ET CONTRIBUTORS | By Raj Khosla | Mar 12, 2018, 02.30 PM IST | Economic Times
Major banks and housing finance companies have raised their lending rates. Whenever home loan rates are hiked, borrowers want to know whether they should prepay their loans to save on interest. In the past, there was no clear answer because there were several investment opportunities that could yield better returns than the interest paid on the home loan.
Not any longer. Stock markets are looking jittery, fixed deposits are tax-inefficient and debt funds are giving poor returns. If a penny saved is a penny earned, prepaying a home loan may be the best investment option available. Where else can you get 8.5% assured ‘returns’ on the surplus cash? Another compelling reason to rework the math and at least partially repay your home loan is the new tax rule that caps the deduction on home loans at Rs 2 lakh a year. If you have a large home loan running, you would do well to make partial prepayments as soon as you can.
There are some obvious benefits of foreclosing a long-term loan. The longer the tenure, the higher is the interest outgo. Just like long-term investments build wealth for you, longterm debt burdens you with high interest. Yet, a long-term loan may be unavoidable in some circumstances. A young person who has just started working may not be able to afford a large EMI. The loan tenure would have to be increased so that the EMI fits his pocket.
In such situations, borrowers are advised to go for a ballooning repayment, where the EMI increases every year in line with an increase in the income. This can have a dramatic impact on the loan tenure. If you take a home loan of Rs 50 lakh at 8.5% for 20 years, the EMI will be Rs 43,391. But a 5% increase in the EMI every year will end the loan in 12 years and two months. If you tighten your belt a bit and increase the EMI by 10% every year, you can become debt-free in less than 10 years (see grphic)
Pay off a 20-year loan in less than 10 years
Hiking the EMI every year reduces the tenure drastically.
Contrary to what T.S. Eliot said, April is not the cruellest month. Any salaried individual will vouch for this. While annual increments are something to celebrate, people with large outstanding debts should also try and increase their EMIs in line with the increase in income. In a few weeks, they will also get their annual bonuses. At least some of that should be used to prepay the home loan.
Reducing your outstanding debt or closing the loan is naturally a psychological boost. It gives the individual a sense of financial freedom.
Some people argue that prepaying the home loan robs the individual of liquidity. That’s not correct. Several banks offer home loans with an overdraft facility that allows the borrower to withdraw money as and when he needs it. Though overdraft facilities normally entail annual maintenance charges, home loan overdraft facilities are exempt from this charge. It’s also a good idea to use a loan against property to repay other costlier loans. For instance, an unsecured personal loan that charges 18-20% can be replaced with a loan against property that costs 8.5%.
(Author is founder and managing director, Mymoneymantra.com)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of http://www.economictimes.com.
By Vandana Ramnani | Sep 14, 2017 03:54 PM IST | Source: Moneycontrol.com
Jaypee home buyers want interim relief from court that they should be allowed to stop paying EMIs until flats are delivered to them as they have no hope yet
More than 100 homebuyers, who have invested their hard-earned money in Jaypee projects, are planning to move court to grant them interim relief to allow them to stop paying their equated monthly instalments (EMIs) until completed residential units are delivered to them.
“Why should we pay EMI for a non-existent property? What is the monetary relief we are getting from the September 11 SC order? We are not asking for suspension of EMIs – we are only asking for deferment of our EMIs until the insolvency resolution professional (IRP) comes up with a resolution plan and preferably possession of the flat is given to us without any interest or penalty to ensure that we are not charged or penalised for the delay in paying EMIs,” says Shilpa Vij, a buyer who bought a house under the subvention scheme in 2011and started paying EMI in 2013 in the hope of getting her house in 2014.
“We want an interim relief. EMIs and monthly rents are draining us and there is no hope yet that we will get a flat,” she says.
Ramakant Rai, Trilegal, who is advising Jaypee home buyers, says that buyers have two options – one, they can write to RBI or the National Housing Bank concerning their problems and two they can file a writ petition either in the High Court or the Supreme Court concerning the issue.
“Many buyers have already sent complaints to RBI and NHB. RBI can act on the basis of these complaints. Also, in case the issue is raised through a writ petition before the Supreme Court, the SC on grounds of equity to protect the interests of home buyers can issue directions to RBI, NHB or directly to banks to allow them to hold EMIs until units are fully developed,” he says.
Homebuyers have alleged that banks did not do their due diligence and disbursed loans even when project approvals were not in place and that banks had given pre-approved loans for the project.
“We have filed RTIs with the Noida Authority and received a response from them that approvals were sanctioned only in 2012 whereas projects have been sold since 2008. The requisite permissions were not in place at the time of the project launch. There was lack of due diligence on the part of banks as they had disbursed loans even when plans were not in place,” says Pramod Rawat, a buyer.
S K Suri, a home buyer, who has filed RTIs with the authorities for information regarding dates of applications made by the developer and final approval of plans, says that he has been given copies of approval letters for seven Jaypee projects, details of the builder filing an application for approval and the date of the authority granting approval.
“Most of the approvals were received only after 2011 whereas most bookings/loan disbursements started way back in 2008,” he says, adding it took him nearly four months to get a response to his RTIs and several rounds to the authority’s office. One response is still awaited.
Most homebuyers have decided against not paying their monthly EMIs for fear that their CIBIL score and future credit history may get impacted. But legal experts say that in case the court intervenes in this matter, it can direct CIBIL to not touch their scores. “Also, buyers are not asking for a refund, they are only asking not to pay EMIs until they get possession of the flats which has been delayed by almost five to eight years,” they say.
Legal experts also say that the September 11 SC order puts a moratorium on all cases against Jaypee. ‘All suits and proceeding instituted against JIL shall in terms of Section 14(1)(a) remain stayed as we have directed the IRP to remain in Management,’ says the order. “Homebuyers can argue that this is a uni-dimensional order as homebuyers cannot file cases against the builder in other courts such as NCDRC or RERA. It should also protect home buyers and allow them to stop paying EMIs and banks should not proceed against buyers until the time homes are delivered,” they say.
“The only possible way that home buyers have recourse to the bank is if the deal has been brokered by the bank’s real estate arm or if the bank has disbursed the full amount rather than construction-linked progress payment. Even in such cases they should issue a notice to the bank first claiming damages before taking any precipitate action such as stopping pre- EMI interest payment,” says CA Harsh Roongta, a fee only investment adviser.
The couple were forcibly evicted from their home which has been auctioned as part of the loan recovery procedure.
Press Trust of India, Kochi | Updated: Aug 25, 2017 11:19 IST | Hindustan Times
An elderly couple was on Friday evicted “forcibly” from their house in Kochi for failing to repay loan to a cooperative society but were brought back within hours after Kerala chief minister Pinarayi Vijayan’s intervention.
Condemning the eviction, video footage of which was purportedly telecast by TV channels, Vijayan directed the Ernakulam district collector to initiate steps to ensure their stay in the house at Thrippunithura, an official release said.
The couple, said to be Tuberculosis patients, were admitted to a government hospital after being forcibly evicted from their home, which has been auctioned as part of the loan recovery procedure.
After Vijayan’s intervention, officials brought them back to their home.
The state human rights commission also intervened in the matter.
According to the neighbours of the couple, they had taken a loan of Rs 1.5 lakh from the cooperative society by pledging their property seven years ago.
They, however, could not repay the loan amount due to their illness following which the firm initiated the recovery proceedings.
The chief minister also directed the district collector to take steps to provide them food.
The person who bought the auctioned house has agreed to let them stay in the house for the next three months, officials said.
RADHIKA MERWIN | February 14, 2016 | Hindu Business Line
SBI’s FlexiPay lets you to borrow more. But don’t bite off more than you can chew
Buying a home is a major milestone for most young people with a secure job.
But it can also be one of the most stressful financial decisions you take at the start of your career, as it can set you back financially by a few years.
If you have put off buying your dream home because you could not afford to pay the hefty equated monthly instalments (EMIs), the recently launched home loan product by State Bank of India could appear attractive.
For one, the product, known as SBI FlexiPay, helps you get a higher loan amount than you would normally be eligible for under a regular home loan.
Two, for the initial three-five-year moratorium period, you will pay only the interest on your loan, after which you will have to pay moderated EMIs. These will be stepped up in later years.
The ability to borrow more and the lower EMI in the initial years may tempt you to go for that sprawling villa you have been eyeing for some time now. But here are a few things you need to take note of before signing up.
Most banks decide on your eligible loan amount based on the value of the home and your affordability. Banks offer loans at about 75-80 per cent of the value of the house (loan-to-value ratio). But banks may offer you a lesser amount than this if your affordability is lower.
Do you need more?
Say, for instance, you decide to buy a house worth ₹80 lakh. Based on a 75 per cent loan-to-value-ratio, the bank can offer you a loan up to ₹60 lakh. But, based on your income, the bank may offer you only a ₹50-lakh loan.
Under SBI’s FlexiPay, you can now be eligible for ₹60 lakh (20 per cent more than that under a regular home loan).
The reason for the bank’s largesse is the assumption that your income level will increase over the years, and you will be able to pay the additional loan amount comfortably.
It may seem an attractive option for you, too, as the additional loan amount will bring you closer to your dream home.
But it will also mean that you are stretching yourself thinner on your income. If earlier the bank offered you a loan that translated into an EMI of half your monthly income, you will now be able to get a loan in which your monthly payments are maybe about two-thirds your monthly income.
You may want to assess your monthly expenses to see if you can actually afford a higher loan.
To relieve you of the additional burden on your EMI (on the higher loan amount), SBI makes the deal sweeter by allowing you to pay a lower amount in the initial years.
The product allows you to pay only the interest component in the first three (for a ready-to-buy home) to five (under construction house) years.
Hence, on a ₹60-lakh home loan at 9.5 per cent for 25 years, while your EMI works out to about ₹52,420 under a regular home loan scheme, under the new SBI scheme, you have the option of paying only about ₹47,500 a month (the interest portion) for the first three years.
A clear saving of about ₹4,900 a month for three years sounds like a good deal. But this respite comes at a cost.
The EMI on your home loan, normally, goes towards payment of both the principal and the interest components of the loan. In the initial period, say, three-five years, a chunk (85-90 per cent) of your EMI goes towards payment of the interest component.
As you move towards the end of your loan period, the major portion of your EMI goes towards paying your principal amount.
Even so, by paying only the interest component in the first three years, you end up increasing your total outgo on the loan by the end of the tenure.
In the above example, after three years, on your principal of ₹60 lakh, the bank will calculate EMI based on the original tenure of 25 years (assuming the same rate of 9.5 per cent).
So your monthly payment from ₹47,500, will go up to ₹52,420, a straight 10 per cent jump from the fourth year.
So, you will have to ensure that you can afford the bump up in monthly payment after three years.
SBI calculates your EMI from the fourth year, based on the original tenure (25 years) and not the remaining tenure (22 years) after the three-year principal moratorium period. This is to start you off with a lower EMI.
Remember, if the loan is spread out over a longer tenure, it results in lower monthly payment. Since you pay a lower EMI from the fourth to the sixth year, SBI gradually steps your EMI from the seventh year onwards, to make good the lower amount. So, from ₹52,420, the bank will increase the EMI by about 5 per cent to about ₹54,900 from the seventh year.
In the above example, under SBI’s FlexiPay scheme, you may pay about ₹4 lakh more on your loan over the tenure of 25 years compared with a regular home loan.
The scheme offers you flexibility at a cost that is not too high. But be sure that you are able to afford the higher EMIs in subsequent years.
Source : http://goo.gl/dpDt3z
By Rishi Mehra | 25 Jun, 2015, 10.21AM IST | Economic Times
Personal loan has been a very popular product in the country because of the flexibility it brings in. Often taken to tide over a temporary shortfall in money, personal loans are taken for weddings, to buy consumer durable, medical emergencies, vacation and to fulfill many other needs.
While interest rates on a personal loan continue to be the single biggest factor in deciding which bank to take a loan from, another important factor in deciding the bank is on prepayment provisions. Since many take a personal loan to repay it back before the stipulated tenure, prepayment policies around a personal loan are important. Also, personal loans are a form of “bad loans” and often do little to increase your asset or improve your financial position. Hence, it makes sense to repay the loan if possible. In such a case, prepayment policies play a vital role in choosing the bank.
There are generally four reasons to prepay a personal loan:
The amount is less – Many choose a full payoff of the loan when the principal amount left is relatively small and the borrower wants to save on whatever interest he can by paying off the loan early. Full payoff generally happens when the loan has been serviced for a considerable period of time and the remaining loan balance is small.
Refinancing – A prepayment also happens when the borrower decides to switch banks to take advantage of a lower interest rate. Personal loans often carry very high interest rates and borrowers often switch banks to refinance their loans at a much lower interest rate. Once the lock in period (generally a year) is over, a large percentage of borrowers refinance their loans. In such cases prepayment provisions are very important.
Increase in Salary – When a personal loan is first taken, a borrower’s financial condition can be quite different from what it is say two years down the line. An increase in salary or a bonus may lead to greater cash in hand. Keeping such eventualities in mind, it may make sense to factor in provisions of prepayment for the personal loan before taking one.
No Tax Savings – Unlike a home loan that helps a borrower save taxes, there is no such provision when it comes to a personal loan. In such a case it makes sense for a borrower to look to prepay off the loan and save on the high interest outgo. Coupled with the fact that personal loan, often does not lead to an increase in asset, looking to prepay the loan is a very important factor when choosing a bank.
People tend to prepay personal loans, especially since the interest rates on the product are significantly higher. Interest rates on personal loans often range anywhere between 12 %- 26 % and borrowers look at paying off this loan before they look to tackle any other credit. Also, since the amount in questions is significantly lower, unlike a home loan, it is possible for a borrower to, perhaps, save and prepay the loan. For a shorter time frame, even a few thousand can be a significant savings generated out of prepaying the loan.
The personal loan prepayment is also a relevant factor since it is easier to refinance a personal loan since there are very less documents involved. Unlike a home loan where the property documents are with the bank that has originally extended the loan, a personal loan has no such documents with the bank and is relatively easy to be refinanced.
What a borrower must look at before taking a personal loan that he intends to prepay is whether it has a prepayment fee tied to it. Banks often charge this rate because they have to forego the interest that they would have got if the borrower would have stuck to the agreed loan agreement. Some banks in India have a prepayment fee and as a borrower it is very important to find out if the benefit of prepaying is more than the fee you have to pay.
Bank Prepayment Charges: ICICI Nil (For Loan amount >10 lakh & 12 EMI paid), else 5% HDFC Nil (For Loan Amount > 10lakh with >Salary 75k) else 4% Bajaj Finserve Nil Tata Capital Part Prepayment with ZERO Charges SBI Nil Kotak Mahindra 0% – 5% Fullerton India Zero after 3yrs (Otherwise 4%) Axis Bank Nil
Personal loans are relatively easy to understand when it comes to their terms and conditions. While rate of interest is the most important factor when choosing a bank, the often neglected, but equally important factor is prepayment provisions of the lender.
(The author is co-founder deal4loans.com, which is a platform for online comparison for retail loans in India. Views expressed are personal)
Source : http://goo.gl/POYl3H
Preeti Khurana of Cleartax.in | Updated On: May 23, 2015 17:54 (IST) | NDTV Profit
Several new home buyers purchase their property jointly with spouse or with parents. Pooling of funds and getting a higher loan sanction limit are some of the advantages of joint purchase. Joint ownership of a house property also has some tax benefits, let’s understand them in detail.
Any deduction for interest on home loan can be availed by a person when they meet these conditions.
1. Firstly, one must be ‘owner’ of the property. For example, Vinay helped his retired father buy a property by contributing to his father’s pool of funds and then taking up a home loan to repay from his salary. Can Vinay claim interest deduction on the home loan? No, not unless he is an owner of property.
2. Secondly, one must be a ‘co-borrower’ in the home loan. Besides being a co-owner, one must also be a co-borrower to avail tax deductions. Take the case of Ritu and Arun who pooled in their savings to buy their first home. The property was bought in both their names, since adding Ritu’s name helped save on stamp duty. Arun who had a larger salary took up a loan for the money they were short of. Will Ritu be able to claim interest deduction? Ritu can claim deduction on interest only when she is a co-borrower in the home loan.
The joint owners, who are also co-borrowers of a self occupied house property can claim – deduction on interest on home loan up to Rs 2,00,000 each. And deduction on principal repayments, including deduction for stamp duty and registration charges under section 80C within the overall limit of Rs 1,50,000 each. These deductions are allowed to be claimed in the same ratio as that of the ownership share in the property.
As a family when you take up a joint home loan, your tax benefits will be larger where your interest outgo is more than Rs 2,00,000 or where availing a deduction moves one of the joint owners in a lower slab.
It’s pertinent to note that tax benefits on a house property are available when the construction of the property is complete. These tax benefits are not available for an under construction property.
If you have a joint owner, who is also a co-borrower but does not contribute to EMI payment; you may claim the entire interest as a deduction in your income tax return.
(Preeti Khurana is a chartered accountant and chief editor at http://www.cleartax.in)
Disclaimer: All information in this article has been provided by Cleartax.in and NDTV Profit is not responsible for the accuracy and completeness of the same.
Source : http://goo.gl/Ys6ziY
Sanjeev Sinha | ECONOMICTIMES.COM | May 14, 2015, 02.52PM IST
NEW DELHI: Home financing companies these days are offering many customized payment options to suit your loan requirements. While some of these options give you flexibility in repaying your loan, others are linked to the various stages of your house construction. Overall, these plans are a win-win for both the lender and the borrower. In fact, some of these plans increase the repayment capacity of the borrower with some tax benefits.
Here are the different types of repayment plans prevalent in the market today, which a borrower needs to analyze before making a decision, based on his/her requirement:
1. Step-Up Repayment Loan: In this plan the repayment is directly linked to the borrower’s monetary growth (growth in income). This helps the borrower to avail higher loan compared to a normal housing loan.
“This scheme is beneficial for those who buy a house at a younger age. That is because one’s income increases as one moves ahead in career. Since people pay lower EMIs in initial years, they can adjust the loan as per their need and also enjoy the same tax benefit even if the EMI increases,” says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
2. Step-Down Repayment Plan: This is exactly opposite to the above option. Here, EMIs are higher in the initial years and decrease later. This plan is most suitable for people who borrow loan at an older age, i.e. mostly senior citizens or those nearing retirement. Since the income capacity alters at later stage, the lower repayment helps in keeping your finances within manageable limits.
3. Fixed and Flexible Installment Plan: In a fixed repayment plan, the EMI will be fixed for a certain period after which it gets adjusted as per the market rate. During this fixed tenure, the EMI is not affected by market conditions. It is beneficial for borrowers when interest rates are expected to rise. However, one needs to be aware as many lenders in their agreement do have provision of increasing the fixed amount.
Contrary to this, in a flexible loan installment, the EMIs are higher in the initial years, but decrease gradually in the later years of repayment. “This option can be good for parents who wish to buy houses for their children. The loan can be planned in such a manner that by the time they retire or are not in position to repay the EMIs, the children will be in a position to fulfill the liability,” says Solanki.
4. Tranche-Based Repayment Plan: Ideally a borrower has to pay interest on the home loan amount based on the stage of property construction till the project is complete. This type of repayment plan is offered by a few banks/lenders, which helps the borrower save interest. The borrowers can fix an amount as per their capability which they can pay in installments to the bank till the property is ready to occupy. The minimum amount payable is the interest on the total loan amount. Any amount over this fixed amount goes towards the principle. This way the borrower saves on the tenure of the loan by repaying the loan faster. This option is most suitable when you buy an under-construction property.
5. Accelerated Repayment Plan: In this plan borrowers can increase the EMI amount when they have surplus money or when the disposable income increases. Another option which is highly opted is paying a lump sum amount towards the loan. This helps in faster loan repayment and saves tax also.
6. Balloon Repayment Plan: This plan is similar to the step up option, but in this option you could pay a very small amount of installments in the beginning of the loan term. As the name suggests, in the later years of the loan term, the installment amount also starts ballooning to a higher amount than the normal step up option.
Although lenders may give you various loan repayment options as a borrower, you have to do some due diligence to ensure that any chosen option does not go against your expectations.
“The most important thing is to check the clauses the lender has in the repayment plan you are opting for and how the lender has treated its existing customers. Even speaking to any existing customer is not a bad proposition knowing that you have your life-time savings invested in your dream home and borrowing credibility need to be kept good,” observes Solanki.