Wednesday, 25 January 2017
Tuesday, 24 January 2017
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]
Friday, 20 January 2017
Wednesday, 18 January 2017
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]
Wednesday, 11 January 2017
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/]
Tuesday, 10 January 2017
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]
Monday, 9 January 2017
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