The Reserve Bank of India (RBI) has reduced risk weight on home loans which will help banks in lowering interest rates on home loans below Rs 30 lakh.
RBI governor YV Reddy stated, “Reduction in risk weight-age is an enabling provision and we expect banks to pass on the benefits to the customers.” Now the risk weight on home loans up to Rs 30 lakh will be 50 basis points. Earlier risk weight on home loans up to Rs 20 lakh was 50 basis points and above Rs 20 lakh was 75 basis points.
However banks at the same time have no plans to raise interest rates on bigger home loans in spite of a hike in the cash reserve ratio. “Considering the slowdown in the economy and that interest rates have already peaked, banks may not consider raising lending rates immediately,” said Punjab National Bank’s CMD, KC Chakrabarty. While home loan rates vary from 9.5% to 12% on the floating rate loans.
Keki Mistry, vice-chairman & MD of HDFC — India’s largest home loan lender said, “This is a positive step as property prices have gone up significantly. This will encourage banks that are running tight on capital to extend more home loans.” He pointed out although these guidelines apply to banks, the National Housing Bank, which regulates housing finance companies like HDFC, usually follows RBI’s footsteps.
Currently, several public sector banks are offering lower interest rates on home loans below Rs 20 lakh. However, even as the risk weight has been lowered for loans up to Rs 30 lakh, only loans up to Rs 20 lakh will be eligible for priority sector loans. However RBI has allocated different levels of risk weight for different categories of loans to calculate capital adequacy ratio, which is pegged at 9%. On a loan of Rs 100, if the risk weight is 100%, a bank has to set aside a capital of Rs 9.
Earlier urban co-operative banks (UCBs) were offering home loans up to Rs 25 lakh now RBI has increased the limit to Rs 50 lakh for UCBs. “This will increase the home loan portfolio of UCBs and give them competitive advantage over its peers in the private and public sector. Currently, home loan portfolio accounts for 35% of the loan portfolio and UCB do not have high NPA in this segment,” New India Co-operative Bank’s CEO, DR Shirodkar. Although limit has been increased but it will be subject to certain conditions which are yet to be finalized.
Wednesday, April 30, 2008
Monday, April 28, 2008
Negotiate for cheaper home loan
Are you planning to take home loan for buying your dream house?
In each corner of the street banks are offering home loans but one should keep eyes open before making final decision.
Here are some simple steps to help you in finding cheaper home loan.
When you apply for the loan the bank check your income statement because the loan is sanctioned according to your repayment capability. There is another option in case your income alone cannot help in getting loan from the bank. You can put in more of your own money or adding a co-applicant to the loan i.e. you can apply for a loan jointly with your spouse or any close relative who is earning good income and can finance you.
Many banks offer an attractive interest rate but fleece you by charging high fees so you must ask for lowest possible initial fees and charges. But the final amount will depend on your income.
A bank imposes various charges like processing fees, pre-closure fees, etc. The processing fee is usually a percentage of the loan amount. So before finalizing the bank for loan, do the survey so that you can compare the charges being offered by your selected bank. Negotiate with the bank to either lower the percentage or even ask them to fix an amount about post-disbursement fees, and the terms and conditions.
Negotiate for loan amount according to your salary and repaying capacity. Usually the bank gives 80% of the amount of the value of the property. It is you have to see that your budget does not get curtailed with the remaining amount which you have to shell out from your pocket.
While selecting the bank for loan do survey about bank’s history and infrastructure. Most of the banks are offering post-disbursement service an essentially customer service which includes answering your queries on various aspects relating to your loan. The bank calls you. You don't need to chase them.
Follow these simple steps before you sign on the dotted line with your home loan provider.
In each corner of the street banks are offering home loans but one should keep eyes open before making final decision.
Here are some simple steps to help you in finding cheaper home loan.
When you apply for the loan the bank check your income statement because the loan is sanctioned according to your repayment capability. There is another option in case your income alone cannot help in getting loan from the bank. You can put in more of your own money or adding a co-applicant to the loan i.e. you can apply for a loan jointly with your spouse or any close relative who is earning good income and can finance you.
Many banks offer an attractive interest rate but fleece you by charging high fees so you must ask for lowest possible initial fees and charges. But the final amount will depend on your income.
A bank imposes various charges like processing fees, pre-closure fees, etc. The processing fee is usually a percentage of the loan amount. So before finalizing the bank for loan, do the survey so that you can compare the charges being offered by your selected bank. Negotiate with the bank to either lower the percentage or even ask them to fix an amount about post-disbursement fees, and the terms and conditions.
Negotiate for loan amount according to your salary and repaying capacity. Usually the bank gives 80% of the amount of the value of the property. It is you have to see that your budget does not get curtailed with the remaining amount which you have to shell out from your pocket.
While selecting the bank for loan do survey about bank’s history and infrastructure. Most of the banks are offering post-disbursement service an essentially customer service which includes answering your queries on various aspects relating to your loan. The bank calls you. You don't need to chase them.
Follow these simple steps before you sign on the dotted line with your home loan provider.
Monday, April 21, 2008
Choosing the best option of home loan
Today the economic structure of the society has changed. The youngsters working with MNCs are earning good package. As the incomes have increased people are looking for different options for investments. Investing in a property either buying home or land is one of the best options being looked upon as loan for this is being offered by almost every bank.
Although every bank is offering multitude housing loan options, but one has to be very careful and choose the one that best suits your financial profile otherwise you might end up paying a heavy price. Here some steps which will help you in choosing the most suitable home loan scheme.
First is the Eligibility: Your income level decides the loan amount. The loan can be taken individually if your income level is up to the mark otherwise you can go for a joint loan with your spouse or some specified relatives who have a means of income.
The one thing to know is bank might sanction more amount of loan than you have applied for on the basis of your current income if you choose a loan with a longer term. Though the eligibility will generally be the same across all institutions, study the variations carefully.
The Time span: Before applying for the loan do your homework about the most attractive rates. Normally, banks offer home loans for a five, ten- or 15-year period. The interest rate depend is in relation to the time period of the loan repayment i.e. interest rate for a five-year loan may be one to two percentage points lower than ten-year or a fifteen-year loan. But you cannot to go for five year loan depending on this sole criterion.
You have to choose the time period very carefully if the period is too short; you might end up spending a more-than-comfortable portion of your income on repayment of principal and interest and be left with little for your living expenses. Apart from this you might face financial crisis incase unforeseen expenses crop up. In case you choose to repay over too long a term, you will be still paying the installments of home loan at a time when other financial obligations, such as your child’s higher education, may need to be met.
Fixed or floating rates which is best?
The most important question must be answered before taking loan. Fixed interest is always a bit higher than floating interest. But that is the premium you pay for maintaining the same repayment amount, month after month, year after year, irrespective of the interest rate fluctuations that may occur.
In today’s scenario where there has been a rapid change in the interest rate this would seem ideal. You must ask your banker if the fixed rate is really fixed or whether it will be reviewed, say, once every two or three years.
Although fluctuating rate loans are cheaper but they come marked with uncertainty. For, instance, if you had taken a housing loan three years ago when interest rates were benevolent, today your monthly installments might hit the roof unless you have extended the tenure to stick to the same amount.
But this might be temporary. In case the rates go below the fixed rate in another two years, you will be able to save something for yourself.
Knowing the long-term nature of the loan, a long-term view on interest rate movement should guide your choice.
Repayment Options
Pay attention to the repayment options available before choosing a scheme. Some banks offer a step-up facility under which you can pay a lower EMI (equated monthly installment) in the initial years and gradually increase your payments corresponding to growth in your income.
In this you also get an option to step up the EMI whenever you feel you can increase the repayment amount. Some banks also give loan to buy a property under construction, in this case some banks give option to decide on how much you want to pay back till the property is ready; the interest element being the minimum required to be paid.
This in turn helps you begin the repayments as soon as possible and finish the repayment within a schedule. Also, check with the banks whether they have option of pre-paying loan at any point if you have a lump sum on hand. Never forget to compare the charges for exercising any of these options across lending institutions.
Tax benefits on loans
Both principal as well as interest payments carry tax benefits.
Under section 80C, the tax benefit on principal amount up to a maximum of Rs 1 lakh along with other savings such as insurance premium and PPF, and on interest payments up to Rs 1.5 lakh (subject to various provisions in the Act) as a deduction from Income from house property.
Although every bank is offering multitude housing loan options, but one has to be very careful and choose the one that best suits your financial profile otherwise you might end up paying a heavy price. Here some steps which will help you in choosing the most suitable home loan scheme.
First is the Eligibility: Your income level decides the loan amount. The loan can be taken individually if your income level is up to the mark otherwise you can go for a joint loan with your spouse or some specified relatives who have a means of income.
The one thing to know is bank might sanction more amount of loan than you have applied for on the basis of your current income if you choose a loan with a longer term. Though the eligibility will generally be the same across all institutions, study the variations carefully.
The Time span: Before applying for the loan do your homework about the most attractive rates. Normally, banks offer home loans for a five, ten- or 15-year period. The interest rate depend is in relation to the time period of the loan repayment i.e. interest rate for a five-year loan may be one to two percentage points lower than ten-year or a fifteen-year loan. But you cannot to go for five year loan depending on this sole criterion.
You have to choose the time period very carefully if the period is too short; you might end up spending a more-than-comfortable portion of your income on repayment of principal and interest and be left with little for your living expenses. Apart from this you might face financial crisis incase unforeseen expenses crop up. In case you choose to repay over too long a term, you will be still paying the installments of home loan at a time when other financial obligations, such as your child’s higher education, may need to be met.
Fixed or floating rates which is best?
The most important question must be answered before taking loan. Fixed interest is always a bit higher than floating interest. But that is the premium you pay for maintaining the same repayment amount, month after month, year after year, irrespective of the interest rate fluctuations that may occur.
In today’s scenario where there has been a rapid change in the interest rate this would seem ideal. You must ask your banker if the fixed rate is really fixed or whether it will be reviewed, say, once every two or three years.
Although fluctuating rate loans are cheaper but they come marked with uncertainty. For, instance, if you had taken a housing loan three years ago when interest rates were benevolent, today your monthly installments might hit the roof unless you have extended the tenure to stick to the same amount.
But this might be temporary. In case the rates go below the fixed rate in another two years, you will be able to save something for yourself.
Knowing the long-term nature of the loan, a long-term view on interest rate movement should guide your choice.
Repayment Options
Pay attention to the repayment options available before choosing a scheme. Some banks offer a step-up facility under which you can pay a lower EMI (equated monthly installment) in the initial years and gradually increase your payments corresponding to growth in your income.
In this you also get an option to step up the EMI whenever you feel you can increase the repayment amount. Some banks also give loan to buy a property under construction, in this case some banks give option to decide on how much you want to pay back till the property is ready; the interest element being the minimum required to be paid.
This in turn helps you begin the repayments as soon as possible and finish the repayment within a schedule. Also, check with the banks whether they have option of pre-paying loan at any point if you have a lump sum on hand. Never forget to compare the charges for exercising any of these options across lending institutions.
Tax benefits on loans
Both principal as well as interest payments carry tax benefits.
Under section 80C, the tax benefit on principal amount up to a maximum of Rs 1 lakh along with other savings such as insurance premium and PPF, and on interest payments up to Rs 1.5 lakh (subject to various provisions in the Act) as a deduction from Income from house property.
Monday, April 14, 2008
Real estate experts expect raise in home loan ceiling for metros
Within months the inflation has gone very high, run-up of April monetary policy has been taken over by the discussion on repo rate as it is expected that there are possibilities of increase in either the repo rate (the rate at which the RBI lends to the banks) or Cash Reserve Ratio (the amount of funds that banks have to keep with the RBI) but it is for sure regarding the home loan rates that either they will remain where they are or go up further.
Deepak Parekh, Chairman, HDFC, in an interview with The Indian Express said, “it is most likely that there will be an upward revision either in the CRR or repo rate and so the home loan rates could go up marginally.”
Other than this there is one more factor which is causing greater concern, especially among real estate players and the others involved — the Rs 20 lakh limit for priority sector lending. According to them there’s need, to revise the upward limit from Rs 20 lakh or introduce a differential limit for Tier I, II and III cities so that home buyers in larger towns can also avail benefit. Another suggestion they gave is to increase the tax benefit limit of Rs 1.5 lakh for the interest component paid on a home loan.
Anuj Puri, Managing Director, Trammel Crow Meghraj, a multinational real estate consultancy, said: “There are properties within the Rs 20 lakh limit in smaller cities but home buyers in larger cities are getting little benefit from it. I think there should be differential limits based on the tier of the town — like Rs 45 lakh for Tier I, Rs 25 lakh for Tier II and Rs 15 lakh for Tier III cities. The tier classification can be based on the population of the town. Also the tax benefit limit of Rs 1.5 lakh on the interest component repaid should go up. This will bring down the post-tax interest cost for home buyers.”
The other big players of the industry also have the same view. Rajeev Talwar, Group Executive Director, and DLF, said: “Property prices have risen due to a supply gap created as a result of land not being released. There is need for Government to raise the limit for priority sector lending from Rs 20 lakh if they want the credit offtake to go up. Also the limit on tax benefit should be raised from Rs 1.5 lakh. The basic idea should be to allow the economy to flourish and there should be no artificial barrier.”
As per the rules presently, home loans up to Rs 20 lakh fall under priority sector lending across the country. But in recent years, there has been an incredible increase in the property prices across the cities. Then the prices also vary widely from city to city. At the same time the properties under Rs 20-25 lakh are available in Tier II and Tier III cities, therefore it’s difficult to find properties in this range in metros like Delhi and Mumbai.
According to an industry expert “almost 60 lakh individuals have taken home loans and almost 50-60 per cent of these transactions fall within the Rs 20 lakh bracket. Most of these small ticket loans are in smaller towns while in metros and larger towns; this percentage falls to 15-20 per cent.” This is primarily due to the high property prices in larger towns. Therefore the policy of keeping small-ticket home loan rate low is not benefiting borrowers, especially in the metros. Experts are of the view that it is time for RBI to revise the limit range and frame the policy in a way that meets requirements of home buyers across the country proportionately.
Nevertheless, banks have uniform slabs across the country. “Banks need to have categories because of the risk weight age assigned to the size of the home loan, as directed by RBI,” said Parekh. As per current guidelines, banks are required to assign a 50 per cent risk weight age to home loans of up to Rs 20 lakh. And if the loan amount crosses Rs 20 lakh, the risk weight age assigned by the bank rises to 150 per cent. In turn this raises the bank’s cost of lending to borrowers purchasing higher-priced properties.
It is also being expected due to dynamic changes in the market and increasing property prices in metros and bigger cities there is a need to revise the home loan slabs.
Two years before, even in a large city Rs 20 lakh used to be a respectable amount to buy a decent sized house. With the boom in property prices have risen steeply.
Asked about the need to revise priority sector slabs, a senior RBI official said: “We always keep reviewing policies as per evolving situations.” Earlier in April 2007, RBI had reduced the risk weight age for home loans of up to Rs 20 lakh from 75 per cent to 50 per cent.
Deepak Parekh, Chairman, HDFC, in an interview with The Indian Express said, “it is most likely that there will be an upward revision either in the CRR or repo rate and so the home loan rates could go up marginally.”
Other than this there is one more factor which is causing greater concern, especially among real estate players and the others involved — the Rs 20 lakh limit for priority sector lending. According to them there’s need, to revise the upward limit from Rs 20 lakh or introduce a differential limit for Tier I, II and III cities so that home buyers in larger towns can also avail benefit. Another suggestion they gave is to increase the tax benefit limit of Rs 1.5 lakh for the interest component paid on a home loan.
Anuj Puri, Managing Director, Trammel Crow Meghraj, a multinational real estate consultancy, said: “There are properties within the Rs 20 lakh limit in smaller cities but home buyers in larger cities are getting little benefit from it. I think there should be differential limits based on the tier of the town — like Rs 45 lakh for Tier I, Rs 25 lakh for Tier II and Rs 15 lakh for Tier III cities. The tier classification can be based on the population of the town. Also the tax benefit limit of Rs 1.5 lakh on the interest component repaid should go up. This will bring down the post-tax interest cost for home buyers.”
The other big players of the industry also have the same view. Rajeev Talwar, Group Executive Director, and DLF, said: “Property prices have risen due to a supply gap created as a result of land not being released. There is need for Government to raise the limit for priority sector lending from Rs 20 lakh if they want the credit offtake to go up. Also the limit on tax benefit should be raised from Rs 1.5 lakh. The basic idea should be to allow the economy to flourish and there should be no artificial barrier.”
As per the rules presently, home loans up to Rs 20 lakh fall under priority sector lending across the country. But in recent years, there has been an incredible increase in the property prices across the cities. Then the prices also vary widely from city to city. At the same time the properties under Rs 20-25 lakh are available in Tier II and Tier III cities, therefore it’s difficult to find properties in this range in metros like Delhi and Mumbai.
According to an industry expert “almost 60 lakh individuals have taken home loans and almost 50-60 per cent of these transactions fall within the Rs 20 lakh bracket. Most of these small ticket loans are in smaller towns while in metros and larger towns; this percentage falls to 15-20 per cent.” This is primarily due to the high property prices in larger towns. Therefore the policy of keeping small-ticket home loan rate low is not benefiting borrowers, especially in the metros. Experts are of the view that it is time for RBI to revise the limit range and frame the policy in a way that meets requirements of home buyers across the country proportionately.
Nevertheless, banks have uniform slabs across the country. “Banks need to have categories because of the risk weight age assigned to the size of the home loan, as directed by RBI,” said Parekh. As per current guidelines, banks are required to assign a 50 per cent risk weight age to home loans of up to Rs 20 lakh. And if the loan amount crosses Rs 20 lakh, the risk weight age assigned by the bank rises to 150 per cent. In turn this raises the bank’s cost of lending to borrowers purchasing higher-priced properties.
It is also being expected due to dynamic changes in the market and increasing property prices in metros and bigger cities there is a need to revise the home loan slabs.
Two years before, even in a large city Rs 20 lakh used to be a respectable amount to buy a decent sized house. With the boom in property prices have risen steeply.
Asked about the need to revise priority sector slabs, a senior RBI official said: “We always keep reviewing policies as per evolving situations.” Earlier in April 2007, RBI had reduced the risk weight age for home loans of up to Rs 20 lakh from 75 per cent to 50 per cent.
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