By Sunil Dhawan | ECONOMICTIMES.COM| Updated: Jan 04, 2017, 11.23 AM IST
The start of the new year may have something to cheer for the home loan borrowers. Several banks have significantly reduced the interest rates charged on these loans.
The State Bank of India (SBI) has lowered its home loan rate from 9.10 per cent to 8.60 per cent and ICICI Bank from 9.10 percent to 8.65 percent, HDFC at 8.7 per cent, with other banks set to follow suit. Effectively, home loan rate has come down by an average of about 0.4-0.5 per cent after these announcements.
Noticeably, SBI’s one-year MCLR is at 8 per cent which makes the spread on its home loan 0.6 per cent. So, even though the MCLR of banks have fallen, the actual home loans are not at MCLR. Still, the writing on the wall is clear – there is more room to cut home loan rates by the banks.
Borrowers on base rate should switch now
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
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.
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. Get 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.
Switching to MCLR in itself should help you save a substantial amount. In addition to switching the loan from base rate-linked to MCLR and thereby saving interest, prepare a systematic partial prepayment plan to further reduce the interest burden. It’s after all better to up your home-equity rather than making it a highly leveraged buy-out.
Neha Pandey Deoras,TNN | Sep 21, 2015, 06.46 AM IST | Times of India
In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined.For banks and NBFCs, the yawning gap between reality and aspirations is a tremendous opportunity . They are carpet bombing potential customers with loan offers through emails, SMSs and phone calls. Some promise low rates, others offer quick disbursals. Online aggregators help customers zero in on the cheapest loan and banks take less than a minute to approve and disburse loans. However, while technology has altered the way loans are disbursed, the canons of prudent borrowing remain unchanged. It still doesn’t make sense to borrow if you don’t need the money. Or take a long-term loan only to enjoy the tax benefits available on the interest you pay . Our cover story this week lists 6 such rules of borrowing that potential customers must keep in mind. Follow them and you will never find yourself enslaved by debt.
Don’t borrow more than you can repay
Don’t live beyond your means.Take a loan that you can easily repay .”Your monthly outgo towards all your loans should not be more than 50% of your monthly income,” says Rishi Mehra, Founder, Deal4Loans.com.
With banks falling over each other to attract business, taking a loan appears as easy as ABC. But don’t take a loan just because it is available. Make sure that your loan-to-income ratio is within acceptable limits. Take the case of Hyderabad-based Phani Kumar, who has been repaying loans right from the time he started working.
It started with two personal loans of `5 lakh six years ago. Then, he was paying an EMI of `18,000 (or 40% of his take home). Kumar took a car loan of `5.74 lakh in 2012, adding another `12,500 to his monthly outgo. Last year, he took a third personal loan of `8 lakh to retire the other loans and another top-up loan of `4 lakh. Today, he pays an EMI of `49,900, almost 72% of his take-home pay .
If your EMIs gobble up too much of your income, other critical financial goals, like saving for retirement or your kids’ education, might get impacted.Retirement planning is often the first to be sacrificed in such situations.
Keep tenure as short as possible
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years. If you take a `50 lakh loan for 25 years, you will pay `83.5 lakh (or 167%) in interest alone. “Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest the bank earns from you,” warns financial trainer P .V . Subramanyam.
Sometimes, it may be necessary to go for a longer tenure. A young person with a low income won’t be able to borrow enough if the tenure is 10 years. He will have to increase the tenure so that the EMI fits his pocket. For such borrowers, the best option is to increase the EMI amount every year in line with an increase in the income.
Assuming that the borrower’s income will rise 8-10% every year, increasing the EMI in the same proportion should not be difficult. If a person takes a loan of `50 lakh at 10% for 20 years, his EMI will be `48,251. If he increases the EMI every year by 5%, the loan gets paid off in less than 12 years. If he increases the EMI by 10% every year, he would pay off the loan in just nine years and three months.
Ensure regular repayment
It pays to be disciplined. Wheth er it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don’t miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life. Never miss a loan EMI. In an emergency , prioritise dues. You must take care never to miss your credit card payments because you will not only be slapped with a non-payment penalty but also be charged a hefty interest on the unpaid amount. If you don’t have the money to pay the entire credit card bill, pay the minimum 5% and roll over the balance.At an interest of 24-36%, credit card debt is the costliest loan you will take.
Don’t borrow to splurge or to invest
Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won’t be able to match the interest you pay on the loan.And investments that offer higher returns are too volatile. If the markets decline, you will not only suffer losses but will be strapped with an EMI as well. There was a time when real estate was a very cost-effective investment. Housing loans were available for 7-8% and real estate prices were rising 1520%. So it made a lot of sense to buy a property with a cheap loan. Now tables have turned. Home loans now cost around 10% while property prices are rising by barely 4-5%. In some pockets they have even declined.
Similarly, avoid taking a loan for discretionary spending. You may be getting SMSs from your credit card company for a travel loan, but such wants are better fulfilled by saving up.”It’s not a good idea to take a personal loan for buying luxury watches and high-end bags,” says Vineet Jain, Founder of LoanStreet.in. If you must go on a holiday, throw a party or indulge in luxury shopping, start saving now.
On the other hand, taking a loan for building an asset makes eminent sense.For instance, Mumbai-based Sandeep Yadav junked plans to go on a foreign holiday and instead used the money for the downpayment of a house, bringing down the overall loan requirement.
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of `50 lakh will not cost you too much.Banks push a reducing cover term plan that offers insurance equal to the outstanding amount. However, a regular term plan is better. It can continue even after the loan is repaid or if you switch lender. Moreover, insurance policies that are linked to a loan are often single premium plans. These are not as cost effective as regular payment plans.
Keep shopping for better rates
A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible. However, the difference should be at least 2 percentage points, otherwise the prepayment penalty on the old loan and processing charges of the new loan will eat into the gains from the switch. Also, switching is more beneficial if done early in the loan tenure.
The same applies to prepayment of loans. The earlier you do it, the bigger is the impact on loan tenure. The RBI does not allow banks to levy a prepayment penalty on housing loans but they may levy a penalty on other loans. Some lenders do not charge a prepayment penalty if the amount paid does not exceed 25% of the outstanding amount at the beginning of the year.
Source : http://goo.gl/ocTwU6
Go for angel or VC funding if cashflows are likely to be uncertain. Else, borrow from family and friends
Anil Rego | July 25, 2015 Last Updated at 22:04 IST | Business Standard
Financial planning is crucial for any entrepreneur. That’s because entrepreneurship is a high-risk choice that can impact one’s personal as well as family’s well-being. Once salary income stops, it becomes much more difficult to take care of regular expenses such as equated monthly instalments (EMIs) for repaying home loans. This is especially so if your spouse is not working. After assessing cash flow requirements, the next step is to realign existing assets to provide a monthly income. Look at the worst possible scenario and assess how much time you would give yourself to exit the business if it is not successful. It is advisable to plan for three to five years of monthly income, or till business cashflows stabilise.
By doing this beforehand, you will know the time you have to self-sustain the business, or abandon the venture and get a job.The financial plan should include both the business as well as personal life goals, since both are integrated with one’s financial well-being.
Cashflow is the lifeline of any business. Unlike salaried income, cashflow from business is likely to be irregular. You need to forecast the cashflow requirement not only for the start-up phase but also when the business grows to different stages. In the initial years, you may have to fund the operating expenses of your business as well as your family’s personal expenses.
For example, if your monthly expenses including EMIs are Rs 80,000 and your business requires Rs 1 lakh a month, you need to generate a monthly income of Rs 1.8 lakh. You may need to take a call on whether you are okay with eroding capital for a few years if the capital you have built is insufficient.Apart from regular cashflow required to manage operational costs, there could be major investments required in the form of capital. Further, capital infusion is not limited to the initial phase but every subsequent/new phase (like expansion). Entrepreneurs have to make sure that there is adequate capital available to avoid getting into a debt trap or losing out on potential opportunities. If you plan to fund these cash flow requirements from your own assets, it needs to get connected to your personal financial plan.
Debt forms a part of one’s financial plan especially while starting a new business. Typically, cashflows while starting a new venture are managed by borrowing funds. However, debt always has an impact on one’s monthly cashflow since it needs to be serviced regularly in the form of EMIs. The quantum of debt you take would depend on the cashflow analysis you have done. In the previous example, some expenses maybe required upfront and one may need to use debt instead of funding it from your investments. For example, apart from Rs 1 lakh of operating expenses per month, if you are servicing another Rs 50,000 of business loan EMI, then you need to plan for a monthly income of Rs 2.3 lakh per month. If the returns from your investment are unable to cover Rs 2.3 lakh, set a limit for your self on how much capital you can afford to erode.
Servicing debt can become difficult if cashflows are irregular. Thus if an entrepreneur has taken debt or borrowed funds and is regularly paying EMIs, he needs to create a contingency fund which can be in the form of a separate liquid fund or bank deposit. The corpus in the emergency fund can be equivalent to three to four months of monthly expenses and should be touched only during emergencies. If the loan amount is too high, it is advisable to take a risk cover which is equivalent to the outstanding loan amount in order to cover the liability in case of an unfortunate event.
The first place you can go to for borrowing is family and friends as this is unlikely to come with an interest component. However, if there is an issue with repayment, it could impact one’s personal relationships. Banks and NBFCs are options but may not give you loans in the initial stages of your business. So, it is advisable to take loans while you are still working. Mortgage loans are a good option as the interest rate is lower; so is loan against securities like shares. Personal loans, however, can prove costly and should be avoided. If cashflows are not very certain, it maybe a good idea to get equity funding for your business from angel investors or venture capital funds.
Managing investments is crucial. Let’s assume you had a financial portfolio of Rs 1.8 crore, giving a weighted average return of 12 per cent, or Rs 21.6 lakh a year. The portfolio is spread across bank fixed deposits (40 per cent), equity mutual funds (40 per cent) and equity shares (20 per cent). You will need to generate Rs 2.3 lakh a month (as mentioned earlier). As such, there would be a yearly shortfall of Rs 6 lakh which would result in an erosion of Rs 30 lakh in a five-year period.
This portfolio will need to be rejigged to ensure sufficient liquidity and generate returns high enough to replenish the fixed income portion. For this, part of the amount in fixed deposits can be put into liquid funds with a systematic withdrawal option. Periodically, gains from equity shares/equity MFs can be used to replenish the fixed income.
Illiquid assets like real estate or concentrated equity like Esops should be liquidated.
On starting a new venture you will be losing out on the health cover from the company that you had been working for; so it is advisable to have a family health cover. One could go in for a family floater health insurance policy of Rs 10 lakh or more. Sufficient life cover through a simple term plan is necessary to cover your loans. If your spouse is working and you are able to get cover by virtue of her company coverage, then this requirement would be addressed.
Source : http://goo.gl/pi1xeW
India Infoline News Service | Mumbai | December 26, 2014 19:16 IST | IndiaInfoline.com
The financial planners suggest the individuals to pick a term plan so as to cover the loan.
If you are finding the best way to save your home loan, then this article is for you. Here, we will discuss two options, term insurance policy, and home loan insurance.
One of the most important dreams in a person’s life is to buy his or her home. To fulfill a dream, an individual takes a home loan which puts the house on mortgage. The home remains with the lender till the time buyer doesn’t pay the complete loan amount. However, it is important to safeguard the property so that in the event of any accident the home remains with the family. The motive is achieved by a term insurance policy or home loan insurance.
The financial planners suggest the individuals to pick a term plan so as to cover the loan. However, there are other loan protection plans designed and offered by the insurance companies to take care of the outstanding home loans in the event of unforeseeable circumstances.
A loan insurance protection plan covers the balance amount to be paid in case of death of the borrower. The plan is specifically made for high-value mortgages. The premium rates are higher and depend on several factors including the loan amount, age of the borrower, the medical history of the borrower and the loan tenure.
The loan insurance cover acts as a surety to the lenders. The loan cover is bundled with the loan amount. The borrower can either pay the initial premium himself or he can get it funded from the lender. The options come with different tax implications. If the borrower pays the premium, he will be eligible for tax deduction under Section 10(10D) and Section 80C. However, if it is paid by the lender and is included in the loan amount, the borrower will not get any claim deduction.
A vanilla term insurance is a better alternative than a mortgage insurance policy. The term plans are cheaper and also provide high cover to the borrower.
The insurance provided by the loan cover will gradually reduce as the loan gets repaid. However, the insurance cover stays constant in a term plan. It will cover the outstanding home loan and will also meet the other financial requirements of the borrower’s family in case of unfortunate death.
The loan insurance is of little significance once borrower has prepaid loan. It is the same case when the sum assured declines with the time. It is the reason term plan should be considered over loan insurance.
Also, loan cover insurance is associated with a single premium option which implies that if the borrower prepays the loan amount, there will be no impact on insurance cover or premium. There will be other portability issues if borrowers want the loan to be refinanced by another lender.
In case borrower wants to increase the loan tenure due to hike in interest rates, the cover may not be sufficient to fully cover his home loan. Considering all the factors, it is clear that a term loan is better than home loan insurance.
By: CreditVidya | December 26, 2014 9:24 pm | Financial Express
It is one thing to get a home loan and a different ball game to repay the loan, the tenure of which may run over a decade. With such long period of commitments, it is bound to put a person in an insecure mode as anything can happen to the loan holder. To ease yourself of the worries, it is important to take an insurance to protect your life to cover this loan burden in case of any casualty. That way your family inherits your home and not your loan burden.
Buying a house is a big deal today simply because of the high expenses one has to incur while buying. It can be overwhelming in many cases, because you will have to literally pull out all your savings to get it. These days a lot of funding burden has been reduced thanks to the home loans. The lenders also offer you an insurance policy to cover your home loan in case something happens to your life. You have the choice to choose any insurance policy from any company and can say no the bundled offer which in most cases will be from a group company and might come to you at a higher premium.
When UR Simha, a Pune-based techie bought his house, he took a loan from HDFC. He also bought an insurance policy that was offered at the time of signing the loan documents. What he did not realize was that the insurance tenure was for five years and where as his loan was for 20 years.
“I did not even think of securing my life until they offered this insurance. It came at the last minute, so I did not think twice. I bought it anyways. Later, I got to know the details and features of competing insurance products were much better. I wish I had done some study before I paid the premium,” he said.
So what are the terms and conditions you should look for in such policies? Following are a list of features available:
Cover: Ensure that the term covers the entire loan value. Some of them cover applicant and the co-applicant. Choose what suits you the best.
Tenure: It always makes sense to buy a term insurance that covers entire life span of the loan
Premium: Enquire with all the insurance providers. Do not fall for the marketing gimmick of your lender who is trying to cross-sell a product.
You might find a competitor offering you similar terms for lesser amount.
Unemployment benefits: Some of these insurance policies also offer certain benefits in case of a job loss. They pay your EMI if you have been retrenched in your company. But please note that this is for a few months only and you have to provide a proof of being asked to leave along with the reason. So, if you have a job, which is prone to downsizing, it is a good idea to consider this kind of a policy.
Critical care benefits: Some policies also cover your home loan if you end up being in an accident and are bed ridden for life. In such cases the loan outstanding will be waived off. The premium might be a little higher but the benefits are proportional.
Covering the house: Most policies also cover your house and some of them give you additional benefit of covering the contents in your house. But the cover is subject to certain terms and conditions. So make sure you know what you are paying for.
Source : http://goo.gl/OKzYch