Home loan is attached with uncertainty about interest rates and repayment. Harsh Roongta explains some options.
The first thing is with interest rates rising on your home loans, what should you do? Pay a higher EMI or increase the tenure of your loan?
In May 2005, Ratan Shetty, who works with an IT company, took a home loan of Rs 10.5 lakh at an interest rate of 7 per cent for tenure of 20 years. At that time, he was paying an EMI of Rs 7,443. In just two years, the interest on his home loan has risen to 11.25 per cent, and his EMI has increased to Rs 10,453, a rise of more than Rs 3,000 per month.
Which option is the best? This all will depend on your age, your overall financial situation and the future course of interest rates. Here are some advantages and disadvantages of each choice.
Lets look at the first option should you pay high EMI
If you have taken a Rs 10 lakh loan for a 10-year term, half a percentage increase in interest rates will increase your EMI by around Rs 290. If you know that the interest rate will increase in the near future, increasing your EMI may be the best option because you have the advantage of not prolonging your loan period at higher rates. This will also help you in getting tax breaks on your increased interest outgoings.
The disadvantage in this option is the pressure that the higher EMI puts on your monthly budget. You have to make adjustments in your budget. You may have to sacrifice some aspect of your lifestyle or reduce your financial investments. If you are financially overstrained now, it may be better to keep the same EMI and lengthen the tenure.
Increasing the tenure of the loan, if interest rates fall in the future then you will benefit from this strategy; the opposite holds if interest rates rise. In a rising interest rate regime, increasing the tenure of the loan will increase the cost of your home.
If your age is 60 years or 65 then the bank will not extend tenure beyond retirement age. Therefore this option may not be available if you are close to retirement. Another problem is that some banks put a limit on the maximum tenure and it may not be possible to increase it beyond 20 or 25 years.
If you have enough of finance with you and can pay a lump sum this will reduce your outstanding balance so that your EMI doesn’t rise even after taking into account the higher interest rates.
For example, assuming you have a Rs 15-lakh loan for a 20-year term at an interest rate of 12%, your indicative EMI would be around Rs 16,517. If the interest rate inches up to 13%, you would have to pre-pay around Rs 90,000 to retain the same EMI and tenure.
It might be difficult to raise that kind of cash since you have already stretched yourself to buy that dream home. In that case, you may have to settle some of your investments or pledge financial assets such as an insurance policy or national savings certificate and receive an overdraft facility that will allow you to make the pre-payment.
Before choosing pre-pay loan option, check if there is any penalty for the partial pre-payment of your loan. Take into account the loss of tax benefits because your tax-deductible interest payments are lower after pre-payment.
Friday, December 7, 2007
Friday, November 30, 2007
Choose home loan options strategically
Now the things are once again rolling back again in real estate sector. Banks are offering lower rates to the new borrowers but the existing borrowers are waiting for their due rates to come down. Before applying for home loan there are certain factors like fixed, float, monthly rests, yearly rests, fees, penalties, lender, rates about which an applicant should think over. At times lenders offer numerous flexible products the applicants can go for those options also.
You can take home loan from banks for constructing a home or purchasing a ready-built house, flat or residential plot. The banks even re-finance borrowers existing loans which they might have taken from the other bank. The sanction of loan amount is based on certain factors like borrower’s age, salary, educational qualifications, credit history and previous employment track record.
If you are double earning then you can club the income of your spouse in order to increase your loan eligibility. Usually, banks only lend an amount where your monthly EMI outflow is 30 to 50 percent of your salary. Any amount exceeding than this can make repayments towards the loan a burden.
In an initial year when the borrower makes EMI payments to the lender the major portion of the money is marked for the interest repayments. As the year pass by the principal component increases.
Now days buying a house have become difficult especially for those who have started earning recently. To make possible for this segment of people to buy a house stepup loan a flexible and novel product has been designed.
In a step-up loan, a kind of home loan, varying EMIs are offered over the loan’s tenure. This loan is affordable for the young working population that has embarked on its career and holds tremendous growth prospects as during the initial period of the tenure the EMIs are small.
It is presumed that the financial status of the borrower will improve, get promotions and earn increments, as the years roll by, the EMI outflow increases. Even though EMI increase with time, it will still appear affordable for the borrower.
In step-up loan borrowers eligibility for taking loan depends upon the future earning potential so a huge amount is lend much more than his current income. Hence, those earning lesser income initially, can also afford a larger home with their loan.
There is one more option a step-down option in this the burden of EMIs comes down with time. If the borrower’s financial position is strong then he can take this option. Suppose a borrower is close to his retirement years and has a huge earning capacity, some lenders offer step-down loan products. In this the rates are huge during the initial year as the borrower can easily afford high EMI repayments. As the years roll by, the EMI installments come down.
So before applying for the home loan study all the factors requirement and financial position, select a product that best suits your needs by comparing home loan rates offered by various Banks.
You can take home loan from banks for constructing a home or purchasing a ready-built house, flat or residential plot. The banks even re-finance borrowers existing loans which they might have taken from the other bank. The sanction of loan amount is based on certain factors like borrower’s age, salary, educational qualifications, credit history and previous employment track record.
If you are double earning then you can club the income of your spouse in order to increase your loan eligibility. Usually, banks only lend an amount where your monthly EMI outflow is 30 to 50 percent of your salary. Any amount exceeding than this can make repayments towards the loan a burden.
In an initial year when the borrower makes EMI payments to the lender the major portion of the money is marked for the interest repayments. As the year pass by the principal component increases.
Now days buying a house have become difficult especially for those who have started earning recently. To make possible for this segment of people to buy a house stepup loan a flexible and novel product has been designed.
In a step-up loan, a kind of home loan, varying EMIs are offered over the loan’s tenure. This loan is affordable for the young working population that has embarked on its career and holds tremendous growth prospects as during the initial period of the tenure the EMIs are small.
It is presumed that the financial status of the borrower will improve, get promotions and earn increments, as the years roll by, the EMI outflow increases. Even though EMI increase with time, it will still appear affordable for the borrower.
In step-up loan borrowers eligibility for taking loan depends upon the future earning potential so a huge amount is lend much more than his current income. Hence, those earning lesser income initially, can also afford a larger home with their loan.
There is one more option a step-down option in this the burden of EMIs comes down with time. If the borrower’s financial position is strong then he can take this option. Suppose a borrower is close to his retirement years and has a huge earning capacity, some lenders offer step-down loan products. In this the rates are huge during the initial year as the borrower can easily afford high EMI repayments. As the years roll by, the EMI installments come down.
So before applying for the home loan study all the factors requirement and financial position, select a product that best suits your needs by comparing home loan rates offered by various Banks.
Friday, November 23, 2007
LIC Housing Finance working on projects for senior citizens
LIC Housing Finance is working on the projects for the senior citizens. LIC is constructing homes for the senior citizens who are living alone and no one is there to take care for them.
LIC Housing Finance director and chief executive S.K.Mitter said the project is aimed at senior citizens who face loneliness.
The first Care Home project was set up at Bangalore recently. As many as 96 homes were constructed in an area of five acres.
LIC is planning to construct its second Care Home project for senior citizens at Aluva. In a press conference Mitter said a similar project is proposed at Aluva. The project is expected to be completed within three years. Similar projects were also being planned at Bhubaneswar, Chandigarh and Jaipur.
The project envisages setting up of an eco-friendly village comprising small houses and common facilities like meditation rooms, recreation facilities and common kitchen.
Briefing on the financial performance of LIC Housing Finance, Mitter said that the company had recorded a net profit of Rs. 116.37 crore for the quarter ended September 30 showing a growth of 53 percent.
He told that the company had sanctioned loans of Rs 2,268 crore and disbursed Rs 1,599 crore registering a growth of 69 percent and 36 percent respectively.
In the Kerala region, the bank had registered a 20 percent growth in disbursements as on October 31.
LIC Housing Finance director and chief executive S.K.Mitter said the project is aimed at senior citizens who face loneliness.
The first Care Home project was set up at Bangalore recently. As many as 96 homes were constructed in an area of five acres.
LIC is planning to construct its second Care Home project for senior citizens at Aluva. In a press conference Mitter said a similar project is proposed at Aluva. The project is expected to be completed within three years. Similar projects were also being planned at Bhubaneswar, Chandigarh and Jaipur.
The project envisages setting up of an eco-friendly village comprising small houses and common facilities like meditation rooms, recreation facilities and common kitchen.
Briefing on the financial performance of LIC Housing Finance, Mitter said that the company had recorded a net profit of Rs. 116.37 crore for the quarter ended September 30 showing a growth of 53 percent.
He told that the company had sanctioned loans of Rs 2,268 crore and disbursed Rs 1,599 crore registering a growth of 69 percent and 36 percent respectively.
In the Kerala region, the bank had registered a 20 percent growth in disbursements as on October 31.
Thursday, November 22, 2007
'Unfair' home loans under MRTPC Scrutiny
The banks have been using non-transparent ways to compute interest rates on home loans. When ever the banks offer lower home loan rates it is applicable for the new customers only while the existing customers continue to pay the higher rates. Such policies of the banks have come under the regulatory scanner.
The Monopolies and Restrictive Trade Practices Commission (MRTPC) has ordered an investigation into the non-transparent way in which banks are computing interest rates on home loans and how they discriminate between new and existing customers. Taking cognizance of media reports, the commission has asked its investigation wing — the director general of investigation and registration (DGIR) — to probe the alleged unfair pricing practices adopted by banks, particularly for home loans.
According to reports, banks have their own internal computed reference rate to determine interest rates rather than an external market-linked one. When a person opt for a floating rate — believing that his interest burden would ease if the cost of funds falls — is deprived of the benefit.
Many banks are quick in raising interest rates whenever there is a slight increase in the cost of funds. But when it comes to slashing of interest rates, they wait for a considerable fall in the cost of funds before slashing interest rates by a small fraction.
It has been alleged that banks readily reduce rates while negotiating with new customers to beat competition from rivals. Existing customers are often left out from such interest rate cuts.
The regulator has excluded pre-closure penalty from the scope of the probe as it believes that banks have a genuine difficulty when funds allocated over a long period are paid back prematurely. Besides, some banks even reset the fixed interest rate under a provision. This fact is often not properly communicated to customers at the time of selling the loan. DGIR usually completes its investigations in two months.
The investigation comes at a time when existing consumers are feeling the pinch from a sharp escalation in their interest burden. Inflation in cement and steel, too, has dealt a blow to new customers with real estate prices shooting up sharply.
The Monopolies and Restrictive Trade Practices Commission (MRTPC) has ordered an investigation into the non-transparent way in which banks are computing interest rates on home loans and how they discriminate between new and existing customers. Taking cognizance of media reports, the commission has asked its investigation wing — the director general of investigation and registration (DGIR) — to probe the alleged unfair pricing practices adopted by banks, particularly for home loans.
According to reports, banks have their own internal computed reference rate to determine interest rates rather than an external market-linked one. When a person opt for a floating rate — believing that his interest burden would ease if the cost of funds falls — is deprived of the benefit.
Many banks are quick in raising interest rates whenever there is a slight increase in the cost of funds. But when it comes to slashing of interest rates, they wait for a considerable fall in the cost of funds before slashing interest rates by a small fraction.
It has been alleged that banks readily reduce rates while negotiating with new customers to beat competition from rivals. Existing customers are often left out from such interest rate cuts.
The regulator has excluded pre-closure penalty from the scope of the probe as it believes that banks have a genuine difficulty when funds allocated over a long period are paid back prematurely. Besides, some banks even reset the fixed interest rate under a provision. This fact is often not properly communicated to customers at the time of selling the loan. DGIR usually completes its investigations in two months.
The investigation comes at a time when existing consumers are feeling the pinch from a sharp escalation in their interest burden. Inflation in cement and steel, too, has dealt a blow to new customers with real estate prices shooting up sharply.
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