Skip to main content

What should you do with Home loans?

If you have mortgaged your home, true to the word's original Latin meaning, it could well end up being a pledge until death. The latest rise in the Reserve Bank of India's rates will result in banks raising their lending rates by 25-50 basis points. For the home loan borrower, this translates into ongoing loans extending for years beyond the original tenure or paying higher equated monthly instalments (EMI).

Since home loan rates have already moved 250 basis points up, existing borrowers will be hit the hardest.

Renegotiating: A borrower wishing to reduce the interest burden could look at renegotiating with his bank. Some banks and housing finance institutions do offer are deduction in interest rates to retain customers. The fee for restructuring could be anywhere between 0.5-1 per cent of the applicant's balance principal amount at the time. However, renegotiation would also mean the loan will be treated as a fresh one. Bankers say decisions will be taken on a case-to-case basis, with the reduction and fee charged being their discretion.

Balance transfer: An option for existing customers is to look at balance transfer, by moving to a new bank. Again, the loan is treated as a new one. Bankers do not encourage it, charging a 1.5-2 per cent penalty. They only allow entire prepayments without a penalty if you are able to prove it is from your own funds. They quote RBI reports to say there have been substantial rises in salaries, proof enough that interest rate rises can still be serviced.

If one is currently paying 11.50 per cent for a loan of Rs 80 lakh with a 20-year tenure, a drop of one per cent in the interest rate after the first year would lead to a reduction in EMI by Rs 4,100 and a total savings of Rs 50,000.

A new loan account will mean one-time processing fee and mortgage charges. Processing fees are Rs 5-10,000 for salaried persons and could be 0.5 per cent of the loan amount for self-employed individuals. Mortgage fees would be 0.2 per cent of the loan amount.

The new interest rate should be lower after considering all the transfer costs. Just aone per cent differential will not be enough.

Existing borrowers should transfer their loans from floating rates and link it to the base rate (new loans are all linked to the base rate since this regime was introduced; existing borrowers have to approach the bank to shift). This will reduce stickiness of the loan, an advantage when rates go down, as they inevitably will over the longterm tenure typical of a home loan. Most banks had a home loan-specific benchmark rate and the extent of change when rates cretion. It would enable a rise and fall in line with market conditions.

Strategy:  During the first few years of any home loan repayment, the interest component is higher. In case of a switch, customers would pay higher prepayment charges to their existing banks. But if the differential between transfer cost and old rates supports the cause, do it.

Customers in the middle of their loan tenure, mostly after five to seven years, could look at switches, provided the savings on the interest paid is substantial, versus the costs being borne by them. Opting for a balance transfer during the last leg of home loans may not be worth the shift. During this time, the EMIs go towards principal payments.

Those who borrowed under special rate schemes (fixed cum-floating loans) prevalent during the past two years would be able to sustain the rate rises for now. The special schemes offered low rates in their initial fixed rate regime for two to three years and they will only feel the impact of higher rates once they move to the floating rate regime. Such borrowers need not move at all.

Popular posts from this blog

NPS for Tax Saving

The NPS is a great way to save tax if you don't mind locking in your money till you retire. Till last year, the taxability of the NPS was a big issue. But last year's Budget changed the rules and made 40% of the corpus tax free. The PFRDA wants that the balance 60% to be exempt from tax as well. The emphasis is on increasing pension coverage. So, allowing EEE status (to NPS ) is our major demand (in the Budget NPS is especially useful for investors who may have exhausted the `1.5 lakh investment limit under Section 80C but want to save more.   Another way the NPS can cut tax is by rejigging the salary.If a company deposits up to 10% of the basic salary of an employee in the NPS under Section 80CCD(2d), the amount will be tax free. Turn to page 28 to see how much tax this can save. However, the take-home pay of the employee will come down. 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 10 Tax...

Liquidity Adjustment Facility

Liquidity adjustment facility (LAF) is a money market tool used by the central bank of a country (in India it is the Reserve Bank of India ), to infuse funds into the country's banking system when liquidity dries up. Again, in case there is excess liquidity, the central bank uses some tools to help banks manage their surplus liquidity. Usually the RBI uses the repurchase facility (called Repo ) to give short-term loans to banks to meet their temporary liquidity shortage. On the other, hand RBI uses reverse repo facility to help banks park their excess liquidity with it. Banks usually use various securities, which are approved by the RBI, as collateral when they take money from the RBI to meet their short term liquidity requirement     Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara...

BHIM App

What is BHIM? BHIM stands for Bharat Interface for Money , which is an easy way of transferring money from one bank account to an other via a smartphone using the Unified Payments Interface (UPI) platform . It is an instant payments application meant for sending money as well as requesting for payments. How is it different from UPI? BHIM is no different than UPI. But in the case of BHIM, customers don't have to download mobile applications of multiple banks, instead a single BHIM app downloaded from Android Play Store is sufficient. Other than that, payments can be made through a virtual payments ID or through account number and IFS code, same as UPI. What you need to use BHIM? BHIM can be used across an droid smartphones with version 4.0 and above, also it will be made available on iPhones and Windows smartphones very soon. Further, for feature phone users they need to use the USSD feature by dial ing *99#. Why was the need for BHIM felt when UPI is already in place? With various...

NRI from Canada and US Invest in Mutual Funds in India

Investing in Indian mutual funds by NRIs from US and Canada As of December 2016, eight Indian fund houses were accepting investments from US/Canada-based NRIs Most of the Indian mutual fund houses have stopped accepting funds from US and Canada based NRIs due to regulatory restrictions. This is because the Foreign Account Tax Compliance Act (FATCA) makes it compulsory for all financial institutions in the world to report comprehensive details of all transactions involving US/Canada residents, (including non-resident Indians) to the US & Canada Government. 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

BNP Paribas Balanced Fund New Fund Offer

 
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