Tagged: Principal Repayment

ATM :: 6 smart ways to repay your home loan without losing your mind and money

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.

Source: http://goo.gl/zuo2lT


ATM :: Decoding Tax Benefits On Home Loan

Brijesh Parnami | 07 Apr, 2015 17:56 IST | Business World
Home loan can be burdensome as you think the interest outgo squeezes your income. But on the contrary, it actually helps you save more money by providing a breather from taxes, writes Brijesh Parnami, Chief Executive Officer, Destimoney Advisors


Tax outgo skims the hard-earned money you make out of your jobs and businesses. However, to be a responsible citizen, there is no other way out. One has to submit taxes without a fail, to allow the government to take up tasks meant for creating better services and infrastructure for its people.

To ease the tax burden, the government from time to time provides breather in the form of tax rebates. One of the effective tools for saving tax is a home loan. By purchasing a house, you not only become eligible for tax deductions but also a proud owner of a home.

The sole aim of the government to provide lucrative tax breaks on home loan is just to push people to purchase properties. By doing so, it keeps the housing segment booming, the ripple effect of which is seen on other sectors as well.

Home loans are a great way to save tax and enjoy long-term relief. Income Tax Act, 1961 states that loans can be used as tax-saving instruments too. After procuring a home loan for purchasing a property, a person can claim tax deductions on the principal amount as well as on the interest that he would be paying towards servicing the loan.

Tax benefits on home loans are available under the Income Tax Act Sections 24, 80C and 80EE. Only individuals and HUFs (Hindu Undivided Families) are eligible for the benefits. These tax benefits are available only on home Loans and not on Non-Home Loans such as loan against property (LAP) etc.

Tax Benefit On Home Loans
Purchasing a home does not come easy. There is a fat chunk of money that that has to be paid as down payment and for the rest a home loan can be taken, for which one has to pay higher interest rates. But this home loan is your saviour from the taxes that you have to pay year after year. As home loans are for long term, one can enjoy the tax benefits on it during the designated period for which the loan has been sanctioned.

Tax benefits are available on two components of a home loan — Principal amount and the Interest. While the benefit on principal repayment can be availed under Section 80C, the same can be claimed on the interest repayment under Section 24.

The UPA government had introduced Section 80EE in the budget 2013-14 offering additional tax benefits on interest repayment, with certain riders. First time buyers were who took home loan in the financial year 2013-14 became eligible for availing additional tax benefit on Rs 1 lakh for interest payment over and above the tax deduction available under Section 24. For unutilized interest, the deduction was available for financial year 2014-15 as well. This additional tax saving means provided people more room to save extra bucks. But the government did not extend it in the following years and this year too there was no mention of Section 80EE.

For the financial year 2015-16, the benefits are available on Section 80C and Section 24 only.
·Section 80C — On repayment of Principal Amount & Stamp Duty/Registration Charges

On Repayment of Principal Amount
The amount that is repaid by the borrower towards the principal component of the home loan is allowed as tax deduction under Section 80C of the Income Tax Act. One can avail maximum tax deduction to the tune of Rs 1.5 lakhs under this section. This limit of Rs 1.5 lakhs is towards the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others.

The section does not allow the benefit during the years when the property is under construction mode. One can avail the tax deduction only after completion certificate has been given. However, important point to note is that a taxpayer can aggregate the interest that has been paid when the construction was on and can claim the deduction in five equal instalments in the five consecutive financial years, beginning the year during which the construction completes.
However, if the owner sells the property on which he has sought the tax benefit within the five years from the date of obtaining the possession then no tax deduction is allowed. If the assessee has availed tax benefits during this period, then it is treated as income and makes it liable for tax payment.

Also, the deduction is available on payment basis, notwithstanding the year in which the payment was made.

On Stamp Duty & Registration Charges
Section 80C also provides for tax deduction on the stamp duty and registration charges that are paid while purchasing the property. One can claim the deduction as prescribed in section 80C i.e. a maximum of Rs 1.5 lakhs and it is again the total amount paid collectively for PPF, Tax Saving FDs, Equity oriented mutual funds, National Savings Certificates, among others. The deduction can be claimed in the year in which these payments are made.

Section 24 — On payment of interest
In case of purchase of property, this benefit can be availed only when the construction of property is complete and the possession certificate has been provided. Other than purchase of property, the tax deduction is allowed on loans taken for construction, repair, renewal and reconstruction of a residential house property. The income on house property is adjusted with amount of Interest paid on home loan.

Rs 2 lakh is the maximum deduction limit one can enjoy under this section in case of self-occupied property. Besides, if the property is not completed within three years from the date of loan sanction, the interest benefit comes down to Rs 30,000 from Rs 2 lakh.

In case the property is not self occupied, there is no limit and one can claim the whole interest for tax deduction sake. However, there is a fine print here: If the owner does not self occupy the property and resides at any other place due to responsibilities related to job or business, then the deduction one can avail is only Rs 2 lakh.

Unlike the deduction available under section 80C on payment basis, the deduction under this section is available on accrual basis. So the deduction has to be claimed on yearly basis even if even if no payment has been made during the year.

*Borrowers are advised to consult Tax Consultant/Chartered Accountant in all the cases.

Source : http://goo.gl/63Nzfq

ATM :: Considering increase in Credit Card limit? Dont miss this

Rajiv Raj of Creditvidya.com | Retrieved on 6th Apr 2015 | Moneycontrol.com
There is no harm in getting your credit card limits enhanced. However, do not overspend just because you have scope to spend. Keep a tab on credit utilisation ratio.
Is your credit card company increasing you card limit without your request? Were you anyway planning to approach the company for an enhanced limit? Are you confused as to whether it’s a good idea to do so? Will it hurt your Cibil credit score? Well, the good news is that it’s two fold. It is a good idea but only if you can resist temptation.

Many a times we are unsure if we should feel happy and flattered when our credit card limits are raised. People become skeptical when it happens, wondering if it may affect their Cibil score in the long run. On the flip side there are times when you may want to increase the card limit. This also means you are exposing yourself to more debt and this calls for an evaluation. Here are some insights which will help decide what’s best suited for you.

Enhanced Card Limits:

This primarily means you have prepared to take on more debt. The good news is that you have money available at your disposal. But, it also exposes you to more debt. If the idea of going in for an enhanced limit is triggered by a cash crunch situation then it is your red flag. Another red flag would be if the credit card is being used to make ends meet every month. That would indeed be a dangerous financial situation. It is an indicator of poorly managed cash flow and that must be corrected. Enhancing credit card limits in such situations would be equivalent to sinking deeper while already in a quicksand.

Reading this, if you are already adding enhancing credit card limit to the list of vices to stay away from, then stop. It can actually be a smart move if it is well planned and the implications fully understood before going in for it. Foreseeing a big ticket expense like a vacation, educational fees, home renovations etc is a good reason for enhancing your card limits.

Benefits of enhanced limits:

Enhanced card limits will help accommodate occasional expenses. It will also entitle you to reward points and cash back offers which help to save money while benefitting from the purchase. Also, if you are aware of a large expense coming up, swiping the card for a higher amount without raising the credit limit may affect the credit utilization ratio. This move may negatively impact your Cibil score. Hence, it would be wise to get enhanced limits approved beforehand.

Be aware of the flipside of enhanced limits:

Too much debt can be risky. The temptation to spend more than you would otherwise do will remain looming over you all the time. Resisting that may not be as easy as one may envisage. This can potentially be a trigger to take on more debt than your finances would handle at that moment. Lenders generally look at the total credit amount you have access to, before sanctioning loans. Enhanced limits may have a negative impact during such an analysis. While applying for loans for an important purpose like buying a home, education, vehicle, etc this may prove to be factor which will stop from qualifying you for a higher loan amount.

Planned utilization is the key:

Before buying a car, we check if the maintenance cost is reasonable and something we can afford. The same rule holds true for enhanced limits. Affordability of repayments needs to be checked. It can be done by working out a repayment plan beforehand. Interest rates on credit cards, as we know it are high. If you are already in a cash crunch situation, paying interest on credit card money will make it worse. Even for big ticket purchases, one of the valid reasons to enhance card limits, saving and repayment planning has to be initiated before making the purchase. The idea is to reap benefits of an additional security cover and enjoy reward points and cash back offers.

Impact on Cibil score:

As long as you keep an eye on the utilization amount, an enhanced card limit will impact the Cibil score positively. Utilization ratio impacts your Cibil score inversely. The lower the utilization ratio, the better your Cibil credit score. Needless to say this will work only if you can resist the urge to spend more inspite of having a higher credit limit. A lower utilization ratio is read by the lenders as less risky and disciplined financial behavior. An enhanced credit limit can positively impact the utilization ratio.

However, deferred and irregular credit card repayments, are detrimental for the credit scores. So, spending more and increasing debt while on an enhanced limit is not good news for your score. One must also bear in mind that a poor Cibil score, lowers chances of getting a good credit deal elsewhere as well.

Getting the limits enhanced:

Most credit card companies track the financial behavior of their clients and offer enhanced limits accordingly. Before you decide to approach the company for an enhancement give it some time, at least six months. Most companies will offer an enhancement themselves after tracking the card for six months. Also, considering you have decided to go in for the increase after reading the points above, present a strong case while requesting an enhanced limit. Regular repayment pattern, not maxing out the card limit etc are points which show financial discipline and will encourage the lender to give a positive response to your request. As long as you are in good standing, enhanced card limit requests are generally approved.

There is no harm in getting your credit card limits enhanced. Having said that, the points mentioned in this article need to be considered carefully before going in for it. And the last piece of advice would be to ask yourself if you really need it. If not, don’t go in for it. Do not change your spending habits just because you have the capacity to do so.

Source : http://goo.gl/0yy0uN

ATM :: 11 Aspects of your Home Loan that Can’t Be ignored!

Sukanya Kumar, Founder and Director, RetailLending.com | Mumbai | January 27, 2015 16:34 IST | IndiaInfoline.com


For most people, applying for a home loan can tedious and stressful period, and in the process, prospective borrowers may end of ignoring certain aspects of their mortgage in a rush to get the process completed. These aspects may end up being a cause of great anxiety in the future, and it is better to be aware and abreast at the outset of the process. Let’s take a closer look at things you just cannot ignore while applying for a mortgage!

How did you compute the Amortization Schedule?

Everyone, who has in-depth knowledge of mortgages, should be able to explain to you how the equated monthly installment (EMI) is calculated and the relevance of an amortization schedule. It is just not another excel spreadsheet which is shared with all new trainees so that they can forward the same to you to win your business over! This is important for you, as you must understand the ratio in which the principal & interest is spread over the sheet. This will help you decide your interest paid every financial year & save tax. Not saving correctly is a loss and constitutes as a ‘charge’.

Is this loan a Daily Reducing or Monthly Reducing Balance?

Many years ago, when there were only a couple of lenders in mortgage industry, annual reducing rate was the only choice. This meant whatever principal you pay throughout the entire year will be deducted from your principal after completing one year! This meant paying interest on the paid loan amount too! The same is the difference between daily & monthly reducing balance. Are you getting the principal repaid amount adjusted the very next day of your making the payment, or after your next monthly payment date? Paying interest for already paid loan amount is terrible. Don’t you think you should find that out before you choose your lender to save this cost? You sure do.

How does part pre-closure happen in your bank? If I prepay 500 Grand’s on 22nd Jan, when do you reduce my outstanding principal?

Many a times you will find that while closing down your loan, you are forced to pay interest till the next EMI date, or sometimes the closure amount claimed by the lender specified in their foreclosure letter is- “Same for the next 15 days”. Well, how can that be? The closure amount should be different for different dates as interests are calculated daily. Your closure amount cannot be same on 16th & 30th of the same month. Then what you are paying on 16th must be including the next 15 days’ interest. Isn’t it?

When does my EMI start if I draw down my loan on middle of a month?

This is a very interesting question, please do calculate and check how many days of interest are you paying before your actual EMI starts! For example, if you are drawing down your loan on 25th of January, ideally you will be asked to pay simple interest (Pre-EMI) for balance 6 days of the month and then your EMI should start. Question is when does your EMI start? If it starts in February, then how much of that EMI is principal and how much is interest? Some lenders will start EMI from March. So, how is that math done? You need complete transparency on this one!

How do you calculate Pre-EMI for an under-construction property? When does the lender issue the pay-order & when does your developer receive it? If delayed, who pays for the delay in delivering it?

Please note that it is you who always ‘pay’. It is neither the lender nor the developer in any circumstance. So, it should be planned enough, for you not to lose any of it. The Pre-EMI (simple interest) is calculated on the number of days you remain drawn down, before you actually start the EMI. On the other hand, if the amount is not delivered in time to the builder, you may face consequences of delay-penalty, losing builder-subvention interest or something more. So, the gap between the pay-order being prepared by your lender (when your clock starts) to the delivery to developer needs to be monitored by you or your adviser, so that you do not pay interest just like that which is an unnecessary ‘cost’ to you!

What are the charges for switching loan from Fixed to Floating option or vice-versa? Or, switching between different mortgage products?

In India, the loan rates are extremely volatile. We have experienced a range between 7 – 13.50% within 6 years on a home loan! One might laugh saying ‘why didn’t you do something about it on your own mortgage!!’, the answer is- “This is exactly what has given me the life’s bitter experience to be able to advise today.” 🙂 I was asked to pay a 2% switch fee to be able to shift between products. Floating to Fixed, or simply Floating Standard to Floating Overdraft! Please do not make the mistake I made, of not asking your lender’s rep or adviser on this ‘hidden’ fact.

Is there any Documentation Charge in any stage?

Often lenders ask you to do fresh ECS or sign new loan kit while altering rate/margin/product/product-variant, out of the turn. This might involve a fee. Not knowing about it in advance will constitute it to be termed as ‘hidden’. This is generally a very nominal cost, but in my opinion, lenders can easily do away with it.

Does your company follow same rate norms for new & old borrowers? What is the past two-year trend on the differential rate, if any, and why is the difference?

Lenders reduce the offer rate in the market by two ways-(a) By reduction in their base rate or prime lending rate (PLR) and (b) by fluctuating the margin for the new borrowers. Wherein the first one is always welcome as it offers transparency to the existing borrowers, you may sometimes just get a shock to find that the new borrowers from the same lender is getting a better rate than yours. Studying the history of the lender will help you understand the trend with the particular one. The lender who is prompt in reducing base/PLR should be your choice. Servicing loan at a higher rate for even one month is going to matter and obviously it is an outflow from your pocket, hence a ‘hidden charge’.

What are the associated fees like legal, valuation, documentation, administrative, mortgage origination, intimation of registration etc.?

Lenders generally speak about the fees levied directly by them like processing fee. You will find advertisements claiming ‘nil processing fee’ during festive seasons, year-end closure for the lenders or may be while wanting steep rise in portfolio etc. Please understand that processing fee isn’t the only fee you pay for acquiring your Mortgage. Seek complete transparency in all ‘charges’ even if the lending institution does not levy it directly. So, a lawyer fee, technical evaluation fee, Govt. levy, other charges & expenses should be clearly explained to you before you land up thinking ‘I don’t mind paying, but why was I not told?”

Does your chosen lender give Provisional Tax Certificate in advance?

Not receiving provisional tax certificate means you will have to allow your employer to keep deducting tax every month from your pay & when you receive it from your lender at the fag end of the financial year, submission date to your office may be over. All you can do now is to wait for tax refund after filing your ITR. To avoid is craziness, your lender should give you the provisional projected interest and principal outflow statement in advance, which you should submit, in your office immediately to avoid getting deduction on your pay slip every month. The final tax certificate, if has any differential amount, will only have to be paid by you, without having to wait for any refund. Not receiving it upfront will be a ‘costly’ affair!

Cost of stress, having to follow up, coordinating between lender, builder/seller and you, worrying day-in-and-out also costs!

Your business is to get a stress-free mortgage and ours is to make sure you get that. If you are the one is picking up the phone every-time to call the lender or your adviser to know what is happening on your loan application, and not being responded to, I can imagine what is happening on your work-life and how stressed you are even at home! Please do not ignore the ‘price’ you pay for not getting any service. Choose a lender who has good market reputation of customer-orientation and choose the adviser and service-provider that has knowledge, experience & an infrastructure to support you every time you need service.

There are plenty individual loan agents floating in the market who sell all types of loans, credit cards, insurance, holiday package……all at a time! Think before you engage them for a promise of a good ‘deal’. You may not find him after your application gets logged in his code in the bank or he may even not have a direct agreement with the bank at all and working with another person of an agency! The agency may not even know this guy and you can’t even report him! The signs will be: he will be desperate for your business, will offer you the moon, will always assure you that he will do ‘whatever you want, sir’.

The stress of not having a good mortgage-lender and adviser can be as bad as not having a supporting partner. Ultimately, you are getting into a 15-20 years of commitment! It should be from both sides. Isn’t it?

Source : http://goo.gl/FeCIJa

ATM :: You can claim exemption for both HRA and home loan

Ashwini Kumar Sharma | First Published: Wed, Jan 14 2015. 07 01 PM IST | Live Mint
You can claim tax benefit for both, but only if you fulfil the conditions
If you are living on rent and also servicing a home loan, you can take advantage of claiming tax exemption for both house rent allowance (HRA) and repayment of home loan. The equated monthly installment (EMI) against your home loan is a combination of principal repayment and interest on the outstanding loan. All three—HRA, principal repayment and interest payment—can be claimed as exemption under separate sections of the Income-tax Act. However, there are certain conditions that you need to fulfill before you can do so. Let’s have a look at these.

Exemptions and deductions
Income tax rules allow tax payers to claim exemption against some investments and expenses that the assessee has incurred out of her gross income. While exemption for HRA can be claimed under section 10(13A) of the Income-tax Act, principal repayment of home loan and interest on it can be claimed under sections 80C and 24b, respectively.

HRA can be claimed as lowest of actual HRA received from the employer or 50% of the salary for employees living in metro cities (40% for those residing in cities other than metro) or actual rent paid minus 10% of salary (basic + dearness allowance + turnover based commission).

Principal repayment exemption can be claimed up to the threshold limit under section 80C, which is Rs.1.5 lakh, or the actual principal repaid, whichever is less.

Similarly, interest repayment can be claimed up to the threshold limit under section 24b, which is Rs. 2 lakh (if the house is self-occupied) or actual interest paid on home loan, whichever is lesser. In case the house you own is rented out, you can claim the entire interest you pay on the home loan as deduction.

What are the requisites?
You can claim HRA exemption if you are living on rent, whereas you claim deduction for repayment of home loan. You can claim tax benefit for both, but only if you fulfil the conditions.

Let’s say you have bought a house by taking a home loan and you also live in it. In this case, you will not be able to claim HRA, but will be able to claim tax benefits on both the principal and interest.

If you have bought a house with the help of a home loan and live in another house on rent, you can claim tax benefit for both. But if the house you bought and the house you live in are in the same city, you should have a genuine reason for not living in the house that you own. The reasons could be that the house you own is too far from your workplace, or the commute is very difficult.

You may need to provide these explanations to your employer, or the income tax authority in case there is a scrutiny of the details that you have provided.

Source : http://goo.gl/KGBqc3

ATM :: Too much freedom to individual banks?

K N V Prabhu | Jan 10, 2015 | Deccan Herald News Service
Since banks have the freedom to levy foreclosure on fixed rate loans, some banks offer loans only on fixed rates.

In the recent past, bank borrowers were lured by advertisements offering low fixed rate of interest on loans for periods as high as 20 years.

While customers can opt for fixed or floating rates for home loans, several new generation banks now offer only fixed rates for car loans, personal loans, gold and other loans meant for individuals.

Apart from the rate per se, an individual should know the difference between a fixed rate and floating rate loan system in banks to take informed decisions while availing loans.

By definition, a fixed rate loan implies the interest rate is fixed during the tenure of the loan (sometimes, fixed rates on long term loans are reset at regular intervals, say once in 5 years). Like interest on fixed deposits, the subsequent changes in the interest rate structure may not affect the pricing of these loans.

On the other hand, floating rates “floats” with the market and get adjusted with the changes in the base rates of individual banks.  Generally, in the present economic scenario where interest rates are expected to fall, it is desirable to opt for floating rate loans.

Regulations: One has to understand why the banks, especially new gen banks, pushes the customers to avail fixed rate loans or even offer many loan products to individuals only on fixed rates.

In June, 2012, RBI directed banks not to levy foreclosure charges/prepayment penalties on home loans on floating interest rate basis. Similarly, from May 2014, in the interest of the consumers, banks are not permitted to charge foreclosure/ pre-payment penalties on all floating rate term loans sanctioned to individual borrowers.

Thus, these directions do not withdraw the freedom of banks in levying foreclosure/prepayments’ penalties on fixed rate loans.

Practices: Since the freedom to levy foreclosure/prepayment charges is available to banks on fixed rate loans, some banks offer loans to individuals only on fixed rates.

At the time of availing a loan, an individual cannot predict his future income during the loan period. These banks expect the loan to be repaid only on the terms stipulated at the time of sanction and deviations, if any, are charged heavily.

It is true that bank incurs a lot of expenses, especially manpower, in pitching the loan products and the processing fees levied may not be sufficient to recover these expenses. Banks expect to earn interest on these loans and for that purpose loans have to continue in the books.

One should know how this freedom is put in practice to the advantage of the banks and, certainly at the cost of innocent borrowers. Practices differ from bank to bank. Banks are expected to charge interest on the daily outstanding balances.

Stipulating a specific date for paying the EMIs and not apportioning the repayments received prior to these dates’ results in interest loss to the borrowers.

Surplus funds
A borrower may have surplus funds with him and bank will not permit him to repay the installments in advance; nor will the bank accept lump sum repayment.

Sometimes, additional interest is charged on the prepayments. Some banks also restrict the number of prepayments during the tenure of the loan.

In the case of gold loans where bullet payments are stipulated, part payments/foreclosure is permitted only after expiry of specific period from the date of loan availment.

Therefore, the borrowers are compelled to park their surplus funds in their savings account earning much lesser interest than they pay on the amount they borrow. At the same time, any delay in repayment is charged heavily by the banks.

Look at the practices for foreclosure! Not permitting the foreclosure during initial stipulated period (say 6 months), charging heavy amount computed as a percentage on the principal amount outstanding (higher the loan period remaining, higher is the rate), levying the interest for the remaining period, stipulating a minimum amount etc cost the borrowers  very heavily.

For home loans, switch from floating to fixed or fixed to floating is permitted at a charge computed as a percentage on the amount outstanding, subject to a minimum absolute amount.

An individual borrower should understand that availing a loan at fixed rates restricts his freedom of servicing the loans and any deviations from the repayment schedule will add to his cost.

A prudent borrower should not be guided by the rate alone. He has to keep the freedom of prepayment/ foreclosure (without loss) with him. And, certainly, he has to prefer floating rates to fixed rates.

In a country like India, RBI has to consider the interest of innocent consumers. RBI has to balance the consumer protection with the freedom to individual banks and consider issuing regulatory guidelines on levy of prepayment/ foreclosure penalties on fixed rate loans also, directs banks to provide both fixed and floating rates on loan products to individuals.

Too much freedom to individual banks in levying charges results in exploitation of ill-informed consumers.

One can hope for some action from RBI in this direction in the days to come.
(The writer is a retired public sector bank executive)

Source : http://goo.gl/UJl22P

ATM :: Loans will be cheaper, but banking services to be expensive in 2015

Bindisha Sarang, ET Bureau Dec 29, 2014, 08.00AM IST | Economic Times


The banking space was a mixed bag for retail customers in 2014. Interest rates remained decidedly high during the year, delighting depositors but dismaying borrowers. HDFC reduced its home loan rates by a marginal 15 basis points.

There was some relief for home loan customers in the Budget. The deduction limit for home loan interest was raised from Rs 1.5 lakh to Rs 2 lakh a year. But this won’t offer any benefit if your loan is less than Rs 15 lakh because the interest will not be more than Rs 1.5 lakh a year.

The RBI introduced several customer-friendly measures during 2014 and even took up cudgels on behalf of the aam admi by laying down a charter of rights. But all these got balanced by a new rule that allows banks to charge for ATM usage beyond five times a month.

Other banks’ ATM can be used for free only three times in a month. After that, transactions will be charged Rs 20. SBI, Axis Bank and HDFC Bank have already started charging customers for usage beyond the free transactions. However, in response to a PIL, the Delhi High Court has asked the RBI to explain why customers should be made to pay for taking out money from their own bank’s ATM.

Financial inclusion at 10

Another major change was the RBI’s nod to allow children above 10 to operate their bank accounts independently. Kids are permitted to use facilities like ATM and cheque books.

The objective is to familiarize children with banking procedures but many parents are skeptical about letting children handle money so early.

Rate cut seems imminent, but…

Though most analysts expect the RBI to cut rates in 2015, it is not clear if this will happen in the next couple of months. Till that happens, make best use of the high deposit rates offered by banks. If you do not have a large sum to invest in a fixed deposit, use recurring deposits to lock in to the high rates.

Bank deposits are not as tax efficient as debt funds, but the 2014 budget levelled some portions of the playing field. If the investment horizon is less than three years, there will be no difference in the tax.

Also, if you plan to take a home loan in 2015, opt for a floating rate loan. Given the imminent cut in rates, a fixed rate home loan will not be a good idea. Customer friendly steps by the RBI in 2014:

KYC norms eased

Customers may submit only one proof of address when opening a bank account or during periodic updation.

Prepayment charges

Banks not to charge foreclosure charges on floating rate loans.

Minimum balance in savings accounts

Instead of penal charges for not maintaining minimum balance, banks should limit services available on such accounts.

Minimum balance in dormant accounts

Banks not to levy penal charges for non-maintenance of minimum balance in any inoperative account.

Banking for minors

Minors above the age of 10 allowed to open and operate savings bank accounts independently.

SMS alert charges

Banks told to charge customers only on the basis of actual usage.

Source : http://goo.gl/8oiRHw