volatile than stocks. While real estate may be less liquid, and you may have to wait indefinitely before a buyer agrees to purchase your property for the price you seek, the prices are not as volatile as the stock markets. The transition towards a correction or boom takes place gradually, giving ample time for investors to read the transition and safeguard their positions.
Price correction
The economic slowdown had an impact on this sector. The rates have come down over the past few months. Wouldn't it make a lot more sense to invest in real estate when a price correction is taking place rather than in a heated market? People with a large disposable income can explore investing in real estate for diversification of their assets. Lowering home loan interest rates and lower property prices makes it an opportunity hard to resist.
Good in recession
Some investments are considered safe in times of recession like precious metals and foreign currencies. In this list of investments that are popular during times of financial uncertainty, real estate can be included. Focus on achieving positive monthly cash flows rather than immediate appreciation. Cash flow refers to the amount of cash coming in relative to the amount going out.
Hedge against inflation
Real estate and gold are considered a hedge against forces of inflation. Inflation has led to the rupee value depreciating and property prices travelling upwards. Property investments are typically held over a long term.
Tax benefits
Home loan borrowers are eligible for tax deductions on their interest and principal repayments subject to a certain limit. Further, you can use the rental income from the property to make a portion of the EMI repayments.
Good returns in long term
Investments in property has always proved to be stable and yielded good returns over the long term. With lesser risk and probability of higher returns, this is a much favoured investment option.
Stimulus packages announced by the government are expected to show good results and bolster the economy. Cement, a key construction material, has indicated a growth of 12 percent in May.
This is enough indicator of vigorous economic activity. Borrow as little as possible and consider investing in property.
ICICI Bank Reduces Home Loans Lending Rates
ICICI bank has reduced their home loan rate for existing customers. As it is clear, it would benefit only existing home loan borrowers. It is not going to be applicable to new customers who would wish to buy home in current market scenario. Government recently has asked banks to lower the interest rates. Indian banks are not doing it across the board for all types of financial products. Home loan rates for new customers, personal loans, auto loans are still at much higher interest rates.
All these rates can play crucial role of liquidity and easy credit for consumers resulting in higher consumer spending which could provide a boost to economy. Unless this happens, economy and so the stock markets are going to reel under slowdown/depression pressures. Let’s understand what this fresh home loan interest rate cut from ICICI Bank means for consumers.When the State Bank of India (SBI) offered new home loans at 8 per cent interest (for the first year), HDFC upped its switching fees to 3 per cent to prevent the exodus of its customers.
Now, in a move to retain old customers, ICICI Bank is offering attractive home loan swaps for existing customers. If you have already taken a home loan from ICICI Bank at a higher rate of interest, you could now book yourself at 9.75 per cent floating interest rate by paying 0.5 per cent as switching fee on your existing loan. And, you need to decide if you want to switch by April 30, 2009.
In such a scenario, Wealth explores if these are indeed deals to grab. CEO of Apnaloan.com, Harsh Roongta advices, "If the current rate on your loan is 11 per cent, by switching you will be saving a considerable amount - a difference of 2.25 per cent this year!"
As a thumbrule, Roongta suggests that if the interest rates on your new loan and is even 0.5 per cent lower than the old one, you stand to gain by shifting.
The fine print:
Experts say that limited period offers are called teaser loans. And typical features of teaser loans are that you might have to pay a high charge if you decide to pre-close the loan or you will have to bear high interest rate at the expiry of the teaser schemes.
Though that does not mean the current slew of schemes would adopt such practices, it pays to be aware and stay vigilant.
So before you sign the dotted line, make sure you read all the terms and conditions in your agreement, especially with respect to the prepayment penalty clause and the interest reset clause.
Interest rate offered for new customers
For a loan amount of Rs 20 lakh, you can get a home loan for 20 years at the following floating interest rate:
SBI Special Home Loan Scheme: 8%
LIC Housing Finance Limited: 8.75%
ICICI Bank: 9.75%
HDFC: 9.75%
Unless Indian banks reduce the home loan lending rates for new customers, real estate sector will not take off. People willing to buy homes are still waiting for interest rate cut as well as property prices correction. Unless both these things happens, realty company stocks would find it difficult to see any upward direction in near future. It is very much advisable to not buy stocks of realty sector companies for some more time. Real estate sector has not yet bottomed out.
Checkout: Real Estate Sector Still In Downtrend
Stock ideas from real estate: Stocks Affected Due To Real Estate Downtrend
Read more on realty/infrastructure
Top IT Companies & Job Cuts - Property Sale Hit - Future Of Realty Stocks?
Is it the right time to buy stocks of Indian realty/property companies? Surprised to see the title of article about job cuts in top IT companies? How job cuts in IT companies can affect stocks of realty companies? Let's see if you should be buying stocks of realty companies in near future.
Referring to a news published in Economic times on Job cuts at IT companies. The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors. Housing loans grew at 32 per cent CAGR during FY03-FY07, as the employee base at the top 3 Indian IT majors grew 44 per cent.
However, with most global and domestic IT companies going slow on hiring plans, housing demand has been adversely impacted. According to a national survey by the Indian Labour Bureau, 5 lakh jobs were lost during Oct-Dec of 2008, with the gems & jewellery, transport and automobile sectors most affected.
In the IT sector, Infosys Technologies has put a freeze on new hiring to check costs amid the global economic downturn, Tata Consultancy Services (TCS) has ruled out salary hikes for next year and said job cuts are possible, and Wipro is said to be planning to cut 4-5 per cent of its total workforce.
“Slowing home loan growth of 10 per cent year-on-year on the back of slowing employee growth of 14 per cent at the top 3 Indian IT companies in third quarter of FY09 are early signs of this trend. A deteriorating outlook for Indian IT and our IT headcount forecast for the top 3 IT majors, which have been revised down, raise a demand risk for the residential property,” Citigroup Global Markets said in a report.
In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes. According to a survey by Hewitt Associates, projected salary hikes for 2009 in India have dipped to 8.2 per cent versus an increase of 13.3 per cent in 2008. Sectors with the lowest projected salary hike include employee-intensive sectors such as retail, IT, banking & financial services and media / communications.
“While government efforts to lower interest rates to boost affordable housing and developers starting to cut prices are positive measures, these will be insufficient to stimulate residential demand over next few quarters given the rising job insecurity across sectors. For instance, PSU banks’ disbursal of home loans less than Rs 20 lakh in past two months, after lowering rates, was only Rs 15.5 billion, that is, 0.6% of outstanding home loans in Dec 2008,” a Citigroup report said.
“With the developers’ inability and reluctance to reduce home prices along with rising fear of job losses particularly in IT and across the other sectors, we maintain our cautious outlook on the real estate sector and would look for macro stability along with job security as a key trigger for driving housing demand,” said Ankit Sinha, CEO- Spark Advisory.
To bring to your notice are the following two most important facts mentioned above:
==> The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors.
==> In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes.
If you refer to recent news coming out from most IT companies, the news are only about job cuts/pay cuts and brakes on growth plans. Being myself in IT industry, I do not see any significant pay hikes for employees in any company. Infact many of the companies are asking employees to take a PAY CUT! Most of the buyers for realty in last 5 - 10 years were from IT / ITES companies (I would say more than 60 - 70%).
I know one of the employee from my own company who had purchased a flat costing 50 Lacs in DELHI/NCR region with assumptions in mind about his own and his wife's salary figuers (around 1 Lac P.M.). Today his wife has lost her job and he have a big questionmark in front of him about paying the EMI of his flat which is more than RS. 30000 P.M. Other liabilities on him are car EMI - Rs. 10000 P.M., Home rent- Rs. 10000 P.M. and house hold expenses averaging Rs. 15000.
And this is not only about one or two people but millions would be suffering the same in India in next few quarters. Obvious targets hit would be big ticket investments like home purchase and so the realty companies.
Looking at the overall facts, realty companies would be suffering a lot in next few quarters with these negative sentiments. This would be the period of consolidation. Buying stocks of realty company is definitely not advisable for short term but in case any one would like to invest for longer term duration of 3 -5 years, property stocks could fetch decent returns.
Referring to a news published in Economic times on Job cuts at IT companies. The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors. Housing loans grew at 32 per cent CAGR during FY03-FY07, as the employee base at the top 3 Indian IT majors grew 44 per cent.
However, with most global and domestic IT companies going slow on hiring plans, housing demand has been adversely impacted. According to a national survey by the Indian Labour Bureau, 5 lakh jobs were lost during Oct-Dec of 2008, with the gems & jewellery, transport and automobile sectors most affected.In the IT sector, Infosys Technologies has put a freeze on new hiring to check costs amid the global economic downturn, Tata Consultancy Services (TCS) has ruled out salary hikes for next year and said job cuts are possible, and Wipro is said to be planning to cut 4-5 per cent of its total workforce.
“Slowing home loan growth of 10 per cent year-on-year on the back of slowing employee growth of 14 per cent at the top 3 Indian IT companies in third quarter of FY09 are early signs of this trend. A deteriorating outlook for Indian IT and our IT headcount forecast for the top 3 IT majors, which have been revised down, raise a demand risk for the residential property,” Citigroup Global Markets said in a report.
In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes. According to a survey by Hewitt Associates, projected salary hikes for 2009 in India have dipped to 8.2 per cent versus an increase of 13.3 per cent in 2008. Sectors with the lowest projected salary hike include employee-intensive sectors such as retail, IT, banking & financial services and media / communications.
“While government efforts to lower interest rates to boost affordable housing and developers starting to cut prices are positive measures, these will be insufficient to stimulate residential demand over next few quarters given the rising job insecurity across sectors. For instance, PSU banks’ disbursal of home loans less than Rs 20 lakh in past two months, after lowering rates, was only Rs 15.5 billion, that is, 0.6% of outstanding home loans in Dec 2008,” a Citigroup report said.“With the developers’ inability and reluctance to reduce home prices along with rising fear of job losses particularly in IT and across the other sectors, we maintain our cautious outlook on the real estate sector and would look for macro stability along with job security as a key trigger for driving housing demand,” said Ankit Sinha, CEO- Spark Advisory.
To bring to your notice are the following two most important facts mentioned above:
==> The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors.
==> In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes.
If you refer to recent news coming out from most IT companies, the news are only about job cuts/pay cuts and brakes on growth plans. Being myself in IT industry, I do not see any significant pay hikes for employees in any company. Infact many of the companies are asking employees to take a PAY CUT! Most of the buyers for realty in last 5 - 10 years were from IT / ITES companies (I would say more than 60 - 70%).
I know one of the employee from my own company who had purchased a flat costing 50 Lacs in DELHI/NCR region with assumptions in mind about his own and his wife's salary figuers (around 1 Lac P.M.). Today his wife has lost her job and he have a big questionmark in front of him about paying the EMI of his flat which is more than RS. 30000 P.M. Other liabilities on him are car EMI - Rs. 10000 P.M., Home rent- Rs. 10000 P.M. and house hold expenses averaging Rs. 15000.
And this is not only about one or two people but millions would be suffering the same in India in next few quarters. Obvious targets hit would be big ticket investments like home purchase and so the realty companies.
Looking at the overall facts, realty companies would be suffering a lot in next few quarters with these negative sentiments. This would be the period of consolidation. Buying stocks of realty company is definitely not advisable for short term but in case any one would like to invest for longer term duration of 3 -5 years, property stocks could fetch decent returns.
Real Estate Investment & Home Loans - Do a check before investing
Is this the right time to buy a house? Besides ones personal situation, the external factors that influence this decision are real estate prices and interest rates. On the home loans interest rate front, market signals are positive.
Most public sector banks have cut their benchmark prime lending rates by 0.75% to 12.5% effective January 1, 2009. The country’s largest mortgage finance company HDFC has also cut its lending rates by 0.5%. Even lending rate for home loans below Rs 20 lakh for both from state-owned banks and HDFC are cheaper.
However, there is still an uncertainty over the real estate prices. Builders are doling out freebies such as free registration, stamp duty waiver, free parking area or even a flat in another locality. But the rack rates have not come down.
“If there is indeed a genuine need for a home and the current market changes have resulted in the required affordability, one should go ahead and buy now. If the interest is more investment oriented, waiting till March 2009 might bring some better deals — however, this is a risk, since many add-on offers may no longer exist by then.” says Anuj Puri, chairman & country head, Jones Lang Lasalle Meghraj.
A couple of years ago buyers were scrambling to buy a house as prices rose every month. Now, the tide has turned. Buyers are waiting in the sidelines expecting the real estate prices to fall. “Prices will fall further in historically over-priced pockets until demand picks up. The rationalisation process should reach a peak towards mid-2009.” Mr Puri says.
So either the same house will be cheaper tomorrow or you can step up your budget so as to afford a bigger house. For those buying a house on borrowed money, it would be difficult to reconcile to a fall in real estate prices.
“For example, if the property value drops to Rs 75,00,000 from Rs 1 crore (at the time of purchase) then you have to pay a difference in the home equity to the bank. Otherwise the bank has a right to take the possession of your house,” says Swapnil Pawar a financial advisor and director Park Financial Advisors.
At the same time, lenders are now demanding that home buyers come up with a higher margin if they want a loan. “Property prices have been overpriced in the recent times. So there is scope for significant correction. Similarly, even the pay cuts and the prevailing uncertainty over jobs and pay hikes have necessitated extreme prudence in the lending business,” says a private sector banker.
Taking a speculative wait-and-watch stance should be a game of experts, who are also willing to risk a loss if they time their move wrongly. Genuine buyers should buy as soon as prices are affordable. After a particular phase in a career, the growth in income stabilises at 10-15%. That’s the best time to gauge the borrower’s affordability to buy a house. At times, couples often miscalculate their affordability.
Most public sector banks have cut their benchmark prime lending rates by 0.75% to 12.5% effective January 1, 2009. The country’s largest mortgage finance company HDFC has also cut its lending rates by 0.5%. Even lending rate for home loans below Rs 20 lakh for both from state-owned banks and HDFC are cheaper.However, there is still an uncertainty over the real estate prices. Builders are doling out freebies such as free registration, stamp duty waiver, free parking area or even a flat in another locality. But the rack rates have not come down.
“If there is indeed a genuine need for a home and the current market changes have resulted in the required affordability, one should go ahead and buy now. If the interest is more investment oriented, waiting till March 2009 might bring some better deals — however, this is a risk, since many add-on offers may no longer exist by then.” says Anuj Puri, chairman & country head, Jones Lang Lasalle Meghraj.
A couple of years ago buyers were scrambling to buy a house as prices rose every month. Now, the tide has turned. Buyers are waiting in the sidelines expecting the real estate prices to fall. “Prices will fall further in historically over-priced pockets until demand picks up. The rationalisation process should reach a peak towards mid-2009.” Mr Puri says.
So either the same house will be cheaper tomorrow or you can step up your budget so as to afford a bigger house. For those buying a house on borrowed money, it would be difficult to reconcile to a fall in real estate prices.
“For example, if the property value drops to Rs 75,00,000 from Rs 1 crore (at the time of purchase) then you have to pay a difference in the home equity to the bank. Otherwise the bank has a right to take the possession of your house,” says Swapnil Pawar a financial advisor and director Park Financial Advisors.
At the same time, lenders are now demanding that home buyers come up with a higher margin if they want a loan. “Property prices have been overpriced in the recent times. So there is scope for significant correction. Similarly, even the pay cuts and the prevailing uncertainty over jobs and pay hikes have necessitated extreme prudence in the lending business,” says a private sector banker.
Taking a speculative wait-and-watch stance should be a game of experts, who are also willing to risk a loss if they time their move wrongly. Genuine buyers should buy as soon as prices are affordable. After a particular phase in a career, the growth in income stabilises at 10-15%. That’s the best time to gauge the borrower’s affordability to buy a house. At times, couples often miscalculate their affordability.
How to lower your existing home loan EMI: BARGAIN!
THE Reserve Bank of India has lowered the repo rate (rate at which RBI lends money to other commercial banks) by 100 basis point from 7.5 per cent to 6.5 per cent.
Following this, ICICI Bank announced a reduction in its home loan rate from 13 per cent to 11.5 per cent for loans up to Rs 20 lakh. This new rate is applicable only for new customers. Other banks are likely to follow suit.
Must Read: Why home loan interest rates will drop
Existing customers: Bargain!
Home loan expert says, "If your bank offers home loan at more than 11 per cent, look towards other banks who offer lower rate of interest."
While negotiating for lower interest rates from the present bank or the new bank, it will work in your favour to have the following brownie points:
1. A spotless record of repayment since your loan commencement.
2. Your income has either remained stable or has increased.
3. You have not acquired any fresh liability.
Read: Want to buy a home? Better wait for now!
Penalties and fees
It's worth it to pay up the prepayment penalties and loan processing charges if the new loan will come at less than 11 per cent, say experts.
The numbers
Old home loan - Rs 20 lakh
Floating rate interest - 13 percent
Tenure - 20 years
EMI would have been Rs 23,726 per month.
Now, assume that you have paid EMI for 2 years.
Outstanding loan amount - Rs 19.47 lakh
Interest rate - 11 per cent
Tenure - 18 years
EMI would be Rs 21,259
Total switching cost (including prepayment penalty and processing fee for the new loan) would be Rs 48,683.
Following this, ICICI Bank announced a reduction in its home loan rate from 13 per cent to 11.5 per cent for loans up to Rs 20 lakh. This new rate is applicable only for new customers. Other banks are likely to follow suit.
Must Read: Why home loan interest rates will drop
Existing customers: Bargain!
Home loan expert says, "If your bank offers home loan at more than 11 per cent, look towards other banks who offer lower rate of interest."
While negotiating for lower interest rates from the present bank or the new bank, it will work in your favour to have the following brownie points:
1. A spotless record of repayment since your loan commencement.
2. Your income has either remained stable or has increased.
3. You have not acquired any fresh liability.
Read: Want to buy a home? Better wait for now!
Penalties and fees
It's worth it to pay up the prepayment penalties and loan processing charges if the new loan will come at less than 11 per cent, say experts.
The numbers
Old home loan - Rs 20 lakh
Floating rate interest - 13 percent
Tenure - 20 years
EMI would have been Rs 23,726 per month.
Now, assume that you have paid EMI for 2 years.
Outstanding loan amount - Rs 19.47 lakh
Interest rate - 11 per cent
Tenure - 18 years
EMI would be Rs 21,259
Total switching cost (including prepayment penalty and processing fee for the new loan) would be Rs 48,683.
Tips For People Availing Home Loans
How to select a Home Loan?
Home loans - Should you prepay or stay with higher...
CREDIT cards are a like nagging wives
Why home loan interest rates will drop
some recent developments in the markets that will bring down the home loan interest rates in the near future
• Most banks have not reduced their prime lending rate (PLR) to the extent the Reserve Bank of India (RBI) has cut the rates. Therefore, analysts expect home loans rates will go down as more clarity comes on the issue.
• The government is exerting pressure on public sector banks to reduce their lending rates by reducing their spread. Once these banks reduce the rates, private banks are also expected to follow suit thanks to the competition.
• Liquidity conditions have not improved much even after cutting the cash reserve ratio (CRR), statutory lending rate (SLR) and repo rate. Foreign institutional investors (FIIs) are still taking large amounts of money out from the domestic markets. Experts believe that another rate cut by the RBI is imminent, and hence, it will result in lower home loan interest rates.
• The inflation rate has come down drastically during the last six weeks. This is another indication for the government and RBI to go for a softer monetary policy.
• The GDP growth rate is slowing down due to lower demand and negative consumer sentiments. Lower rates will stimulate demand and result in better growth. Therefore, the industry and experts are exerting pressure on the government and RBI to cut interest rates.
• Many large manufacturing companies have announced a production cut. This will lead to lesser requirements of money from corporates. This will have indirect effect on consumer loans, including home loans.
• The demand for loans has reduced significantly due to negative sentiments in the light of the global slowdown. Banks are offering incentives such as lower interest rates to fresh borrowers.
• Many large countries are initiating moves to control the damage due to the global slowdown. Relief packages and lower interest rates are being announced.
• Most banks have not reduced their prime lending rate (PLR) to the extent the Reserve Bank of India (RBI) has cut the rates. Therefore, analysts expect home loans rates will go down as more clarity comes on the issue.
• The government is exerting pressure on public sector banks to reduce their lending rates by reducing their spread. Once these banks reduce the rates, private banks are also expected to follow suit thanks to the competition.
• Liquidity conditions have not improved much even after cutting the cash reserve ratio (CRR), statutory lending rate (SLR) and repo rate. Foreign institutional investors (FIIs) are still taking large amounts of money out from the domestic markets. Experts believe that another rate cut by the RBI is imminent, and hence, it will result in lower home loan interest rates.
• The inflation rate has come down drastically during the last six weeks. This is another indication for the government and RBI to go for a softer monetary policy.
• The GDP growth rate is slowing down due to lower demand and negative consumer sentiments. Lower rates will stimulate demand and result in better growth. Therefore, the industry and experts are exerting pressure on the government and RBI to cut interest rates.
• Many large manufacturing companies have announced a production cut. This will lead to lesser requirements of money from corporates. This will have indirect effect on consumer loans, including home loans.
• The demand for loans has reduced significantly due to negative sentiments in the light of the global slowdown. Banks are offering incentives such as lower interest rates to fresh borrowers.
• Many large countries are initiating moves to control the damage due to the global slowdown. Relief packages and lower interest rates are being announced.
Home Loan - Tenure, Interest & EMI explained
The repayment of a loan taken to buy a house is made through EMIs (equated monthly instalments). EMIs are the fixed instalments which a borrower needs to pay over the tenure of the loan to repay the debt as well the related interest for the period to the bank.
Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure, divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on and varies with the amount of loan, tenure of loan, and rate of interest. One of the important parameters governing the EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in a few cases upto 25 years as well.
Arriving at tenure
Here are two most significant factors that determine tenure:
Age: If you decide to borrow early, you can opt for a longer tenure loan - 15 to 25 years. This way, your monthly EMI payment would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing towards the end of your career, you may have to opt for a shorter tenure.
Income: This means both the present as well as the future income. You should be able to repay his EMIs without compromising drastically on your quality of living. The cash flows available after payment of EMIs should not entail a dent in the living standards. As such, a judicious planning of cash flows is required.
Tenure and interest
The longer the tenure, higher will be the interest rate. This is because of the increased risk the bank has to take. Also, the interest amount in absolute terms is higher, because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer span of time.
The shorter the tenure, lower will be the interest rate. This is because of the relatively lower level of risk the bank takes. Also, the interest amount in absolute terms is lesser, because of the shorter tenure. However, the EMI is higher because the loan and interest are to be repaid over a shorter span of time.
Tax benefits
You should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest upto Rs 1.5 lakhs per annum paid on housing loans is deductible from the taxable income of a borrower. You should structure the housing loan amount and tenure so that your annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course, this would be contingent on other factors as well, like your annual income and savings potential.
Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure, divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on and varies with the amount of loan, tenure of loan, and rate of interest. One of the important parameters governing the EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in a few cases upto 25 years as well.
Arriving at tenure
Here are two most significant factors that determine tenure:
Age: If you decide to borrow early, you can opt for a longer tenure loan - 15 to 25 years. This way, your monthly EMI payment would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing towards the end of your career, you may have to opt for a shorter tenure.
Income: This means both the present as well as the future income. You should be able to repay his EMIs without compromising drastically on your quality of living. The cash flows available after payment of EMIs should not entail a dent in the living standards. As such, a judicious planning of cash flows is required.
Tenure and interest
The longer the tenure, higher will be the interest rate. This is because of the increased risk the bank has to take. Also, the interest amount in absolute terms is higher, because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer span of time.
The shorter the tenure, lower will be the interest rate. This is because of the relatively lower level of risk the bank takes. Also, the interest amount in absolute terms is lesser, because of the shorter tenure. However, the EMI is higher because the loan and interest are to be repaid over a shorter span of time.
Tax benefits
You should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest upto Rs 1.5 lakhs per annum paid on housing loans is deductible from the taxable income of a borrower. You should structure the housing loan amount and tenure so that your annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course, this would be contingent on other factors as well, like your annual income and savings potential.
Planning to Buy A House?
Everyone dreams of owning a home. It is a major decision. At one time, people used to buy a home only close to retirement when they had sufficient savings. However, the scenario has changed quite a bit in the last decade or so. Nowadays, people buy a house in their mid to late 20s. In some cases, even before marriage. This could be attributed to many factors. A rise in the earnings of the middle income group, easy financing, aggressive marketing of properties and tax rebates provided by government to promote infrastructure development are some.
Here are some tips to help you buy that dream home as soon as possible:
Planning and research
This is the first step in buying a property. You need to decide on the locality, space-cost factor, flat or independent house etc. It is ideal to make enquiries and research each of these thoroughly. This validates and refines your thinking, and helps in taking the right decisions.
Planning finances
Buying a property is a major financial decision. Often, it happens once in a lifetime. It is always advisable to go in for a housing loan. These loans are easily available and the government offers tax relief to home loan borrowers.
If you are planning to buy a property in the near future, you should plan your finances for an upfront payment too. Usually, a property buyer has to pay 10 to 15 percent upfront from his own resources. A loan covers the rest of the amount. Therefore, it is important to plan and arrange for such an amount if you are planning to buy a property in the near future.
People who are planning to buy a property 2-3 years down the line can look for slow and steady savings through market instruments - mutual funds, systematic investment plans, investing in blue chip stocks etc. However, people looking at buying a property in the next few months should save in debt instruments which safeguard capital.
Loan eligibility
A housing loan disbursement was quite easy a couple of years ago. Housing finance companies have tightened the process a little now due to the slowdown in the economy. However, there is no dearth of options for buyers who plan well. Usually, banks scrutinise these documents to arrive at the loan eligibility of a borrower. People planning to buy a property in the near future should keep them in mind and plan accordingly, to sail through the process of loan disbursement easily.
Documents that go into arriving at loan eligibility:
Tax returns:
Last three years' income tax returns or Form 16 are checked for consistency in earnings. Large variations in income go against the applicant.
Bank statements:
Usually, banks like to verify the last 3-6 months' bank statements. This is to identify various monthly cash outflows of the borrower. People planning to take a loan in the near future should avoid any unnecessary transactions.
Work history:
This is another important aspect. A long stint with the current employer is seen as a positive sign. Similarly, a good reputation and corporate image of the employer creates a positive impact.
Loan history:
Any previous loan default is treated as a serious negative by banks.
Here are some tips to help you buy that dream home as soon as possible:
Planning and research
This is the first step in buying a property. You need to decide on the locality, space-cost factor, flat or independent house etc. It is ideal to make enquiries and research each of these thoroughly. This validates and refines your thinking, and helps in taking the right decisions.
Planning finances
Buying a property is a major financial decision. Often, it happens once in a lifetime. It is always advisable to go in for a housing loan. These loans are easily available and the government offers tax relief to home loan borrowers.
If you are planning to buy a property in the near future, you should plan your finances for an upfront payment too. Usually, a property buyer has to pay 10 to 15 percent upfront from his own resources. A loan covers the rest of the amount. Therefore, it is important to plan and arrange for such an amount if you are planning to buy a property in the near future.
People who are planning to buy a property 2-3 years down the line can look for slow and steady savings through market instruments - mutual funds, systematic investment plans, investing in blue chip stocks etc. However, people looking at buying a property in the next few months should save in debt instruments which safeguard capital.
Loan eligibility
A housing loan disbursement was quite easy a couple of years ago. Housing finance companies have tightened the process a little now due to the slowdown in the economy. However, there is no dearth of options for buyers who plan well. Usually, banks scrutinise these documents to arrive at the loan eligibility of a borrower. People planning to buy a property in the near future should keep them in mind and plan accordingly, to sail through the process of loan disbursement easily.
Documents that go into arriving at loan eligibility:
Tax returns:
Last three years' income tax returns or Form 16 are checked for consistency in earnings. Large variations in income go against the applicant.
Bank statements:
Usually, banks like to verify the last 3-6 months' bank statements. This is to identify various monthly cash outflows of the borrower. People planning to take a loan in the near future should avoid any unnecessary transactions.
Work history:
This is another important aspect. A long stint with the current employer is seen as a positive sign. Similarly, a good reputation and corporate image of the employer creates a positive impact.
Loan history:
Any previous loan default is treated as a serious negative by banks.
Tips for home loan borrowers
The recent hike in the cash reserve ratio (CRR) and repo rate announced by the Reserve Bank of India (RBI) has prompted banks to review their lending rates. Banks (private as well as PSU banks) have increased lending rates across the board for all loans as their input costs have gone up. Existing borrowers in all consumer loan segments, including home loans, have to pay an additional Rs 20 to Rs 30 per lakh per month in their equated monthly installment (EMI) payments.The higher interest rate affects the home loan borrowers more than any other consumer loan borrowers because the principal amount is high and repayment tenure is longer in home loans. Home loan EMIs account for a large portion of a borrower's income that is paid out to clear the debt. Currently, home loan interest rates are quoting above 10 per cent per annum, which used to be around seven per cent a couple of years ago.
The macroeconomic situation in the country is not very encouraging at the moment. Inflation is ruling at around the 12 per cent level which is much higher than the RBI and government's mandated level of five per cent per annum.
The RBI has increased the interest rate to control the rising inflation. Analysts believe that if this era of higher inflation/interest rates continues for a long time, it will have a negative impact on the economy's growth rate. Here are some significant factors that influence the movement of interest rates.
Inflation
Borrowers can expect some softening in the interest rates if some of them are moderated in the short to medium term:This is one of the prime factors that influences the monetary policy of the RBI and forced it to hike interest rates. Currently, inflation is ruling at around 12 per cent per annum. The main factors that are driving high inflation in the country are sharp rise in prices of basic commodities like cement, steel, food items etc coupled with a hike in petroleum products (petrol, diesel and cooking gas).
These higher prices can be attributed partially to certain global factors and part of it can be attributed to issues in the local markets like speculation etc. The Government and RBI are taking measures to moderate the price hike through the monetary policy as well as government policies.
The liquidity in the system is another parameter which influences the interest rates. Liquidity influences the cost of acquisition of funds for banks. If the liquidity is low, cost of raising the funds will increase, and hence they will need to raise the interest rates on their lending. There are many factors that influence liquidity in the system.
For example, fund inflows from foreign investors and a cut in the cash reserve ratio increase the liquidity in the system and vice versa. Currently, many foreign investors are taking out their funds from the domestic markets due to issues in their local markets as well as growth concerns in emerging markets.
Rates expected to drop
Existing home loan borrowers need not panic at the high interest rate scenario ruling today. Experts believe that the rates are near their peaks and expect them to moderate in the near to medium terms. Most of the banks offer various options for the existing borrowers such as extending the tenure of the loans (rather than increasing EMI) or prepayment of a part of the loan in order to keep the EMI outgo constant.
New borrowers should be a little cautious and evaluate their financial positions before opting between the fixed and floating interest rate options. They can also evaluate combo/structured products like part fixed and part floating interest rates, and step-up EMIs which are low in the initial stages but increase in later years. Borrowers should also weigh the options of making a part prepayment or switching to fixed/ floating interest rates.
Also Read
Tips For People Availing Home Loans
How to select a Home Loan?
Home loans - Should you prepay or stay with higher EMI...
CREDIT cards are a like nagging wives
Buried under debt? Credit counsellors can find you...
Want to buy a home? Better wait for now!
With more price cuts likely, it is advisable to hold out a little more before investing in property. Average capital values in posh South Mumbai have come down from around Rs 1 lakh (Rs 100,000) per sq. ft, last year, to around Rs 65,000 per sq. ft now.
Sales have been down, especially since January this year.
According to a Pan-India Property Brokers' Poll by broking firm Edelweiss Securities, over 90 per cent of brokers have seen a drop in transactions over the past one month; almost 80 per cent of brokers have witnessed a reduction in enquiries over the past month; 70 per cent of brokers expect price trends to be flat or negative over the next three months.
In brief, it has been a reversal of fortunes for the residential property market, which till last year was on a bull run.
Despite the current lull, it is an established fact that returns from real estate in the long run are second only to returns from equities. While a slump in any asset class provides an opportunity for rich pickings, should you invest in real estate now?
The downturn
It all began in mid-January, when negative sentiments from the bourses spilled over into real estate, which was already battling rising capital values and mortgage rates.
When confidence in keeping your job diminishes, it is hard to borrow from future earnings.
Says Pranay Vakil, chairman, Knight Frank India: "When you are hypothecating your future earnings, the confidence that your income stream will continue is a prerequisite. When people begin to have doubts in this regard, they begin to slow down on big-ticket purchases."
So, by how much have the prices come down since January 2008?
"On an average, prices have come down by 15-20 per cent," says Vakil. However, the property market is not homogenous and the degree of price deceleration will vary across locations.
A study on capital values between January 2008 and September 2008 done by Makaan.com, a realty portal, of 120 locations across Delhi NCR, Mumbai, Bangalore, Chennai and Kolkata gives us some pointers. "We find that 58 localities out of 120 have shown a negative growth. The magnitude of capital value erosion ranges from 1 per cent to 13 per cent," says Aditya Verma, vice president and business head, Makaan.com.
The developers' response
With all regular sources of finance drying up, developers have been trying to woo customers with freebies. Their efforts gained more strength with the festive season around. Sales used to pick up at this time of the year during the heyday of the property market.
"This Diwali may not be as promising," warned Vakil. "Everyone is trying to catch the bottom. Everyone feels that the prices will fall further," says Anshuman Magazine, chairman and managing director, CB Richard Ellis, South Asia.
Should you invest now?
"For the investor, this is not the right market," says Vakil. Prices are expected to fall further. "In the next six months capital values are expected to go down by another 15-20 per cent," feels Vakil.
Most developers have pinned their hopes on sales picking up this festive season. If that does not happen "then you will find that around the third week of November developers will actually start reducing prices. It will go on for six months, where you will see reduction in prices and improvement in sales volumes," says Vakil.
Verma offers another view for prices reduction in the near future. "If sales do not pick up by the end of this year, developers will start reducing prices as it will be the last quarter of the financial year. It will be their last attempt to improve sales. So what the developers are offering right now is just the topping. If you wait for another 2-3 months, you will get the cake too," says Verma.
So if you have waited this long, it makes sense to wait a little longer.
It all began in mid-January, when negative sentiments from the bourses spilled over into real estate, which was already battling rising capital values and mortgage rates.
When confidence in keeping your job diminishes, it is hard to borrow from future earnings.
Says Pranay Vakil, chairman, Knight Frank India: "When you are hypothecating your future earnings, the confidence that your income stream will continue is a prerequisite. When people begin to have doubts in this regard, they begin to slow down on big-ticket purchases."
So, by how much have the prices come down since January 2008?
"On an average, prices have come down by 15-20 per cent," says Vakil. However, the property market is not homogenous and the degree of price deceleration will vary across locations.
A study on capital values between January 2008 and September 2008 done by Makaan.com, a realty portal, of 120 locations across Delhi NCR, Mumbai, Bangalore, Chennai and Kolkata gives us some pointers. "We find that 58 localities out of 120 have shown a negative growth. The magnitude of capital value erosion ranges from 1 per cent to 13 per cent," says Aditya Verma, vice president and business head, Makaan.com.
The developers' response
With all regular sources of finance drying up, developers have been trying to woo customers with freebies. Their efforts gained more strength with the festive season around. Sales used to pick up at this time of the year during the heyday of the property market.
"This Diwali may not be as promising," warned Vakil. "Everyone is trying to catch the bottom. Everyone feels that the prices will fall further," says Anshuman Magazine, chairman and managing director, CB Richard Ellis, South Asia.
Should you invest now?
"For the investor, this is not the right market," says Vakil. Prices are expected to fall further. "In the next six months capital values are expected to go down by another 15-20 per cent," feels Vakil.
Most developers have pinned their hopes on sales picking up this festive season. If that does not happen "then you will find that around the third week of November developers will actually start reducing prices. It will go on for six months, where you will see reduction in prices and improvement in sales volumes," says Vakil.
Verma offers another view for prices reduction in the near future. "If sales do not pick up by the end of this year, developers will start reducing prices as it will be the last quarter of the financial year. It will be their last attempt to improve sales. So what the developers are offering right now is just the topping. If you wait for another 2-3 months, you will get the cake too," says Verma.
So if you have waited this long, it makes sense to wait a little longer.
Tips For People Availing Home Loans
EMI flexibility option
This is how it works: You pay a lower EMI (equated monthly instalment) in the initial years and subsequently, you increase the repayment in congruence with the growth in your income. Another option is to accelerate the EMI as and when your disposable income goes up.
In certain cases, when you avail of loan to buy a property under construction, some banks/HFCs permit you to pay just the interest component till it is ready for occupation. Subsequently, you can start paying higher EMIs tracking your income growth. The upside is that you can finish the repayment within stipulated time. But again, your income growth should be capable of accommodating the rising EMIs over a period of time.
However, experts caution against optin
g for such schemes. This is a typical problem. The housing finance companies (HFCs) try to sell step-up loans or accelerate EMIs in a bid to sell a higher loan amount. But that’s not a wise idea as it would eat into your future income even before wealth creation. Unless the year-on-year income growth is more than 30%, it would be very difficult to cope with increasing EMIs. Firstly, you have an increasing headline inflation, which has upped the prices of basic necessities. Over and above that, you would also have to deal with the mounting lifestyle inflation.
Also Read:
How to select a Home Loan?
Home loans - Should you prepay or stay with higher...
I would never recommend anyone to go for the accelerating EMIs option, as there is no point prolonging the repayment. It is better to get out of debt as soon as possible. Neither you should take bridge loan to repay part of home loan.
YOUR ACTION PLAN
1) Extend the tenure
You can extend the tenure of loan in such a way that the EMI outgo remains at a manageable level. For example, you may have opted for a 20-year loan. If the increment doesn’t meet your repayment plan, you can extend it up to 28 years. That would keep your EMI constant. The flip side is that you will have to shell out a higher interest amount with the tenure extension. In such a case, you could consider part pre-payment of the loan whenever you have surplus funds.
2) Make use of surplus funds, investments
If you have windfall gains like bonus, you can use the funds to prepay your loan. Also, you can consider liquidating the debt instruments that are not yielding good returns.
3) Cut your expenses
The best recourse to such problems is making changes in your lifestyle. You should cut corners and lower your consumption needs to meet the EMIs. You have two options. Either you make self changes or loan-related changes such as tweaking payment schedules and looking at different repayment plans. However, making lifestyle changes is always advisable!
This is how it works: You pay a lower EMI (equated monthly instalment) in the initial years and subsequently, you increase the repayment in congruence with the growth in your income. Another option is to accelerate the EMI as and when your disposable income goes up.
In certain cases, when you avail of loan to buy a property under construction, some banks/HFCs permit you to pay just the interest component till it is ready for occupation. Subsequently, you can start paying higher EMIs tracking your income growth. The upside is that you can finish the repayment within stipulated time. But again, your income growth should be capable of accommodating the rising EMIs over a period of time.
However, experts caution against optin
g for such schemes. This is a typical problem. The housing finance companies (HFCs) try to sell step-up loans or accelerate EMIs in a bid to sell a higher loan amount. But that’s not a wise idea as it would eat into your future income even before wealth creation. Unless the year-on-year income growth is more than 30%, it would be very difficult to cope with increasing EMIs. Firstly, you have an increasing headline inflation, which has upped the prices of basic necessities. Over and above that, you would also have to deal with the mounting lifestyle inflation.Also Read:
How to select a Home Loan?
Home loans - Should you prepay or stay with higher...
I would never recommend anyone to go for the accelerating EMIs option, as there is no point prolonging the repayment. It is better to get out of debt as soon as possible. Neither you should take bridge loan to repay part of home loan.
YOUR ACTION PLAN
1) Extend the tenure
You can extend the tenure of loan in such a way that the EMI outgo remains at a manageable level. For example, you may have opted for a 20-year loan. If the increment doesn’t meet your repayment plan, you can extend it up to 28 years. That would keep your EMI constant. The flip side is that you will have to shell out a higher interest amount with the tenure extension. In such a case, you could consider part pre-payment of the loan whenever you have surplus funds.
2) Make use of surplus funds, investments
If you have windfall gains like bonus, you can use the funds to prepay your loan. Also, you can consider liquidating the debt instruments that are not yielding good returns.
3) Cut your expenses
The best recourse to such problems is making changes in your lifestyle. You should cut corners and lower your consumption needs to meet the EMIs. You have two options. Either you make self changes or loan-related changes such as tweaking payment schedules and looking at different repayment plans. However, making lifestyle changes is always advisable!
How to select a Home Loan?
Until some months ago, selecting a home loan was child's play. Floating rates that were a few percentage points below the fixed rates were the obvious pick of the borrower.Spiraling inflation and rising property prices have plunged the prospective borrowers in a dilemma. Adding to this confusion is the constant increase in the interest rates on home loans.
New borrowers wonder if they should take a loan now or wait for some more time. Borrowers hooked on to floating rates, contemplate migrating to fixed rates. However, the fixed rates are currently high - to the tune of 13 to 14 percent.
Wouldn't it be better to wait till the rates dip and go fixed at lower rates? Were the fixed rates truly fixed or fixed for three years? What if the lender increases the rate after you refinance? Will I have to repay to the lender till I retire from service? Should I switch from floating to fixed, at the next rate slide?
Inflation has added fuel to fire. The rates that were showing no signs of reining in got a boost from unbridled inflation. Blame it on worldwide inflation or the soaring oil prices, inflation touched a 13-year high of 11.42 percent in the last week of June.
As an immediate fall-out , the Reserve Bank of India (RBI) recently increased the cash reserve ratio (CRR) and the repo rate by 0.5 percent. Leading banks were quick to pass on the burden of hike to borrowers .
Selecting home loan option
Selecting a lender: This is the most critical, yet often ignored step, in the process of choosing a home loan option. Find out if the bank offers you the cheapest rate. Look at how much they charge in the form of various fees. Ensure that the home loan lender has an established reputation as a good lender to work with.
Some lenders offer low rates to new borrowers but do not pass this advantage to the existing borrowers. Talk to your friends and find out how many times during the past few years the lender has increased rates and how many times the lender has passed the benefit by lowering interest rates of borrowers.
Penalties: Explore fees and penalties . If you're taking a long tenure loan, scout for lenders who do not charge prepayment penalties or foreclosure charges. Borrowers may prefer repaying from time to time when they get any windfall.
A penalty for prepayment is yet another pinch on your pocket. True floating rates: Yes, the lender has promptly passed on the burden of rate hike to the borrowers.
Banks after all are business entities and not charity institutions. But a true floating rate loan fluctuates both ways.
How many times has the lender passed the benefit of lower rates to the borrower? Are his floating rates truly floating? Are the rates offered to existing customers at par with those offered to new ones?
The debate continues. The dilemma persists. "Had I fixed my loan four years ago, I would not be shelling out Rs 500 a day as interest towards my loan today" . If fixed rate is only slightly higher than floating, maybe you can explore the option. If you toss over with sleepless nights and can afford to go fixed, the choice is obvious.
However, fixed rates aren't truly fixed. The lender has all sorts of clauses attached to the fixed rate that gives him unilateral power to push your fixed rates upwards. Get clear about these clauses as not all fixed rates are 'pure' fixed rates.
With the general elections around the corner, the Government could take steps to curb inflation. It is possible that borrowers can see some slide in the rates, at which point they can contemplate switching to a fixed rate.
Home loans - Should you prepay or stay with higher EMIs?
Home loan borrowers are in a dilemma at this juncture, whether to continue repaying EMIs at the same level, to increase the amount, or make part-payment to reduce the loan period.A mere half percent increase in home loan lending rates stretches the repayment period by two-and-a-half years.
In such a scenario, is it appropriate to switch over from one institution to another to take advantage of even marginal differences in interest rates? But what if the rates change yet again once you have made that switch?
These are the kind of questions that haunt home loan borrowers who have been caught in the soaring interest rate regime, with their worries being doubled by the steadily dropping disposable incomes. What is the way out of this impasse?
Should you prepay or stay with higher EMIs?
“At the present rate of 11.50 percent, borrowers end up repaying only 27 percent of their principal amount by the end of seven years and 47 percent by the end of 10 years, that is only if the interest rate continues to remain at the same level,” says Ramesh Kumar, a chartered accountant.
The hike of an additional one percent would result in repayment of only 25 percent of the principal amount by the end of seven years and 45 percent by the end of 10 years.
Read: Tips to lower your Home Loan EMI Burden
According to bank officials, if the intention of a home loan borrower is to maintain the EMI at the same level, the best option would be to make a prepayment as there is no charge involved.
Also, while it is wise to negotiate on the best interest rate, it’s not advisable to switch for only a marginal difference. A two percent charge plus taxes is levied on switchovers. Those in the age group of 25-30 years prefer to stretch the repayment period and maintain the EMI at the same level.
Whereas those in the 45-55 age bracket prefer to confine their repayment within the retirement age as part-payments bring down the loan tenure substantially.
One option is to increase the EMI but for those who cannot afford it, the only choice is to make part-payment during the tenure of the loan.
A few institutions advice that retaining lump sum payment in deposits and continuing EMI at an enhanced level would enable a borrower to use the money in the event of exigencies.
At least 70 percent of the home loan borrowers resort to this route, say bank sources. And 10-15 percent prefer to prolong the repayment period.
There are others who suggest that people should take advantage of the terminal benefits like provident fund as they fetch a lesser interest rate these days. They can use the low-cost loan to service the highcost loan and bring down the repayment period.
But even financial institutions do not subscribe to the practice of using one loan to service the other. Consultants also advise consolidation of assets to bring down the home loan repayment burden through phased repayment.
According to Ramesh Kumar, “If the loan-to-cost ratio (LCR) is low, it is always better to service the enhanced EMI in case of any increase in interest rates since the affordability is better when they take lesser quantum of loan.”
Borrowers should not overstretch just because 85 percent of the property value is available as home loan. “It’s better to sell existing property and use a home loan for the rest of the money as against holding smaller units in addition to buying a new one,” he adds.
A significant development is that unlike other countries, property prices have appreciated over the years in India. One can avail a mortgage loan at competitive rates. Reverse mortgage has been introduced to help senior citizens in the absence of social security benefits.
One can take a loan against future rent receivable and plough back the money into more profitable avenues. So, having a property in your name is a lifelong security that’s definitely worth investing in.
Buried under debt? Credit counsellors can find you a way out
OVER the past few years, factors like rapidly changing lifestyles and easy availability of credit have resulted in many individuals borrowing beyond their limits to fund their consumption needs. And, with interest rates continuing their skyward march, such borrowers’ plight is likely to worsen in the coming days.If you are among those feeling the weight of debt, you shouldn’t hesitate to seek professional help to tide over the crisis. At present, borrowers struggling with repayments can turn to financial planners who can chart out the path to freedom from debt for a fee or credit counsellors who do not seek any compensation for the services rendered. The idea is to spare the already-burdened debtors of further expenses, thus making it an ideal method for debt resolution.
Recognising the importance of such centres, the Reserve Bank came out with a concept paper on financial literacy and credit counselling centres (FLCC) in April this year, and is expected to take further action on the report based on the feedback received from the public. FLCCs are encouraged not only to provide curative advice, ie, debt resolution remedies, but also preventive counselling, that is, educating the borrowers on their repayment capacity, cost of credit and so on before they apply for loans.
Several banks have come forward to set up FLCCs to lend a helping hand to distressed borrowers, out of which, the Bank of India-supported Abhay (http:\\www.bankofindia.con/abhay.aspx) and ICICI Bank-backed Disha (http:\\www.dishafc.org) are active in the urban areas, with three and eight centres, respectively. These entities provide counselling to all borrowers who approach them, irrespective of the bank they have taken the loan from.
Also Read:
Did your home loan just get more expensive?
Tips to lower your Home Loan EMI Burden
Typically, credit counselling centres are manned by retired bank officers, as they are believed to be well-equipped to understand both the borrowers’ and banks’ perspectives and hence, better placed to come up with a mutually acceptable solution. Debt restructuring packages, designed by credit counsellors, are bound to carry more weight than those chalked out by the debtors themselves.
You can get in touch with the centre closest to your house and set up a one-on-one meeting with the counsellor who will devise a debt restructuring plan after taking into account your financial situation and repayment capacity.
While the plans could vary as per these and other parameters, they generally entail waiving penal interest or even a part of regular interest and other charges to arrive at a sum that you would be able to repay in installments at a reasonable rate of interest. “Implementing a mutually agreed upon debt restructuring plan could be a win-win situation for both the parties. Banks will be spared of the need to spend additional money on recovery efforts.
Also, they will not stand to lose much as such plans will not involve any write off of the principal amount,” reckons VN Kulkarni, head of Abhay Credit Counselling Centre.
However, although it has been two years since the first credit counselling centre was set up in India, the concept is yet to take off, promarily due to lack of awareness and to an extent, the stigma associated with acknowledging one’s inability to service the loan.
But borrowers have to realise that approaching a credit counsellor is a better option than taking the legal route. Also, with the Credit Information Bureau of India Ltd (CIBIL) becoming proactive in the recent months, wilful defaulters will find it difficult to get away with non-payment of dues. Banks have started reporting such defaulters to CIBIL, thus denting their chances of securing loans in the future. Compared to finding yourself stuck in such embarrassing situations, enlisting the help of a credit counsellor is certainly a respectable alternative.
Lack of awareness apart, lender banks’ contention that counsellors do not have ‘locus standi’ in the matter – a fact acknowledged by the concept paper – is another hurdle. In spite of the obstacles, the fact that number of such centres are growing, albeit not at a great speed, is an indication that they have had some success in providing relief to indebted individuals.
“The number of people visiting Abhay has been increasing steadily,” informs Mr Kulkarni. Adds B Madhivanan, senior general manager, ICICI Bank: “We are now seeing a trickle of people visiting our centres owing to the pressure of debt burden and awareness of FLCCs. With RBI giving thrust to this movement, we see a significant role for FLCCs in the development of financial markets.”
Did your home loan just get more expensive?
Home loans with floating interest rates can be tricky; the moment you take the loan, the rate seems to start climbing upwards.
We outline some smart tips to help folks like Jaidev get the best deal.
Step 1: negotiate with your bank
Before taking business to another bank, negotiate for a lower rate with your current vendor. They mya have a better plan.
Clayton Scott, the Director of Ecompare.co.in, a financial products comparison web site suggests, “There are banks that allow switching at the time of annual review of accounts, at no extra cost. There are others that allow such switches but at a cost of around 1.5% of the outstanding loan amount.”
This is a good option for refinancing your home loan, as it's quick and involves fewer formalities.
Step 2: negotiate for lower charges
If your bank lets you switch to a lower interest rate plan for no charge, you are in luck. But if they do charge a fee, you should negotiate for a lower rate.
These charges, however, come with clauses like this one: the pre-payment fee is waived only if you are repaying the loan from your own pocket. In other words, you have to shell out a pre-payment fee if another bank refinances you.
Read: Tips to lower your Home Loan EMI Burden
Step 3: compare banks
It's a smart idea to compare the charges offered by your bank and other bank. This will help you negotiate better interest rates, processing fees and charges levied by other banks on refinanced loans.
Other charges by a new bank include a processing fee of about 0.5 to 1% of the loan amount. Ask for this percentage to be further reduced or waived.
Harsh Vardhan Roongta, CEO of apnaloan.com says, “Generally, it works out better if you have about 10 or more years of the repayment period left. Opt for the switch only if the new loan rate is cheaper by at least 0.5% and the pre-payment fee is not more than 2%.”
Step 4: evaluate your position
If you have many years of repayment (say 10 - 15 or more) tenure remaining and even if the new rate is 1% cheaper than current interest rate it is definitely beneficial. The processing fee is not high. The new lender has agreed to lower his pre-payment fee to only 1% of the outstanding principal. Overall, it makes sense for you to make the switch.
Step 5: the refinancing process
Make sure you hand over all original documents of the house to your new lender. The bank’s lawyer will then scrutinise your papers for a fee. This fee could be anywhere between Rs 1,500 and Rs 2,000.
The new bank may want to revaluate your property based on the location and condition of your property. The revaluation charge is approximately Rs 1,500, but can vary from bank to bank.
The refinancing process could take between seven to 10 working days depending on the bank you’re dealing with.
Here's a look at charges at a glance.
Type of charge Approximate cost
Processing fee 0.5 to 1% of the loan amount
Documentation fee Rs 1,500 to Rs 2,000
Revaluation fee Rs 1,500
Can the new lender up the interest rate, again?
“Yes, then the consumer has no option really. If your bank revises the rates it will be for all the consumers and not for you alone. You’ll share the fate of thousands of other consumers,' says Roongta.
Scott asks all consumers to exercise caution, “Never assume that a bank will help you switch to the most favourable interest rate prevailing in the market. It's your responsibility to stay abreast with current market rates and switch when it is in your best interest and when permitted to do so under the terms of the loan agreement.”
We outline some smart tips to help folks like Jaidev get the best deal.
Step 1: negotiate with your bank
Before taking business to another bank, negotiate for a lower rate with your current vendor. They mya have a better plan.
Clayton Scott, the Director of Ecompare.co.in, a financial products comparison web site suggests, “There are banks that allow switching at the time of annual review of accounts, at no extra cost. There are others that allow such switches but at a cost of around 1.5% of the outstanding loan amount.”
This is a good option for refinancing your home loan, as it's quick and involves fewer formalities.
Step 2: negotiate for lower charges
If your bank lets you switch to a lower interest rate plan for no charge, you are in luck. But if they do charge a fee, you should negotiate for a lower rate.
These charges, however, come with clauses like this one: the pre-payment fee is waived only if you are repaying the loan from your own pocket. In other words, you have to shell out a pre-payment fee if another bank refinances you.
Read: Tips to lower your Home Loan EMI Burden
Step 3: compare banks
It's a smart idea to compare the charges offered by your bank and other bank. This will help you negotiate better interest rates, processing fees and charges levied by other banks on refinanced loans.
Other charges by a new bank include a processing fee of about 0.5 to 1% of the loan amount. Ask for this percentage to be further reduced or waived.
Harsh Vardhan Roongta, CEO of apnaloan.com says, “Generally, it works out better if you have about 10 or more years of the repayment period left. Opt for the switch only if the new loan rate is cheaper by at least 0.5% and the pre-payment fee is not more than 2%.”
Step 4: evaluate your position
If you have many years of repayment (say 10 - 15 or more) tenure remaining and even if the new rate is 1% cheaper than current interest rate it is definitely beneficial. The processing fee is not high. The new lender has agreed to lower his pre-payment fee to only 1% of the outstanding principal. Overall, it makes sense for you to make the switch.
Step 5: the refinancing process
Make sure you hand over all original documents of the house to your new lender. The bank’s lawyer will then scrutinise your papers for a fee. This fee could be anywhere between Rs 1,500 and Rs 2,000.
The new bank may want to revaluate your property based on the location and condition of your property. The revaluation charge is approximately Rs 1,500, but can vary from bank to bank.
The refinancing process could take between seven to 10 working days depending on the bank you’re dealing with.
Here's a look at charges at a glance.
Type of charge Approximate cost
Processing fee 0.5 to 1% of the loan amount
Documentation fee Rs 1,500 to Rs 2,000
Revaluation fee Rs 1,500
Can the new lender up the interest rate, again?
“Yes, then the consumer has no option really. If your bank revises the rates it will be for all the consumers and not for you alone. You’ll share the fate of thousands of other consumers,' says Roongta.
Scott asks all consumers to exercise caution, “Never assume that a bank will help you switch to the most favourable interest rate prevailing in the market. It's your responsibility to stay abreast with current market rates and switch when it is in your best interest and when permitted to do so under the terms of the loan agreement.”
Tips to lower your Home Loan EMI Burden
THE flipside of taking a home loan with a floating interest rate is that when rates go up, you land up shelling more bucks!Expert Harsh Roongta tips off a borrower on how to manage his loan.
I took a home loan of Rs 23 lakh at an interest rate of PLR plus 1 per cent margin, that is, 7.75 per cent plus 1 per cent margin, which comes to 8.75 per cent. I took the loan from ICICI Bank on November 30, 2004. The loan tenure was 180 months and I was paying an Equated Monthly Installment (EMI) of Rs 22,987 per month, which was due on the 7th of every month. At present, the interest rate on my loan stands at 13.25 per cent, the tenure has been increased from 15 to 25 years, and the EMI amount has gone up from Rs 22,987 to Rs 25,109. For new customers, the bank is giving the same loan at a much lower rate but has not revised our interest rate. We have raised questions but the bank says this is due to an RBI ruling. What's the solution?
Option 1: Bargain for a lower rate-- If you have maintained a good repayment track record, you could get an interest rate of around 10 to 10.50 per cent from other lenders. So, you could consider shifting to another lender.
For instance, if you take a home loan of Rs 23 lakh at 10.5 per cent for a period of 20 years, your EMI will be around Rs 22,900. That way, you can go back to paying your initial EMI.
Option 2: Prepay-- You could prepay a part of the home loan if you have surplus money. Many banks do not charge a pre-payment penalty on partial prepayment. So, find out if your bank levies a penalty before you consider prepaying it.
Prepaying helps because:
-- It reduces the EMI burden since you can bring down the EMI amount.
-- You save on high interest costs on the portion of the loan that you prepay.
The flipside: When you prepay your loan, you might lose out on the Section 80 C tax break for principal and interest repaid. Hence, it can lead to a higher tax outgo.
Also, a prepayment penalty may be applicable.
Smart tip: Clear high interest loans first
However, before you prepay a home loan, remember to clear all unsecured debt such as credit card dues and personal loans. Also, do set aside some money to meet emergency expenses.
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