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

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...
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