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

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

WEALTH TAX

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 WEALTH TAX   WHAT CONSTITUTES WEALTH? For wealth tax purposes, "wealth" means property , urban land, car, jewellery , yacht, boat, aircraft and cash in hand in excess of Rs 50,000. CAUTION POINT | Do not think you will have an easy escape from wealth tax by transferring your `wealth' without consideration to your spouse or minor child. Such assets will also be considered as your wealth. HOW TO DETERMINE YOUR TAXABLE WEALTH Add the taxable value of the above assets (computed as per the detailed rules for valuation) owned by you as on March 31 (for FY 2014-15, it will be March 31, 2015). In case you sold your car during the year, it will not be taxable wealth. Deduct loans if any obtained by you to acquire any of the taxable assets from the value of gross tax out for at least 300 days in a...

Equity Savings Fund

Invest Equity Savings Fund Online   The best part about these funds is that they are subject to equity fund taxation and at the same time are structured like MIP like funds . This new category, equity savings funds , offer a little of everything. They allocate money to equities & equity related instruments, and fixed income. They aim to generate returns by diversification. Such funds invest in fixed income and arbitrage to protect the investors from short term volatility and equity for capital gains. The best part of these funds is that they are subject to equity fund taxation and at the same time are structured like MIP funds.   MIP funds however are subject to debt fund taxation. Investors Equity savings funds are suitable for the following: First time investors who seek partial exposure to equity with less volatility and greater stability Investors seeking moderate capital appreciation with relatively lower risk Those wh...

How to Pick Top Performing Mutual Fund Schemes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to Pick Performing Schemes  Funds that continue to stay in the top grade of performance over longer periods are the ones to bet on, advise investment experts   The mutual fund performance charts of the past few months make for an impressive reading. Funds across all categories boast of stellar returns. Sample this: The mid and small cap category has averaged 77 percent return over the past 12 months, with the best fund delivering a staggering 120 percent. The tax-saving funds also average an impressive 51 percent, including a fund which has soared 92 percent. Many of the table-toppers are funds of proven quality and track record. However, there are also schemes that are not that well-known. Some of these have rarely made it to the performance charts in the past, yet, of late, they bo...

8% Government of India Bonds quick guide

For those seeking comfort in safety of returns, the Government of India issued 8% savings bond once again comes to the fore. First launched in 2003, these bonds are issued by the government with a maturity of 6 years. The bonds are available at all times with specified distributors through whom you can apply to invest in them. Here is a quick guide to what the bond offers and its features to ascertain to check for suitability. What are Government of India bonds Government of India bonds are like any other government bonds with specified rate of interest. The rate is fixed at 8% per annum paid half yearly, or you can opt for cumulative payment of interest at the end of the tenure. You can buy these bonds from State Bank of India and its associates, other nationalized banks and some private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd, among others. The bonds can be bought from the offices of Stock Holding Corporation of India as well. They are available in physical form onl...
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