Posts Tagged ‘Home Loans’

Floating rate: old borrowers take the hit

February 5th, 2010

If you have taken a home loan in recent years, you may be paying higher interest rates between 10 per cent and 13 per cent, whereas new borrowers are charged 8-8.25 per cent for the first two or three years and later on at around 9 per cent (as per prevailing rates then), which may be still much less.

Being a loyal customer who has been paying EMIs (equated monthly instalments) for the past few years, ideally the lender should have rewarded you by charging interest a notch less than that charged to the new customer.

The floating rate home loans are benchmarked to PLR (Prime Lending Rate) or Benchmark Prime Lending Rate (BPLR).

The PLR is defined as “the lowest rate of lending offered for the most preferred borrower and for such loans which are fully secured.”

A committee headed by Executive Director was formed by the RBI felt that there was much less transparency in fixing the PLR and it recommended to do away with PLR and introduce a base rate comprising of all cost elements which can be identified and are common across borrowers.

The committee recommended charging the same rate of interest for new borrowers as well as old borrowers under floating rate loans.

When it was expected that the woes of lakhs of home loan borrowers would end, the leading bankers aired their inability to charge same rate of interest for all borrowers old and new, under floating rate home loans.

The RBI officials clarified that since incremental funds have brought down average cost of funds for banks, why cannot they pass on the benefit to old customers.

Some bankers have expressed the fear that offering same interest rate for all borrowers may invite legal disputes as interest spreads (loans offered at PLR-2%, PLR -3% and so on) varied from customer to customer.

The RBI should help set right the injustice meted out to existing borrowers.

News Published Under:  The Hindu

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Low-down on loans

January 22nd, 2010

As we enter the new calendar year, the focus is once again on the interest rates. This time, unlike last year, the rates are showing mixed signs. While deposit rates have already dipped, the lending rates haven’t kept pace with them.

Even banks are playing the waiting game and have created innovative products. That makes life tough for the borrowers as they need to take an informed decision. Here are some tips for choosing your loan:

Many banks have launched hybrid loans wherein the rate is fixed in the first year of the loan period but is linked to the market rate from the second year onwards. Here, the assumption is that the rate would go up at a later date though chances of the rate coming down are not ruled out. For instance, some banks have pegged the first year rate at eight per cent. One of the reasons why the rate could be higher from the second year onwards is the linkage of the rate to the benchmark lending rate which still hovers around 10-11 per cent.

In the last few years, though banks have reduced the lending rate on special products, they have not cut down the benchmark rate. So, Barring home loans, most other loans such as personal loans or overdraft facility continue to attract an interest rate of over 14 per cent. Hybrid loans will be suitable for individuals who are looking at home loans with a tenure of less than 10 years.

Since the interest component of an EMI is large in the initial years, it will be profitable to go for this option even if the lower interest is for a period of one year.

News Published Under:  The Hindu

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ICICI Bank to focus on home-loans

December 31st, 2009
Mumbai: With the real estate segment witnessing a comeback after the economic slowdown, banks are now focussing on the home-loan segment, a top banker said. “We are focussing on the home-loan segment at the moment as there is a lot of activity in this sector (home)…people who stopped buying a few months ago, are back again,” ICICI Bank’s Managing Director & CEO, Chanda Kochhar, said Friday.
The bank had recently launched a home-loan scheme under which 8.25 per cent interest rate will be fixed for the first two-years for loans sanctioned from December 1, 2009 to January 31, 2010, irrespective of the loan amount. The first disbursement of the loan should be availed before March 31, 2010.

From the third-year onwards, the lender would charge a floating interest rate depending upon the then prevailing floating reference rate.

News Published Under:  Manorama Online

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A closer look at repayment options

December 15th, 2009

Housing loan seekers must analyse whether the special repayment options offered are beneficial. 
For many customers of home loans, the EMIs (equated monthly instalments) remain constant throughout the tenure. For example, if a loan of Rs.20 lakh is taken at nine per cent interest and the tenure fixed is 15 years, then the EMI will be Rs.20,286 throughout the tenure if the interest rate is not altered.

However, these days, banks and home finance companies offer a number of repayment options, which are a bit complex. Here is an effort to analyse them.

SURF

If you are a professional seeking a home loan and having good employment, no bank or home finance companies will like to lose you as a customer.

They will lure you with a higher loan amount by offering a telescopic repayment facility, also called as the step-up repayment facility (SURF), under which the EMIs will be less initially and will gradually increase over fixed intervals.

Let us suppose you are eligible for a loan of Rs.20 lakh under the regular scheme with EMIs of Rs.20,286 for 15 years at nine per cent interest. Under SURF, you will be eligible for Rs.25 lakh for the same tenure and interest, but the EMI will be Rs.18,750 for the first 24 months, Rs.25,357 for the next 60 months and Rs.29,325 for the balance 96 months.

On the face of it, it looks attractive. For a higher loan, the initial EMIs are less. But it is beneficial to the lender and not you, as in the first two years, the lender will be collecting only interest. As a result, the total interest payable over 15 years will be 10 per cent more than in the normal scheme.

For a loan of Rs.25 lakh under the regular scheme, the total interest payable will be Rs.2,064,133 in 15 years, whereas in SURF, the total interest payable will be Rs.2,286,608, an additional interest of Rs.2,22,475. Hence SURF scheme is not advisable.

FLIP

If you are applying for a home loan with your father/mother who is left with less service (or if your service left is less than 15 years and your wife has more service left), in the regular scheme, your loan eligibility will be less as the tenure offered will be restricted to the service left for the elder applicant.

Under these circumstances, the flexible loan instalment plan (FLIP) comes in handy. It works the exact reverse of the SURF scheme. In the initial years (up to the retirement of elder applicant) EMIs will be higher and for the balance period, the EMIs will be much lesser.

For instance, a man is left with five years of service with a salary of Rs.40,000 a month and his wife has 12 years’ service and her salary is Rs.25,000 a month. In the normal scheme, the couple will be eligible for a loan of Rs.12.5 lakh for five years’ tenure, considering 40 per cent of the combined income towards EMI and interest rate of nine per cent. If you opt for FLIP, the eligibility will get enhanced to Rs.16.5 lakh. For the first five years, the EMI will be Rs.26,000 approximately, and for the balance seven years, it will be Rs.10,000.

This scheme is advisable as applicants will get a higher loan amount and end up paying lesser interest compared to regular schemes.

Home saver account

In the regular home loan, you go on paying EMIs comprising interest and principal amount. It is a non-transactional account. In the home saver account, the home loan account is made transactional by connecting it to a current account. It works like an overdraft facility and the borrower can park his surplus savings in the home saver account and can withdraw the surplus as per his needs.

Till the surplus (other than EMI) amount is lying in the account, it will earn same interest as that of loan. Such interest earned is accounted as principal loan amount repaid on a daily product basis. In this scheme, one can save a lot of interest payable on home loan as tenure reduces considerably. The scheme is ideal for business class applicants, who will have a current account for their business deals, which earns no interest and will have a high turnover on daily basis. The scheme can be opted for by high net-worth individuals who can keep surplus funds parked in their home loan account.

Accelerated repayment

Under this scheme, the borrower is allowed to increase his EMIs as and when his income is increased and he can pay lumpsum amounts, which will be apportioned to the principal loan outstanding. In this scheme, the loan gets repaid faster resulting in a lot of savings in interest payment and the long-term debt closes much earlier.

This scheme is good for salaried class borrowers, as whenever they get an increment, or disposable income is increased, they can use it for increasing the EMI amount or use it for part prepayment.

The banks and the home finance companies will try to lure you by offering many special schemes, saying that the scheme is custom-made for you and will try to push you to seek a higher loan amount. This is because there is surplus credit available and fierce competition among banks and home finance companies is making it difficult for the lenders to attract good customers.

Hence, before finalising the option, the customer needs to thoroughly analyse whether the special repayment option offered is really beneficial.
News Published Under:  The Hindu

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Posted in Kerala Real Estate, Real Estate

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Waiving pre-closure penalty will ease burden on borrowers

October 29th, 2009

At a time when Indian households have been forced to cough up more for their monthly living needs, the Reserve Bank of India (RBI) seems to have come to their aid. Last week, the Central Bank, for the first time, has indicated that it is not comfortable with the penalty being charged by banks for pre-closure of loans.

According to media reports, the RBI is planning to ask banks to discontinue the practice of foreclosure penalty, which was a bane for the borrowing community.

At present, borrowers sitting on large chunk of loans need to think twice before shifting loans as in most cases the penalty amount runs into thousands of rupees.

Though penalty charges are applicable for all types of loans, it is particularly harsh for those sitting on home loans because of the large loan ticket size.

Hopefully, it will be a thing of the past soon.

As a borrower, you are bound to feel like celebrating but you will have to wait a little longer.

For, the RBI’s move is likely to be applicable only for fresh loans though the regulator is not averse to the idea of extending it to old borrowers at a later date.

In fact, the RBI wants to make life good both for new and old borrowers by removing various disparities between the two.

For instance, there is a move (still in early stage) to remove the concept of benchmark rate and replace it with a single rate which would be

The above changes, in reality, would put a greater emphasis on the concept of borrowing and borrowers would be required to keep track of loan pricing.

At present, for many borrowers, the downward trend in interest rate did not mean much as they were forced to continue with existing loans because of pre-closure penalty. In the case of home loans, the penalty amount was good (huge) enough to maintain their loyalty.

For instance, a loan amount of Rs.30 lakh required the borrower to cough up a penalty of Rs.60,000 for foreclosure (at a rate of 2 per cent) and worse, this was not funded by the fresh lender.

As you are aware, loans when shifted from one bank to another, take care of only the principal amount and do not include other charges.

Hopefully, the new regime will bring in the desired changes.

As pointed out earlier, the changes on the home loan front require borrowers to be agile to the changing dynamics and it will be prudent for borrowers to prepare for an early closure in their own good.

Gone are the days when borrowers could feel comfortable with the fact that their EMI is not a burden. With interest rates fluctuating on a regular basis, it will be advisable to look at the option of closure of loans well before the due date.
News Published Under:  The Hindu

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Real estate looking up, people start buying again

August 3rd, 2009

The booming real estate market that received a jolt during the slowdown last October-November seems to be recovering. People are slowly purchasing, but only for personal use. Not for investment purposes.

“In the last few months the real estate market has undergone major changes. The slowdown that migrated from the US has got corrected in India now. The prices have got corrected. And whatever pent up demand was there in the market has started getting converted into business,” Santosh Rungta, president Confederation of Real Estate Developer’s Associations of India (CREDAI), told IANS.

With 4,000 members, CREDAI is the apex body of the organised real estate developers and builders across India, representing pan-India associations of real estate and housing developers.

People were virtually not buying during the slowdown as the real estate price was high and insecurity gripped buyers.

“The government made an appeal to us that the prices should be brought down and we (CREDAI) made an appeal to our fellow developers that they should try and bring down prices, and they acted accordingly,” Rungta said.

The pan-India price reduction was to the tune of 15-35 percent depending on various categories and geographies, he said.

“Today flats are being sold, but the pace could be better. Generally things have reversed. In Mumbai also, rightly priced projects have been sold. The major contributor to this is the government policy to generate demand. It brought in stimulus packages, ensured availability of liquidity to the home buyers, interest rates softened,” he said.

Another real estate player Indrajit De, chairman of Eden, also said housing loan lending rates cut may attract a few more buyers into the market.

“If the lending rate falls further by 50 basis points, the sales figure will climb up,” he said, adding, “Certainly the market is looking up now. Sales have also improved.

“We are selling around 25-30 units (flats) per month. But it was much higher in the range of 55-60 units per month before the recession actually hit India.”

Harshavardhan Neotia, chairman, Ambuja Realty Group, told IANS: “Sales have picked up in the last two-three months. There is more offtake now than what it was six months back. But now the buyers are genuine users and not just investors. These are the people who really need housing. They are lot more quality conscious and they look for the right products.”

He said there was a drop of 10-15 percent in the price during the recession period. In the last two-three months the company has sold around 200 flats, he said.

Reacting to the recent announcement by union Finance Minister Pranab Mukherjee on interest subsidy on new home loans and extension of deadline in tax holidays on projects approved by March 2008 if they are completed by March 2012, Rungta said: “One must understand that extending the tax holiday under 80 I B (10) for a mere one year to projects approved by March 2008 will fail to create a significant positive impact on the real estate market. It will only benefit a few micro markets with a handful of projects.”

CREDAI has suggested the centre consider extending the dateline to March 2012 for providing tax holidays to projects irrespective of the date of approval. “This will be of greater benefit to the sector and encourage developers to take up new projects and expedite ongoing projects as well.”

Rungta further said: “Even the proposed interest subsidy of one percent to home loan borrowers for loan taken for houses costing up to Rs.20 lakh is also not justified.”

CREDAI has proposed that the centre increase the subsidy to home loan interest rates by another one percent to two percent and extend the scheme for houses costing upto Rs.30 lakh from the currently proposed valuation of Rs.20 lakh. 
News Published Under: Malayala Manorama

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Home buyers in no-comfort zone

July 27th, 2009

Developers and consumers are concerned that the interest rates will go up further. 

For all the expectations that preceded its presentation, the Union Budget 2009-10 is a huge disappointment for the real estate sector.

In fact, it has turned out to be a ‘non-event’ for the housing industry. Budget is an income-expenditure statement of the government.

“A single budget speech cannot solve all our problems, nor is the Union Budget the only instrument to do so,” said Union Finance Minister Pranab Mukherjee while presenting his Budget. This statement gives a window of hope to all aggrieved segments of the industry.

The corporate borrowers and others will vie with the over-spending government for the money in the system. This competition is bound to push up interest rates.

Will the government go back to former times and regulate the interest rates? This looks farfetched at the moment.

Home loans these days are linked to the variable interest rates. By moving over to the variable-interest rate-based home loans, housing mortgage providers often justify their asset-liability mismatch (where they lend for long-term while themselves borrowing for medium-term).

In a situation like this where there is a slowdown and a lurking danger of a rising interest rate, any housing loan firm will not sit in a comfort zone just because it has lent at variable interest rates. It is likely that the interest rates will have to be raised.

Borrowers, perhaps, will manage if the rise in interest rates lies within a reasonable band.

What if the rates rise faster and go beyond a band? Like the proverbial sword, an ever uncertain interest regime is holding the borrowers on edge.

What really is the remedy? It lies in opening up the long-term debt market. Insurance firms, pension funds and the like are the right candidates with resources to be led into the long-term debt market.

A robust long-term debt market will rid the sellers and buyers of the home mortgage products of the persistent worry over the oscillating interest rates.

The Finance Minister has haltingly moved to woo the salaried class with marginal sweeteners in the form of a small increase in personal income-tax exemption limit. Any savings made through this would be offset by range of things from rising petrol prices to possible increase in EMI.

There were widespread expectations that Mr. Mukherjee would increase the interest limit for tax concession on home loans. But he did not do that.

The Finance Minister did, however, bring some limited cheers to home loan providers by announcing an allocation of Rs.2,000 crore to the rural housing fund of the National Housing Bank (NHB).

In the absence of a long-term debt market, the Finance Minister could have at least let the NHB issue tax-free bonds to step up re-finance to banks and housing loan companies.

 

News Published Under: The Hindu

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