Top tips for buying House & Land

Purchasing Vacant Land

If you are planning to build immediately, or at least fairly soon, a construction loan might be the best option. Most lenders demand that building on a construction loan must start within a specified time, usually between one and three years, depending on which lender you use and whether the property will be owner-occupied or investment.

This mortgage type allows you to draw down segments of the loan amount in stages as they are needed – for the land purchase and then for the stages of construction – which saves you paying interest on the entire loan amount when you don’t need to be.

If you don’t plan to build immediately, and you want the loan for the land without any time pressures, a vacant land loan may be the best option.

While regular mortgage types can be used for the purchase of vacant land, most lenders also offer vacant land loans. Most will go up to a 30-year loan term and finance up to 90 per cent of the land’s value, and some go as high as 97 per cent loan-to-valuation ratio (LVR). Lenders’ mortgage insurance (LMI) would still most likely be payable on any LVR higher than 80 or 85 per cent, depending on the lender.

Construction Loans

If you are thinking of building your own home, you will need to be familiar with the ins and outs of construction loans.

Construction loans are not as straightforward as your usual home loans with proper Home Loan Interest Calculation. There are additional decisions to be made about the structure of the loan, additional documentation is required and the funding is released in an entirely different way.

Documentation

In addition to documentation about your finances, income and identity, your application for a construction loan needs to include contracts or tenders for the construction, as well as the plans so that a valuation can be performed.

Further documentation will also be required before the first payment is made from the lender to the builder, including a schedule of the payments to be made (called drawdowns), the builders’ insurance details and the final plans that have been approved by the local council.

Structure

To avoid having to contribute your full deposit and being charged interest on the entire loan amount from the moment the land purchase settles, you can split your mortgage into a land loan and a construction loan. At settlement of the land purchase, you pay LMI on the land loan (if LMI applies) and start being charged interest and making repayments on the balance of the land loan. The interest and repayments on the construction portion then kick in only as each drawdown is processed.

Funding

The drawdown schedule is very important, as you don’t start paying interest on each portion of the loan until it is paid to the builder – you, the lender and the builder need to be satisfied with the schedule.

For the lender to make each payment to the builder, you will need to fill out a drawdown request form from your lender, and submit it to your builder. The builder can then send the lender your form with an invoice for that part of the payment and, after the lender is satisfied that the work has been completed and is up to the standard expected in the valuation, the drawdown can be completed with a payment to the builder.

Any changes to the contract and plans can trigger a reassessment of the loan, so be as sure as you can be that the plans and contracts the lender sees are final, and it is also worth trying to pay for any small amendments from your own pocket, rather than changing the loan and risking a reassessment.

Problems can also arise when other work on the site that isn't completed by the builder needs to be paid for, as some lenders only make the remaining funds of the mortgage available after the completion of construction. While some builders will include subcontractors as part of the main contract, meaning that they can be paid by the builder as stages of work are complete throughout the drawdown schedule, others will not do this. Again, this may make it necessary to pay from your own pocket.

[Source: http://www.dreamfinancial.com.au/blog/top-tips-for-buying-house-land]

Things you need to know about housing finances

Emi Calculator

How best to reduce the burden of home loan prepayment

If you have a home loan, you may have often thought of repaying it, either in whole or in parts. What’s the best way to repay?

We receive a lot of queries from young double-income-no-kids (DINKs) clientele, whose primary and high priority goal is buying that “dream home”. On an average, one out of five clients asks such a question. They are usually in the middle of paying a home loan, or have booked an apartment and want to know which is the best method to fund it—through regular equated monthly installments (EMIs), or only interest payments for under construction properties.

What are the tax benefits that they can claim in both options? Whether the vested stocks they receive annually or the bonus they get should be directed to reduce their home loan liability? Which is the best EMI option: fixed or floating? Which option to choose when interest rates are rising or falling, and what is the fine print on “fixed interest rate”? These are just some of the questions that we receive on a regular basis.

Obviously there are many permutations and combinations, and each case is unique and requires individual analysis, calculation and guidance. The idea is to work out the best possible option for loan repayment, to enable the lowest impact of interest rate cost to the client.

Firstly, there are many ways to reduce the burden of a home loan—through prepayment (partial or full), by increasing EMIs, or shifting to another loan.

Some choose to foreclose an existing loan and take another loan with the same bank or another bank. This scenario works best in a falling interest rate regime. Mind you, there are costs associated with this, and every individual’s loan would involve weighing the pros and cons based on the client situation at hand.

Some choose to increase their EMIs (from the normal specified for a given rate of interest and tenor) to reduce the principal outgo, reduce the tenor, and thereby, reduce the interest charged by the bank. This choice is possible when other commitments such as child’s education are already being saved for or the goal has already been met. Some people prepay from the bonus that they may have received or other windfalls.

Let’s assume a client has taken a home loan a few years ago, and has a current outstanding amount of Rs.26,04,262 with a monthly EMI of Rs.36,407 to be repaid to the lender. The current interest rate on this loan is 11.75%, and the remaining tenor is 124 months.

There are four scenarios in which this Home Loan India can be repaid. The aim is to see which option works in the best interest of the client for a speedy closure and lowest cost incidence.

Scenario 1: We are assuming that the client makes no change in her EMI, and continues to make the monthly payment towards her home loan. The total interest to be paid for the remaining tenor of 124 months would be Rs.18, 99,000.

Scenario 2: We tweak the interest rate and reduce it to 10.50%, and assume that the client’s affordability hasn’t changed and she is paying the same EMI of Rs.36,407. Since, the interest rate is reduced, she can close the loan in 113 months, saving a total interest of Rs.3,94,000 over the remaining tenor of the loan.

Scenario 3: We further play with the numbers, and assume that the client will make prepayments towards the home loan from the annual bonus she receives. With the same EMI of Rs.36, 407 and assuming that the client and her spouse are able to make annual prepayments of Rs.2, 00,000 for a duration of five years, the total interest paid under this scenario will be Rs.10,49,147. And surprisingly, the loan will be completed in just 73 months, versus the original duration of 124 months. The total interest saved in this option, is a substantial Rs.8, 49,803.

Scenario 4: Lastly, we worked with the assumption that the client is able to increase her EMI to Rs.42, 000 per month (because of her annual pay hike). She will be saving a total interest of Rs.4,76,000 over the remaining tenor of the loan, and by doing this, the loan would completed in 96 months.

The result

After doing these calculations, we finally went back to the drawing board and provided the client with the analysis of our findings under different scenarios.

What we learnt was that maximum amount saved (Rs.8, 49,803) through interest was with the annual prepayment option. In this scenario, even the loan tenor came down to 73 months. But this is not a thumb rule. One must analyze factors such as the outstanding loan amount or the bank’s prepayment charges asked by banks. Apart from this, some banks also put a limit on the quantum of prepayment allowed in a year. Such clauses must be studied carefully. Then there are the client’s other goals to be seen—life insurance, healthcare, retirement planning, or even tax planning.

[Source: http://www.livemint.com/Money/DqhQ6uOxGDtpKyfEMElWwK/How-best-to-reduce-the-burden-of-home-loan-prepayment.html]

How to choose the best housing finance deal?

Home Loan

How interest rate increases will Impact you

December 14, the Federal Reserve raised its key short-term interest rate by a quarter-point, from 0.5% to 0.75%, which is still considered low. Most banks then raised their prime rate to 3.75% from 3.5%.

It was the second rate hike in 13 months. For most of the last decade interest rates were untouched, in an attempt to improve the economy after the financial crisis. If you applied for a credit card or even a mortgage, these low interest rates certainly helped.

The increase, which is subtle, wasn't entirely surprising, partly because 2016 has been a year of relatively robust economic growth. In fact, more than 2 million jobs have been created in the last year, and the unemployment rate fell to about 4.6%, the lowest it has been since the summer of 2007.

Low interest rates give consumers more borrowing power. When consumers spend more, the economy grows. Higher interest rate encourages people to save more, and borrow less, and reduces the amount of money in circulation. This slows the rise in prices. Learn more about how interest rates work.

One of the few surprises from the Fed's announcement is that in 2017, there may be two, or three, additional interest rate increases. JPMorgan Chase's head economist, James Glassman, offered this analysis:

“Ideally, the Fed's policies will prolong the current business cycle and keep the economy operating at its peak potential for as long as possible. In the past, the top of every business cycle has generated imbalances as the economy began to overheat. But as we approach the current peak, slightly higher interest rates may effectively discourage the creation of the asset bubbles and bad investments that could lead to the next recession."

Here's what the interest rate increase may mean for you:

Checking, savings, CDs & IRA CDs: Most banks will not automatically change deposit rates, because they aren't tied directly to the prime lending rate. The prime lending rate is used for pricing short- and medium-term loan products, such as credit cards and home equity lines of credit. (This infographic explains more about the prime lending rate.)The good news for people with savings accounts is that they may start seeing larger returns, at least in the long term.

Credit cards: Most credit cards carry a variable interest rate. So, credit card interest rates will likely go up—but modestly. It probably won't affect your ability to pay your bills each month.

Home Equity Lines of Credit (HELOC) and other variable-rate products: In general, the rate that banks charge on many HELOCs, it can be calculated through Online Emi Calculator and other lines of credit is a variable rate, so they will be affected, but only slightly since the rate hike is only a quarter point.

Adjustable-rate mortgages: These mortgages, often called ARMS, are tied to a different index which can change only at specific time periods, usually annually. The rate hike could cause your mortgage rate to increase on your next rate change date.

Existing fixed-rate loans: Interest rates on car loans, fixed-rate mortgages and other existing fixed-rate loans won't be affected. Currently, an average mortgage rate is about 4%. Going forward, that may increase, but mortgage rates vary from customer to customer, based on any number of factors.

[Source: https://www.chase.com/news/121916-interestrate-hike]

What’s a top up loan!

A top up loan basically allows you to avail a loan amount on top of your home loan. The usual loan tenure is about 10 years and is often offered only after a few years into the home loan disbursal, as this gives a fair idea about your repayment track record, which means no defaults down the line and this also increases your loan eligibility.

Vinita Mistry took a home loan from her friendly neighborhood bank two years ago. She bought a cute cozy apartment in a block of 60 apartments in a community enclave, which housed 300 apartments in all. At that time she did not have a four-wheeler and rode a trendy power bike to work, which was always parked under the stairway that went up to her 5th-floor apartment. She eventually moved office and upgraded to a gorgeous looking small car. Then she had a problem! Parking Space!!.

She figured she needed to buy that additionally apart from her apartment cost. She wished to take a loan to cover the cost of purchasing a parking slot. How can she go about this? Are you stumped like Vinita wanting more amenities or are you looking for some urgent funds, without expensive interest rates attached to it?  Well, a top up loan on your existing home loan might just be the answer. Let us understand the various nuances of a top up loan before you decide to shortlist this as an option.

How it works

A top up loan basically allows you to avail a loan amount on top of your home loan. The usual loan tenure is about 10 years and is often offered only after a few years into the home loan disbursal, as this gives a fair idea about your repayment track record, which means no defaults down the line and this also increases your loan eligibility.

The logic behind a top-up loan is the fact that you have already started repaying your loan, hence your outstanding loan amount with the bank has already begun decreasing with each payment. A top up just enables you to utilize that margin towards obtaining a loan that you may urgently require to meet some of your needs.

Utilizing a top up loan

Top up loans are a boon to people who are in urgent need of funds. It is almost like a personal loan, except that it comes with better interest rates though not as good as home loan rates but is based on the prevailing rack rates. You can utilize this loan for any purpose. A top loan on your existing home loan is an ideal choice to pay for your parking space or to fund your son’s higher education for instance.

Eligibility

You can take a top up only when you have a Loan for Home to top up on. The conditions for top up loans vary from bank to bank. You can approach the same bank in which you took your home loan but if your bank does not offer you the option, as some reserve the right to provide a top up, then you could shift the home loan to a bank that is willing to give you a good deal on the top up loan. Keep in mind that you need to have an impeccable repayment track record.

The outstanding loan amount pending with the bank, the market value of the property and your ability to repay a top up, are all taken into account to figure out how much top up the bank gives you. In fact the upper limit on the loan amount is defined based on these three aspects.  It is always ensured that the outstanding loan amount you owe the bank plus the top up personal loan does not increase beyond around 70% of the market value of the property. Also, each bank will have its own upper limit and the loan amount will be restricted accordingly.

Tax benefits

Tax benefits are dependent on the purpose for which the loan is utilized. For Vinita, the loan is for parking space, which is part of property acquisition. Hence, she would be eligible for a tax rebate on both the principal and tax repaid towards the top up loan capped at Rs. 1 L and Rs. 1.5 L respectively, which is inclusive of the rebate she would avail from her current home loan.

A sample calculation for Vinita’s top up loan

Let us assume Vinita has taken a loan of Rs.30 L at a 12% interest rate for a period of 20 years and as specified is now in her third year into the loan.

Let us make another assumption that from the time she purchased the property, the value has risen by Rs. 20 L, which pegs the current market value of the property at Rs.50 L.

70% of Rs. 50 L = Rs. 35 L (70% of the value is taken as the margin beyond which the loan will not exceed)

Next, the outstanding loan amount is deducted from the above figure:

Three years into the loan she would have repaid a principal amount of Rs.1.31 L

Remaining Principal amount to be repaid – Rs. 28.7 L

Rs. 35 L ( 70% of market value) – Rs. 28.7 L (principal yet to be repaid) = Rs. 6.3 L

Hence the maximum top up loan she will be eligible for based on this example, is Rs. 6.3 L.

However to avail a top up loan, factors like your repayment capacity based on your income and commitment towards any other loans other than your home loan etc., will be factored in before the bank decides on the exact top up loan amount they can offer you.

[Source: https://blog.bankbazaar.com/need-more-from-your-home-loan-take-a-top-up-loan/]

Why it makes more sense to switch your home loan after this interest rate cut

If not all then at least the old borrowers who have been servicing their EMI's based on the erstwhile base rate system of lending, stand to benefit. Even though bank's base rate hasn't come down as much, they now have a stronger reason to switch to the current MCLR-based lending. With the recent interest rate cuts on loans by banks the differential between base rate at which old borrowers are servicing their loan and the current MCLR is widening.

For those who had taken loans after July 1, 2010, but before April 1, 2016, the loans are linked to the bank's base rate. And for most of these borrowers, the home loan interest rate is around 10 per cent. After the recent rate cuts announced by banks, the average MCLR has fallen to about 8.75 percent or even lower. This differential of 1-1.25 percent in base rate and MCLR will help old borrowers to switch to MCLR and save on total interest outgo.

Why to switch now

The primary reason to switch from base rate to MCLR has to be the sluggishness seen in banks' passing on the benefits of RBI rate cuts to borrowers. RBI's repo rate cuts were not reflecting in the bank's base rate but are a part of the factors that goes into calculating the bank's MCLR so, the moment repo rate changed, MCLR was impacted.

Further, the MCLR takes into account the marginal cost of funds which includes the rate at which the bank raises deposits and other cost of borrowings. With banks flush with funds post demonetisation, the bank's CASA deposits (current account-savings account) have swelled and have given the banks the leeway to go for such major rate cuts.

The base rate, on the other hand, has seen only marginal reduction since last 24 months. Post demonetisation, banks are expected to wait and see the impact once the restrictions on cash withdrawals are removed. If the funds don't move out from the banking system in significant amounts, further rate cut is expected.

MCLR based borrowers

For the new home loan borrowers who have taken loan after April 1, 2016, there's not much immediate benefit from the recent rate cuts. For most MCLR-linked home loan contracts, the banks reset the interest rate after 12 months for their home loan borrowers. So, if someone has taken home loan from a bank say in May, 2016, the next re-set date will be in May, 2017. Any revisions by RBI or banks will not impact their EMIs or the loan till the reset date it is done through Home Loan Emi Calculator

What's MCLR mode of lending

A new method of bank lending called marginal cost of funds based lending rate (MCLR) was put in place for all loans, including home loans, given after April 1, 2016. Under the MCLR mode, the banks have to review and declare overnight, one month, three months, six months, one year, two years, three years rates each month.

Watch outs

In a falling interest rate scenario, quarterly or half-yearly could be a better option, provided the bank agrees. But when the interest rate cycle turns, the borrower will be at a disadvantage. After moving to the MCLR system, there is always the risk of any upward movement of interest rates before you reach the reset period. If the RBI raises repo rates, MCLR too, will move up.

Options for base rate borrowers

When the interest rate on your loan goes down banks, on their own, typically reduce the tenure automatically (instead of reducing EMI amount) and thereby, transfer the benefit of lower rate to the customers.

The base rate borrowers now have two options - switch to MCLR based lending with the same bank or else transfer i.e. get the loan refinanced from another bank on MCLR mode. One may also continue the loan on base rate, especially if the loan term is nearing the end.

The RBI has made it clear that banks should allow base rate borrowers to switch to MCLR. The existing loans can run till maturity or borrowers can switch to MCLR on mutually agreed terms.

Switching from base rate to MCLR within the same bank

It makes sense to switch if the difference between what you are paying and what the bank is offering now as MCLR is significant. And also in cases where the time for the home loan to finish is not near.

Switching loan from base rate to MCLR with another bank (refinancing)

If your bank is offering a high home loan interest rate (MCLR plus spread) then look for refinancing. Gets the loan refinanced from a bank offering a lower interest rate. You may have to incur processing fees. However, banks are not allowed to charge foreclosure or full repayment charges. Other charges may include lawyer's fees, mortgage charges, etc. Remember, the bank may ask you to buy a home loan insurance cover plan, which is not mandatory. Get the loan insured through a pure term insurance instead, in addition to any insurance that you already have.

[Source: http://economictimes.indiatimes.com/wealth/borrow/switch-home-loan-on-base-rate-to-mclr-to-cut-interest-burden/articleshow/56326321.cms]

Choose your best Financial Dream for your dream home

Housing Loan