Tagged: Overdraft

ATM :: Home loan overdraft accounts squeeze banks

Mayur Shetty | TNN | Updated: Jul 2, 2018, 14:40 IST | Times of India


MUMBAI: Well-heeled borrowers are parking larger amounts in their home loan overdraft account after running out of options for generating high returns. This has prompted lenders to hold back on offering this product to new customers.

The home loan overdraft facility allows the borrower to use the advance as a savings account and transfer surplus funds there. The advantage is that no interest is charged on the home loan to the extent of the extra money kept in the account.

But lenders are unhappy with more money being parked there as they lose out on interest income, while having to make all provisions required for outstanding loans. Traditionally, middle-class borrowers would use any additional funds to prepay loans, while savvy investors would avail of an overdraft facility and park surplus funds there. Kept temporarily, this surplus would be used for another investment.

Now, with both financial markets and real estate in a sluggish state, the idle funds in these overdraft accounts are rising. “If a substantial part of the loan amount is parked in the overdraft account, the bank loses money as there is no interest income but all attendant costs — commission to agents and provision costs — are there,” said a senior official with State Bank of India (SBI).

While banks are not withdrawing the product, they are putting additional conditions to apply for it. Some banks are refusing to take over loans where the customer has parked more than half the loan amount in the account. Others are not offering the loan for smaller amounts. Yet another multinational bank is charging an annual fee on the unused balance.

Sukanya Kumar, founder of RetaiLending.com, which acts as a direct selling agent for many lenders, said, “This is a strange situation where the banks have a product but they do not want to offer it to a customer. Even if they insist on a higher loan amount today, what will they do if customers park more funds in their account?”

Even otherwise, the overdraft version has traditionally never been pushed the way home loans are sold. It was initially offered by multinational banks to their wealthy borrowers to differentiate themselves from other lenders. This was soon picked up by private banks ICICI Bank and Axis Bank, and even state-owned SBI. Most of the multinational banks — including Citi, HSBC and DBS — are offering this to customers. Banks that have shifted focus to retail like IDBI Bank and IDFC Bank are also providing this product. But even as the number of banks has increased, lenders are becoming choosy.

Source: https://bit.ly/2MD9HRE

ATM : 5 ways to leverage your house to fund your goals

By Bindisha Sarang | ET Bureau | 8 Jun, 2015, 08.00AM IST | Economic Times


Here are the ways in which you can leverage your property to fund your goals.

1) Loan against rent receivables This loan is taken against the future rental income of a residential or commercial property.

LOAN AMOUNT: 55-85% of the receivable rent for the residual lease tenure, subject to a maximum limit, usually Rs 10 crore. TENURE: Maximum of 10 years or residual lease period, whichever is lesser. RATE: 11.75-14.5% PROCESSING FEE: 1-2% of loan amount.

2) Top-up loan This loan is taken in addition to an existing home loan.

LOAN AMOUNT: Equivalent to originally sanctioned home loan, subject to a maximum limit, which varies for banks. It can also be calculated as percentage of the market value of property, minus the outstanding home loan. TENURE: Up to 20 years; can also be linked to original home loan. RATE: 50-200 basis points more than your existing home loan rate. PROCESSING FEE: 0.35-1% of loan amount.

3) Home equity loan Such a loan allows you to borrow against the value of your residential or commercial property.

LOAN AMOUNT: 50-65% of the current property value. TENURE: Up to 15 years. RATE: 11.5-15.5% PROCESSING FEE: 0.5-1.5% of loan amount.

4) Overdraft against property This option lets you take an overdraft against your property.

LOAN AMOUNT: Up to 65% of the value of the property, subject to a maximum limit. TENURE: Up to 10 years. RATE: 12-14% PROCESSING FEE: Up to 1% of loan amount.

5) Reverse mortgage The property owner can borrow against his home equity and get regular monthly payments or a lump sum.

LOAN AMOUNT: 45-65% of the current value of the property, subject to a maximum limit. TENURE: 15-20 years RATE: 11-13% PROCESSING FEE: 0.25-0.5%

Source : http://goo.gl/ovtmV9

ATM :: Use offset loans to reduce interest costs

Harsh Roongta | May 11, 2015 Last Updated at 00:07 IST | Business Standard


“We are a working couple and looking for a loan of Rs 50 lakh. We can repay the loan in five years time, from our annual bonuses. But, we are being forced to take a 20-year loan as we cannot afford the monthly EMI of a five-year loan”

This kind of query is very common among the young clients I meet. The EMI for Rs 50 lakh loan at the rate of 10 per cent is Rs 1.06 lakh for five years and only Rs 48,000 for 20 years – more than 50 per cent less. With the removal of prepayment charges on floating rate loans, many are able to make lumpsum payments without any prepayment charges and, thus, achieve their purpose of paying off their home loan early.

One solution: There are products called offset loans. Each bank has its own brand name for these products. They are currently available from a limited number of banks, namely, Bank of Baroda (Home loan advantage), Citibank (Home Credit), HSBC (Smart Home), IDBI Bank (Home Loan Interest saver) PNB (flexible housing loan), SBI and subsidiaries (Maxgain), Standard Chartered Bank (Home Saver) and Union Bank (Smart Save).

They work by linking a bank account with your regular home loan account. You can make a deposit and withdraw from this linked bank account like any other regular one. The difference comes at the end of month, when the EMI you pay is split into interest and principal. The average balance in the linked bank account is deducted from the principal loan amount due at the beginning of the month. The interest is calculated on this reduced principal and the balance amount is allocated towards paying off the principal.

Abroad, these kinds of loans are popularly referred to as “offset loans” as the balance is the linked account offsets the home loan amount.

An example will explain this. An offset loan of Rs 10 lakh is available at an interest rate of 10 per cent for a tenure of 20 years In this case, the monthly instalment works out to Rs 9, 650. Let’s the loan is disbursed on April 1.

In the linked current account, you deposit Rs 20,000 in cash on April 11, and another Rs 50,000 in cash on the 21st of the same month and withdraw the entire Rs 70,000 on May 1. The average principal due for April will be Rs 9,70,000, calculated as given below:
Rs 10,00,000 for the first 10 days,
Rs 9,80,000 for the next 10 days and
Rs 9,30,000 for the last 10 days.

The weighted average will be {(10, 00,000*10) + (9, 80,000*10) + (9,30 000*10)}/30 = Rs 9,70,000. The interest component for 30 days in the first month of an instalment amount of Rs 9,650 works out to Rs 7,970 at the rate of 10 per cent on Rs 9,70,000 for 30 days, while the balance Rs 1,680 (Rs 9,650 minus interest Rs 7,970) will be adjusted against the principal. Compare this with the normal break-up of Rs 8,219 towards interest and Rs 1,431 towards repayment of loan under the normal home loan. You can see that the principal gets paid off much quicker in this system though, the money deposited in the linked current account is subsequently withdrawn.

In fact if you do not make any deposit in the linked current account at all, the break-up of interest and principal will remain the same as a normal home loan.

The advantage of this product is that it allows you to use both your temporary and permanent cash surpluses to reduce interest liability on your home loan and at the same time gives you the flexibility of withdrawing the surpluses for other uses, as and when you may require. The linked account is highly recommended as an ideal place for your contingency fund, since it gives you instant liquidity and you effectively earn interest on it at the home loan interest rate.

These loans are normally priced about 0.25 per cent higher than normal home loans, though currently because of competitive pressure, they are available at the same rate as regular home loans especially from foreign banks, major players in this market.

Banks do not push these loans aggressively as they incur an additional treasury cost in terms of managing the liquidity demands. Due to competitive pressures, they are not currently able to charge a premium for such loans. Only foreign banks see this as a marketing opportunity and push the product aggressively but then they are only interested in large-value home loans with ready properties and, thus, address a small portion of the market. Whether you are an existing home loan borrower or a new borrower, this should be your first choice of home loan to shift to or borrow from.

The writer is a registered investment advisor.

Source : http://goo.gl/3tIFW8