Skip to main content

Home loans - Low interest rates

Low interest rates in the initial period of the home loan do not necessarily mean low interest outflow. In view of the prevailing home loan schemes

 

BAFFLED by the mumbo-jumbo of home loans when you are already lost on the choice of home? Don't want to be trapped by the gobbledygook in agreements? We ran through a host of offers made by mortgage lenders in the last few weeks, mainly from the outgo point of view over the lifetime of the loan. And it showed, the best deal for you, is from the nation's biggest, State Bank of India.

 Most of the schemes discussed below offer home loans at fixed rate in initial years and switch to floating interest rate in later years, which matters the most for total interest outflow. The schemes differ from each other in terms of the spread once it become floating, prepayment charges, and in terms of other qualitative factors like the speed of processing the application, documentation requirements and time taken to disburse funds. But what matters above all is saving a few lakh rupees by paying lower interest. For the current analysis our focus is on the overall interest outflow.

THE SCHEMES:

State Bank of India offers Easy Home loan scheme under which the interest rate is fixed at 8% for first year and 8.5% for next two years for a home loan above Rs 5 lakh and upto Rs 50 lakh. Most of the public sector banks are currently offering home loan scheme on similar lines.


   Till a week back it was only the PSU banks that were offering fixed rates but now, even private banks have joined the fray. HDFC, the largest housing finance company, is now offering loans where interest rate is fixed at 8.25% till Dec 31, 2012, irrespective of the loan amount.


   Post 2012 this will be subject to floating rate prevailing at that time which is hard to guess even for experts. The catch is that no fixed spread is assured for the later part of the loan tenure and the time frame for making a loan application is also just about a month.


   Recent entrants in this price war are ICICI Bank and Kotak Mahindra Bank. ICICI is also offering home loan at fixed rate of 8.25%. But this is for first two years and then it will be 3.5% below its prevailing Floating Reference Rate (FRR). This is applicable for loans above Rs 20 lakh and upto Rs 50 lakh. Kotak Mahindra Bank meanwhile launched fixed-to-floaty loans where interest rate is fixed at 8.49% in first 30 months (2.5 years) and floating rate thereafter, which is relatively higher compared to its peers. Nevertheless, a spread of 5.5% below PLR is assured. But since its current PLR of 14% is at a higher end amongst the group, it does not look an attractive bet. Thus not considered for the detailed analysis.

ASSUMPTIONS:

Historical trend suggests one interest rate cycle lasts for about six years. Considering this, three interest rate cycles would be witnessed over a 20-year tenure of the loan. So post the fixed interest rate regime (3 years for most schemes), we have assumed two years as buffer for the peak interest rate. Assuming rates may peak in 2012 so for HDFC it could be 15.5% from the current 13.5% (25 basis points increase in every quarter starting June'10 till March'12). Hence floating rate (FR) would be 13% for the fourth and fifth year (based on past track where FR is 2.5% less than PLR). Similarly for SBI, this would be about 10.75% for the interim two years.


   Hence, sixth year onwards, we have considered these factors while arriving at the floating rate average range of 10.25-11.25% for the later part of the loan tenure. For loans above Rs 30 lakh, the interest rates charged are 50-75 basis points higher and are also subject to lower spread once the rate becomes floating.

MAKING THE CHOICE:

One should not opt for a scheme based on the rates offered in initial years. An important factor to note here is the total interest outflow over the life of the loan, although sales pitch could be on "customer service" and other subjective issues. These calculations may differ when it is done on daily reducing balance as compared to quarterly reducing balance, however broad numbers will remain the same.


   For a Rs 30-lakh loan, the maximum interest outflow is Rs 42.5 lakh under HDFC's scheme as against Rs 42 lakh under ICICI's scheme. Besides ICICI, SBI's offer is the cheapest with just Rs 38.3 lakh interest outflow over 20-year period. On a monthly basis the difference in SBI and HDFC and ICICI's EMI is just Rs 468. But this is only in the first year.


   As HDFC has not specified the spread in latter part of the tenure, additional EMI more than makes up for the initial lower interest rate. Though ICICI comes little lesser than HDFC, if you include the implicit cost of prepayment charges and convenience of service, the difference become insignificant.


   Similarly for Rs 60-lakh loan, SBI's 'Advantage home loan' is a notch over other schemes. The next best option in this category is ICICI's dual rate product. SBI results in interest saving of Rs 3.49 lakh over ICICI scheme.

THE DECISION:

Based on the given analysis, SBI's 'Easy Home loan and Advantage Home loan' look better than other schemes in both the Rs 30 lakh and Rs 60 lakh category. Though private players are offering lower interest rate for first three years, they make up for the lost money in the later part of the loan.


   So, before applying for any offer one must verify the details and not just go by absolute numbers in order to avoid agonising over the decision in the future.

Popular posts from this blog

Rs 14,000 Crore worth of tax free bonds coming soon from NHAI , PFC

  NHAI, PFC file prospectuses, coupon rate not yet decided MORE debt investment options have opened up for investors with AAA rated tax-free bonds worth over Rs 14,000 crore lined up. The National Highway Authority of India ( NHAI ) and Power Finance Corporation ( PFC ) are offering Rs 10,000 crore and Rs 4,033.13 crore worth of tax-free bonds, respectively, as per prospectuses filed with the Securities and Exchange Board of India (Sebi). Of a Rs 5,000 crore issue by PFC, Rs 966.87 crore has already been raised through private placement on September 28 and November 1. Tax-free bonds give investors tax-free return on any amount invested. In another kind of bonds, the long-term infrastructure bonds, investments up to Rs 20,000 are tax exempt, that is this cap amount can be deducted from the taxable income. Accordingly, the NHAI prospectus has clarified that only the amount of interest from -and not the actual investment on -its new bonds will be tax-free. "NHAI's publ...

Change in Fund Manager for some of HSBC Mutual Fund Schemes

Buy Gold Mutual Funds Invest Mutual Funds Online Download Mutual Fund Application Forms Call 0 94 8300 8300 (India) However, this facility is only available to Unit holders who have been assigned a folio number by the AMC.   HSBC Mutual Fund has announced that the below mentioned schemes shall be managed by the new fund managers as stated in the table. The effective date will be July 02, 2012.   Amaresh Mishra 's will be Vice President and Assistant Fund Manager. Having done a Post graduate diploma in Business Management and Bachelor of Chemical Engineering, he has over seven years of experience in Equities and Sales.   Mr. Piyush Harlalka's designation shall be Vice President- Fixed Income. Qualified as a C.A., C.S. and holding M.B.A.( Finance degree), he has over six years of experience in Fund management and ...

How EEE and EET Tax affect Retirement Investments

  An important factor while choosing a financial product is its taxation , and for retirement savings, this is even more important as the sums involved are usually life-long savings. Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS). EPF The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act , which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond th...

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family. Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss. The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance. The policy is tailor made to individual requirements and needs. The sum insur...

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now