With interest rate-cuts and increased liquidity with banks following the demonetisation, loan products have more accessible.
Adhil Shetty | Published: May 11, 2017 4:02 PM | Financial Express
Consumers with healthy credit scores today would be receiving loan offers aplenty. With interest rate-cuts and increased liquidity with banks following the demonetisation, loan products have more accessible. Yet availing a home loan for the very first time remains a complex experience that loan seekers view with trepidation.
There are often misconceptions about what a home loan can do, and what it costs. For instance, you may be of the belief that the loan granted will match the property price. That is untrue, as financial establishments expect you to pay the margin amount.
The margin amount is another term for down payment for your new home. It could be anything between 15% and 20% of the home’s net value. For a first time home buyer, it is no easy task raising this money.
Here are some ways to help.
1. Strategic savings
Nothing beats strategic savings and for this you need to start your planning early. It involves you visualizing your long-term fund needs—including the need to buy a home—and beginning to save and invest accordingly. Begin with simple and accessible investment tools such as mutual funds or recurring deposits. Slowly and surely, you’ll be able to build your deposit over time. You can be efficient at this by locking in your savings at the start of the month. The earlier you start, the sooner you build this fund for your down payment.
2. Take loans but exercise restraint
There could be a situation where you are in urgent need of funds for the down payment. You could consider taking a personal loan to meet the need. Yet, you need to do this in a controlled manner. Having an existing loan will reduce your ability to take on, and repay, additional loans such as a home loan. You would find your finances stretched as you attempt to pay two EMIs at once. This isn’t an ideal situation to be in and is recipe for a financial disaster, in case you were to temporarily lose your ability to generate income. Therefore any loans for down payments need to be taken thoughtfully, and settled as soon as possible to reduce monthly EMI liabilities.
3. Mortgage another property
If you are confident that your current income can take care of EMIs of more than one loan, you could consider a loan against property. You can claim this loan against several options. For example, an existing property or home could be mortgaged. You could also claim it against assets such as shares, jewelry, PPF account, and LIC policies. There also exists the option of taking a loan against rent.
4. Withdraw from your PF account
As per the new EPFO norms, you are now allowed to withdraw up to 90% of your EPF corpus. Not just that, you could also withdraw from this corpus to pay for your EMIs. This scheme was recently implemented keeping in line with the Housing For All initiative of the central government. A word of caution: your PF corpus is meant to help you generate a pension income in retirement, so if you intend to redeem it for a property purchase, you must replenish it soon, or create a backup pension fund to meet your future needs.
5. Deferred down payment
You have the option of requesting a deferred down payment when purchasing a house from a well-known property developer. Under this, you will have the choice of dividing the down payment into multiple instalments. These instalments can be paid over a jointly agreed period of time. Let us say that you have to make a down payment of Rs. 10 lakh. Ask the builder for a time frame of five months to pay Rs. 2 lakh per month.
6. Liquidate your investments
Before you decide to make a property purchase, take stock of your savings, investments and assets. Anything from a vehicle to a part of a property you own can be liquidated for a down payment. Bank deposits, gold, mutual funds, shares etc. can be disposed. This should be carefully done so as to not disturb other financial objectives.
7. Approach an NBFC/ HFC
Non-Banking Financial Companies (NBFCs) and House Finance Companies (HFCs) provide loans that can help you cover a larger part of your fund requirement. For example, they may provide a loan to cover your registration and home repair costs as well. The entitlement of the loan, of course, will be calculated on the basis of your ability to repay.
Always remember to not act in a hurry. Think long and wise about the route you are taking to raise the down payment for your house. It is also advisable to wait and let an offer go if you cannot make the down payment, as there will always be another good offer in the future.
(The writer is CEO, BankBazaar.com)
Source : https://goo.gl/8ixiEW
Buying a home early in life helps home buyers.
Kishor Pate CMD, Amit Enterprises | Retrived on 12 July 2016 | Moneycontrol.com
There are lots of arguments for and against buying a home early in life, but the rationale for doing so is, in fact, the strongest and most convincing.
1. In the first place, the longer the tenure of a home loan, the lower the EMIs are. EMIs are calculated on the basis of the loan amount and how long the borrower can logically repay the home loan. In India, the retirement age is 60, and banks will consider this as the age by which the borrower must under any case close the home loan if he or she has not done so already. The longer one defers the decision to avail of a home loan to buy a property, the bigger the EMIs become.
Also, it is easiest to get approved for a home loan when one is young. Lenders are eager to provide home loans to young people because they are at the beginning of their careers, and will doubtlessly grow in them over the ensuing years. Their financial viability – and therefore their future ability to service a home loan – is therefore at its highest point.
2. In fact, the eligibility for a home loan is even higher for young married couples taking out a joint home loan. This is by far the most desirable lending scenario for banks. They are assured that two instead of only one income stream will back the home loan proposal, and the fact that two instead of one borrower are involved decreases their risk. Taking a joint home loan also helps a couple to close down the financial commitment of a home loan much faster, allowing them to focus on other investments earlier in life.
3. Another advantage of purchasing a home early in life is that it becomes easier to pay off the outstanding amount on a home loan with accumulated savings later in life. This opens up the opportunity to upgrade to a bigger, better-located home is the future – which is what most Indians aspire to do at some point.
4. Today, many newly-married couples are deferring their plans to have children until they have had a chance to enjoy some unfettered years together. Such a decision also works very well for such couples from the point of view of home purchase. It means that they can make a big down payment on their home before children and their education become an additional financial responsibility. A bigger down payment reduces the EMI burden, meaning that they can close their home loans faster.
5. It is also important to note that the earlier one buys a home, the longer it has to appreciate in value. Given that the annual appreciation of a well-located residential property can be to the tune of 15-20%. This results in a huge incremental increase of the investment value of such an asset.
6. It also makes much more sense to invest one’s hard-earned money in an appreciating asset rather than pay monthly rentals for which there are no returns at all. Repayment of a home loan also brings with it the financial advantage of income tax breaks. These are an added benefit which the Indian Government has provided with the express purpose of encouraging young citizens to invest in self-owned homes and thereby safeguard their and their children’s future.
7. Finally, it makes much more sense to pay monthly EMIs on a home loan, into an investment-grade asset, rather than pay monthly rent which is nothing but an expense with absolutely no returns on investment.
The above reasons should present a convincing argument for making the important decision of buying a home early in life. The New Age ‘logic’ that it is better to live on rent simply does not hold water if one considers the multi-faceted advantages of investing in a self-owned home while one is young. It is true that it requires financial discipline to service a home loan, but this very desirable quality can never come too early.
Source : http://goo.gl/iGEZw9
Some of the important factors that you must take into account if you are thinking of buying a house after 50 years of age by taking a bank loan.
By: Naveen Kukreja | Updated: May 13, 2016 10:31 AM | Indian Express
Rakesh Kumar, a railway employee in his mid-50s, never had to worry about buying a house. He had a transferable job and hence, his employer took care of his accommodation. Now that he was nearing his retirement, it was important for him to buy a flat. To his surprise, his loan application was rejected by several banks on the grounds that the majority of his loan tenure would fall in his post-retirement life.
Most of us tend to save for the down payment of a home loan after taking care of other financial goals such as children’s education and marriage. However, most people don’t take into consideration the fact that bankers may hesitate to approve loans once we cross 50, owing to our limited source of income.
Here are some of the important factors that you must take into account if you are thinking of buying a house after 50 years of age by taking a bank loan.
Your income is one of the most important criteria to judge your loan application. The possibility of loan approval increases if your pension is large enough to accommodate home loan EMIs. Usually, lenders prefer EMIs to be less than 40–50% of your monthly income. Also, EMI outgo on any existing loans will be subtracted from the total income while evaluating your loan repayment capacity. Consider including your spouse or working children as co-applicants of loan if your pension is not large enough to support EMIs.
Your credit score plays an important role in your loan approval process. A lower credit score can dampen your chance for securing a loan. Avoid applying for loans with too many lenders at the same time; this may reflect negatively in your credit score.
You can offset the disadvantage of your age by using your existing investments as collaterals for your home loan. Investments made in bank fixed deposits, mutual funds, NSC, KVP etc improve your loan eligibility, as the lender will have something to fall back on in case you fail to pay back the loan.
This is the amount that you will shell out of your own pocket to avail the home loan. Usually, lenders require you to pay 10–25% of your property value as down payment. They also consider age and repayment capacity to fix the down payment amount. Opt for a higher down payment, depending on your affordability. This may result in lower EMIs.
Type of loan
Based on the interest rate, there are two types of home loans — floating and fixed-rate. The interest rate for fixed-rate home loans remains the same during the entire tenure of a loan, while the interest rate for floating-rate loans varies according to the MCLR set by the bank. Although the floating-rate home loans work in your favour in case of a declining interest rate regime, the reverse is true during a rising interest rate regime. Some lenders have come up with a mixed variant where the interest rate is fixed for a predetermined period, following which it becomes a floating one.
As your income in your post-retirement life will remain somewhat fixed, an increase in EMIs due to an increase in interest rate may adversely affect your monthly budget. Therefore, opt for a fixed-rate loan to ensure a certainty in your cash outflow in your post-retirement life.
Generally, the tenure of home loans can be as high as 30 years. However, as lenders expect borrowers to complete the loan repayment before reaching 65-70 years of age, you may not be able to avail such lengthy tenures. Opt for a loan with a short tenure to reduce your interest payout. However, keep your cash flows in mind as a short-tenure loan will result in higher EMIs.
This penalty is levied when you pay the entire outstanding loan balance or a part of it before the completion of your loan tenure. However, this penalty is only applicable in case of fixed-rate home loans. Opt for prepayment of home loans (if your finances permit) as it results in reduced interest cost as well as a reduced EMI/loan tenure. However, do not use your retirement savings to prepay your home loans.
To sum it up, your monthly income, credit score, post-retirement income in the form of pension or annuities, and existing investments or properties will play a major role during the loan approval process. The other factors discussed will help you to bring down the interest cost of your loan and optimise your cash flows in your post-retirement life.
The writer is CEO & co-founder, Paisabazaar.com
Chandralekha Mukerji | Apr 25, 2016, 05.13 AM IST | Times of India
It is the time for annual appraisal letters and the bonus. Many of you might have got your tax refunds too.
While you may be happy to have some extra cash, handling it can be tricky. You need to juggle multiple aims and concerns to maximize your yearly perk. Here are suggestions for getting the most from that extra money .
OPTION 1: Reduce your debt burden
Before you start investing your surplus, pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt in the order of interest rates. The ones with no tax benefits and higher interest cost should be paid off first. Loans that offer tax benefits should be the last on your list.
OPTION 2: Invest in National Pension Scheme (NPS)
Upto Rs. 50,000 invested in the NPS, under Section 80CCD (1b), can be claimed as deduction, over and above the Rs1.5 lakh investment deduction limit under Section 80C. At the highest tax bracket of 30%, this could mean a savings of Rs 15,000 on your next tax bill. Under NPS, it is mandatory to buy an annuity plan with 40% of the corpus at maturity . The remaining 60% can be withdrawn. The Finance Minister has made withdrawals up to 40% of the corpus tax exempt, adding to NPS’ appeal.
OPTION 3: Increase equity exposure
The Sensex has fallen around 12% in the past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and use a systematic transfer plan to move the money into equity funds. You could also earmark this corpus for a goal that is 5-10 years away. For instance, you can use the money towards increasing your down payment for an asset purchase and reduce your future loan burden.
OPTION 4: Invest for your daughter
If your daughter is less than 10 years old, Sukanya Samriddhi Yojana (SSY) is the best debt option to invest in for her future. At 8.6% yearly compounded rate, this is among the highest paying small savings schemes. Investment in SSY is tax deductible under Section 80C, and you can invest up to Rs1.5 lakh per financial year. The principal invested, the interest accumulated and the payout are all tax-free. However, you have to stay invested till your child turns 21.
OPTION 5: Build corpus to buy a house
An extra Rs. 50,000 in tax break has been introduced for first-time home buyers where loan amount is less than Rs 35 lakh and the property’s worth is not more than Rs 50 lakh. Use the bonus to increase the size of your down payment. It will bring down your loan requirement, which means lower EMIs and, if it falls below Rs 35 lakh, there’s the extra tax benefit as well. Put the bonus in an income fund if purchase is less than a year away.
OPTION 6: Build an emergency corpus
If you do not have an emergency fund, you should use your bonus to build one.You should invest the money in highly liquid options such as short-term debt funds. The corpus will help you manage sudden, unplanned expenses.
Source : http://goo.gl/QPXcFx
STEVEN FERNANDES, Proficient Financial Planners | Source: Moneycontrol.com
Take stock of your liquid investments and your monthly income. This will give you an idea of how much you have to arrange. Rely only on safe debt fund to save money for down payment
Life’s biggest financial decision is buying a house and therefore it requires lot of calculated planning in advance to avoid any regrets later on. Considering the escalated property prices, most houses or flats would necessarily have to be purchased with the help of a housing loan. Assuming that the preferred location is identified, the next thing to do is to decide on a budget which should include the price of the property and other charges like stamp duty, registration charges, Vat, etc. Let’s assume that Akash (34) and Avni (33) are presently staying on rent and they have planned to buy an apartment after 2 years in a desired locality costing Rs. 70 lakhs today. Considering a 10% increase in price, the estimated price of this apartment after 2 years will be Rs. 85 lakhs. The couple’s monthly income is Rs. 125000 and they have the following financial assets as of now.
Assets Value (Rs)
Savings account ==> 350000
Fixed Deposits ==> 1000000
Equity Mutual funds> 400000
Monthly Income Rs. 125000
Monthly Expenses Rs. 55000
Monthly Surplus Rs. 70000
1. Deciding the amount of loan that needs to be taken.
While most banks provide loan up to 85% of property value, you need to first check the EMI that you would be most comfortable with rather than decide based on what the bank is offering. For example, in the above case, after taking care of the monthly expenses, the couple have a surplus of Rs. 70000 per month. They can comfortably opt for upto 45% of their net monthly take home salary as EMI which comes to Rs. 56250. This will enable a loan of approximately 52 lakhs for a tenure of 15 years at 10% interest. Now the couple is clear that they need to arrange the down-payment which is Rs. 33 lakhs in 2 years’ time.
In some cases, where people don’t have any substantial investments to make the down-payment, they go for a higher loan component thinking that the higher EMI will pinch in the firsts year but with salary increase expected going ahead, servicing the high EMI will become manageable. They need to be prepared to reduce their lifestyle and rework on their expenses as the salary increase might get delayed. In case you have a good amount of investments, then you could work vice versa and add up your investments to see how much is the gap and then decide on the loan amount.
2. Planning to arrange the down –payment
It is during this time that a list of all the available financial resources is made by most couples and accordingly all the liquid resources like savings account, fixed deposits, gold, mutual funds are considered to make the down-payment. Care should be taken to ensure that you maintain funds separately for at least six months of contingency and any short term goals. Rest of the funds can be considered for the down-payment. In our given example, the savings account balance is maintained for contingency and mutual funds are also maintained separately for interiors and other post possession expenses.
In the above case, fixed deposit can fetch Rs. 12.60 lakhs @ 7% post tax interest and the balance required now is Rs. 20 lakhs for which the couple will have to invest Rs. 78500 per month in liquid funds and recurring deposits (50% each). Budgeting becomes very important during such times and reducing expenses becomes crucial.
Whenever down-payment is to be made in less than three years time frame one should invest on a monthly basis in debt instruments only like liquid funds, ultra-short term funds or recurring deposits. Do not invest in equity funds or stocks thinking that you will get better returns in 2-3 years which will reduce your loan amount. One needs to play extremely safe when dealing with short term investment, especially for a home. Gold invokes a lot of sentiments but for such an important goal, one needs be prepared to use a part of it to shore up the down payment.
3. Borrowing from family/relatives
If you are falling short of down-payment amount by a few lakhs, do not hesitate to borrow from your close family members as most would not even charge any interest on that loan. Secondly you will get some time to pay off the loan as per your convenience. I have come across several people who explored this option and took a soft loan either from their in laws, siblings or close cousins. Take this as the last option.
4. Other things to consider
Since most people utilize their entire life’s savings for buying a house, they could be running low on liquidity in case any adverse event such as medical emergency were to take place. Therefore one should be adequately covered for health and life cover or review one’s existing covers when buying a house.
Steven is a member of The Financial Planners’ Guild , India ( FPGI ). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.
Source : http://goo.gl/4YzFkL