Lower interest rate should not be the only criteria for initiating the transfer of your home loan.
By: Naveen Kukreja | Published: June 14, 2016 2:01 PM | Financial Express
Sachin had taken a fixed rate home loan of Rs 40 lakhs in December 2013, with 20-year tenure at 10.5 per cent p.a. Although the bank has progressively reduced its home loan rates since, he has not benefited from it as he had opted for fixed interest rate. His requests for converting the loan to floating-rate were declined by his lender. Finally, he decided to transfer his home loan to a new lender, at lower rate of interest.
Falling interest rate has been prompting many borrowers to opt for home loan balance transfer, like Sachin. However, lower interest rate should not be the only criteria for initiating the transfer of your home loan. There are other scenarios that work in favour of home loan balance transfer. Let’s look at what home loan balance transfer entails:
When to opt for home loan transfer
Lower interest payouts: Reduced interest payout due to lower interest rates is the primary driver behind the decision. However, remember that the earlier you transfer your loan, the more will be your savings. Opt for home loan transfer if the savings generated is large enough to leave you with sizeable amounts for further investment apart from covering the cost of transferring the loan.
Poor service from existing lender: Poor service from your existing lender can also be a valid reason for you to transfer your home loan. Opt for it if your existing lender does not extend special offers or privileges (even after consistently repaying your outstanding balance) or refuses to bring the interest rates at par with the ones offered to new lenders.
Non-approval of top-up loans: Consider switching your loan if your existing lender does not allow you to avail top-up loan. Banks and NBFCs may offer such loans to existing borrowers in case they need funds over and above the existing home loan amount. These are quite similar to personal loans in the sense that lenders don’t monitor the final use of loan proceeds and hence, you may use it for home renovation, buying consumer durable or even for meeting emergency expenses. The interest rates on top-up loans are usually lower than the ones charged on personal loans.
Renegotiation of terms and condition: As transferring your home loan is similar to availing a fresh loan, you can negotiate with the new lender for changing some terms and conditions. You can opt for increasing your loan tenure to reduce your EMI or for decreasing it if you are comfortable with paying higher EMIs. However, remember that increasing your loan tenure will increase your interest payout.
Freeing up collaterals: As you must have already paid a substantial amount of your existing home loan, your collateral for the new lender should be based on the outstanding amount. This will allow you to free up some of the collaterals. You can then use the freed up collaterals take new loans for your business or other uses.
When not to opt for home loan transfer
If fees and charges are high: As the new lender will treat your home loan balance transfer as a new loan application, the new lender will charge various fees and charges, such as processing fees, conversion fee and administrative charges. Calculate these charges and compare them with the amount saved on reduced interest payout. If the savings is not substantial, continue with your existing lender.
If existing loan is in its last leg: Transferring your loan at the end of its tenure will not make much sense as the reduction in interest payout will be balanced out by the efforts and costs incurred while transferring the home loan.
Opt for home loan balance transfer only if the benefits outstrip the costs and efforts involved by a significant margin. Have a frank conversation with your current lender about your intention to transfer the loan. If your current lender agrees to reduce the rates and the resultant savings is more or less equal to the savings from loan transfer, consider continuing with your current lender.
The author is CEO & Co-founder, Paisabazaar.com
Source : http://goo.gl/7Hw9ql
Nov 2, 2015, 08.00AM IST | Economic Times
Arvind is an IT professional, living in a metro with his wife and children. His income has been steadily rising over the last 10 years. The family leads a comfortable life, despite servicing a home loan taken eight years ago. Arvind’s wife now wants to renovate the house. The family had not planned on or saved for this expenditure. Arvind is unable to spare any funds and he does not want to draw from his existing investments. Since the renovation is going to be a one-time expenditure, his wife suggests that they take a personal loan. Is that the right thing to do?
Arvind is not keen on going through the hassless of applying for a new loan. Since he already has a running home loan, his financial adviser suggests taking a top-up loan, which would be a better and faster option than a personal loan. Arvind will be eligible for a top-up loan now since the original loan was taken eight years ago and he has been diligently paying all the EMIs towards repaying that. Moreover, thanks to the steady rise in his income, he will be eligible for a sufficiently big topup loan.
Considering Arvind is an existing customer, the documentation and the overall process will be fast in case of a top-up loan as there is an existing relationship and the history is known by the lender. Moreover, with a top-up loan, he gets the benefit of a longer repayment tenure. The maximum tenure for a personal loan is 5 years while a top-up loan’s tenure could go up to the remaining tenure of the home loan. Also, the interest rates on top-up loans are lower than a personal loan. A personal loan is unsecured, while the top-up is an additional home loan secured by the property. Additionally, Arvind will be able to seek tax benefits as he plans to utilise the top-up loan amount for renovating the existing house.
For someone like Arvind who has a good repayment track record, availing a top-up loan may work out to be an efficient solution. He would get the benefit of a secured loan (lower interest rate and EMI, longer tenure) without having to mortgage a new asset. He should, however, review the insurance cover for the loan and ensure that it is also modified to cover the new increased liability.
VINEET JAIN CEO, Loanstreet.in | Moneycontrol.com
Balance transfer can help you save money on interest and at the same time allow you to raise additional money to retire high cost borrowings such as credit card debt and personal loans.
Electric switch at home gets the lights on, and brightness brings cheer. Switch a.k.a. balance transfer of your home loan is also like that.
First of the month is a great day, salary credited to account and lots of positive mood. But many-a-time the cheer goes away by third of that month itself as equated monthly installments (EMI) have been debited and all the bills have been paid. To protect the lifestyle one has, it is very important to manage the biggest expense every month and WHAT’s THAT? Of course, the EMI(s).
So, finding an alternative lender who is going to give a better deal for the loan makes perfect sense.
Benefits of balance transfer
In the floating return of interest era; lenders are quick to increase the EMI whenever monetary policy hardens the rate regime, but are slow in passing on the benefit when the reverse happens. Although, they do offer sweet deals to new customers they acquire. So, a balance transfer is sure way to get a reduction in rates and reduce the monthly outflow towards loan repayment.
With new zero foreclosure regime, cost of switch has become zero and one can get additional money against the same property and / or basis the same Income. It is also a fantastic self-controlled debt restructuring tool as additional money raised can be utilized to close any short term unsecured outstanding such as personal loan or credit card dues.
Self-employed segment loves the balance transfer product as they can use the same for funding their business finance requirements as an alternative to working capital finance products. They unlock the equity in their property by raising additional money on the same through the transfer route. As soon as the property appreciates and they see an interest rate differential available in the market, they can transfer to the best rate lender and take a higher tenure to get as much top-up loan as possible. They can then use this additional money; given at a longer tenure to retire their short term and higher interest debts such as unsecured business loans.
Who should apply?
If the rate of interest of the existing loan can be reduced by at least 50 basis points (half percentage point) by doing a balance transfer, one can consider the option. For illustration – An INR 50 lakh home loan with tenure of 20 years will save Rs. 1668 in EMI and Rs. 4 lakh in interest outflow over the tenure, if switched from 10.5% to 10% rate of interest. The same loan saves Rs. 2657 in EMI if switched to 9.7% rate of interest and saving in interest outflow of INR 6.37 Lakh. As quite a few banks are offering 9.70 % as the home loan rate now.
There can be three possible objectives for a balance transfer – reducing EMI, reducing total interest outflow or raising additional money. EMI and interest outflow comparison should be done keeping the tenure constant in both the existing loan and the new loan by the prospective lender; as a higher tenure will save immediate outflow but will result in a higher interest outflow overall.
But in case of additional loan amount as the main consideration, a higher tenure in the new loan is always beneficial as it will result in lower EMI, higher income eligibility and hence maximum amount of top-up, additional loan.
Factors to consider
One should always assess the following:
• Tenure of the new Loan,
• Any additional conditions by the new lender,
• Fees charged by the new lender
• Any government charges, such as 0.2% stamp duty charges in maharashtra
• EMI Saving,
• Additional loan amount as top-up
A word of caution is that a balance transfer might not work if the remaining tenure of the loan is low as the new lender might offer a higher tenure and give you lower EMIs but a fresh loan has high interest outflow and so overall, it is going to be more expensive than the existing loan.
Source : http://goo.gl/1vY0cQ
But tax exemption will depend on the purpose
Priya Nair | Mumbai July 16, 2015 Last Updated at 22:33 IST | Business Standard
Balance transfer of home loans has become very common after the removal of penalty on pre-payment. Many banks are offering borrowers the option to avail of a top-up loan while doing the transfer. The advantage is the possibility to shift to a lower interest rate loan and getting a higher amount at the same time. The additional amount can be used for any purpose as long, as it is not speculative in nature.
Today, banks are willing to offer top-up home loans at the same rate as a home loan, as a strategy to entice borrowers to do a balance transfer, says Gaurav Gupta, of Myloancare.in, a home loan advisory.
“Most banks tend to price top-up loans closer to rates on loan against property (LAP). But to make balance transfers attractive, many are offering discounts on top-ups as an incentive,” Gupta says.
As compared to an LAP, the advantage of a top-up home loan is a lower interest rate and longer repayment period. Processing is also faster since the bank already has your property documents, says an official from State Bank of India. “We offer up to a maximum of Rs 5 crore and repayment period of up to 15 years on a top-up loan. If the repayment period on the original home loan is 10 years, the top-up can continue up to five years after that.”
Some reasons why people take a top-up loan include home renovation, home extension, childrens’ education, medical emergency, etc. In the case of businessmen, the loan can be used to meet a cash flow requirement. Remember that the tax exemption will be available only if the purpose is home extension or home renovation and not for any other purpose, points out Gupta.
“The bank will take an undertaking from the borrower about the purpose of the loan. If the purpose is children’s education or investing in business, then the top-up amount will not be eligible for tax exemption,” he points out.
A top-up loan can also be used for repaying off other loans like auto loan or personal loans, says Brijesh Parnami, chief executive officer, Destimoney Advisors. “If customers have the ability then we advise them to take a top-up and consolidate other loans, as it will work out cheaper. Today, with banks offering similar repayment terms as a home loan, it makes sense to take a top-up loan. We see lot of customers opting for top-up while doing balance transfer,” he says.
Typically, the rate on LAP is 11-12 per cent, while on top-ups it is around 9.5-10.5 per cent. The eligibility for top-up depends upon two factors — value of the property and the EMI paying capacity of the borrower.
Assume, borrower took a 25-year home loan of Rs 50 lakh at 10 per cent to buy a property worth Rs 65 lakh when he was getting a salary of Rs 75,000 per month. The EMI would come to Rs 45,435. Then after five years, the borrower wants to take a top-up loan.
Assuming the property value has grown at nine per cent, it will be worth around Rs 1 crore. The bank will offer home loan at a loan to value (LTV) of 75 per cent and top-up loan at 65-70 per cent LTV. In this scenario, the maximum top-up loan possible is around Rs 25 lakh (given that the home loan is still running). The combined LTV would be around 73 per cent.
Similarly, if the customer’s income has grown to Rs 1,25,000 per month, he would be eligible for a top-up loan of up to Rs 35-37 lakh. So, the customer would be eligible for the lower of the two amounts as a top-up loan – that is Rs 25 lakh in this case.
The eligible amount for LAP would be lower by about 20 per cent due to the higher rate of interest. The second issue is that since the house is already mortgaged to the bank for a home loan, an LAP might not be possible on the same property at the same time.
All said and done, borrowers should avail of loans only if extremely necessary. For those borrowing more or merely extending the tenure, they will end up paying more interest to banks, not prudent for their financials. But, if one is combining all other high-cost loans into a single top-up loan at a lower interest rate, it would be the best, provided the tenure is the same or lesser.
Top up loans have costs such as processing fee and in takeover cases foreclosure charges of previous home loan. Top up loan need not necessarily offer tax sops.
Adhil Shetty, Bankbazaar.com | Source : MoneyControl.com
Ravi, an IT professional received a call from a bank offering a home loan. When Ravi told that he already had a home loan with a different bank, the caller suggested a loan transfer to their bank, with an offer of an additional Rs 10 lakh as top up loan.
The offer seemed lucrative for Ravi who was eyeing a new sedan and was looking to fund his buy. His existing bank had offered him a car loan at an interest rate of 11.5%. Hoping to save on his interest outgo, he had approached his existing bank for a top up loan to fund his car buy, only to be offered a top up loan of Rs 5 lakh at 10.5%.
The top up loan offer from the new bank sounded attractive for Ravi, as they not only offered to takeover his existing loan at 10.25% but also offered a higher top of loan of 10 lakhs, which would be sufficient for his car purchase.
All in all, Ravi’s problems appeared to be solved. But, is it really? Let’s take a closer look.
Understanding ‘Top-up’ loans
Top up loans are offered only to existing home loan borrowers with a good repayment track record. Top up loans work on the basic principle that since you have started reducing your outstanding loan amount by repaying it, a margin money by way of a top up can be added to your loan account. The amount taken as top up loan can be used for any purpose like wedding expenses, medical expenses, car purchase, or any other.
If you are transferring your existing home loan to a new bank, they will also offer you a top up loan, provided you have a good track record with the other bank.
Now let’s run the numbers in Ravi’s case.
The math in Ravi’s case
In Ravi’s case, his existing home loan was at a fixed interest rate of 10.5%. The new bank offered him a takeover, plus a top up loan of Rs 10 lakh at 10.25%. Ravi who was in need of money didn’t think twice on hearing the offer. But, let’s do the math.
Ravi’s current principal outstanding was Rs 38 lakhs. As it was a fixed rate loan, he had to pay 2% of the outstanding as pre-closure fee, which comes to around Rs.76,000. Now, the new bank charged Ravi a processing fee of 1%, i.e., around Rs.48,000. So altogether, he paid around Rs.1.24 lakhs for the transfer.
What Ravi did not realize was that the difference in the interest rate was only marginal, i.e., 0.25%. So, the additional expense he incurred during the switching process in fact exceeded the amount he saved on interest outgo, which was around Rs. 1 lakh.
Here are few things you should know before taking up a top up loan.
A lucrative top up loan offer may lead to a bad loan take over: A top up loan offer along with a takeover may sound lucrative, but weigh the deal after calculating the possible charges associated with it.
No tax advantage: You will get a tax advantage for a top up loan only if you use the loan amount exclusively for repair, renovation and construction activity of the home. Otherwise top up loans are loans with no tax sops, unlike a home loan.
Charges for the loan: Banks charge a processing fee to facilitate top up loans. For customers who are shifting their home loans from a different bank, the processing fee is applicable for the takeover as well as the top up amount. Also, most top up loans are offered at 0.5-1.0% higher interest rates than a usual home loan.
No say in property price appreciation: Most banks offer top up loans in accordance with the amount of money which is reduced by the outstanding amount of the home loan through repayment. Even if the property price witnesses an increase in price index, the quantum of top up loan may not be increased by the bank. Many customers who wait for top up loans realize this at a later stage.
Banks have the final call: While top up loans may have their benefits and are even considered superior to personal loans, banks are the final authority in approving or rejecting any top up loan plan. Even if you receive a deal from the tele-sales person, the final call on approving your loan lies with the credit department.
The Bottom Line: Even if you may not need a loan, the prospect of an easily approved loan where the funds can be used in any way is far too alluring for many borrowers. So, if you think the persuasive telesales representative who is asking you to consider a loan takeover by offering you a top up loan is doing you a favor, ask the right questions, analyze the deal end to end, and then take a final decision.
Opt for balloon schemes if you are capable of paying a large instalment upfront
Gaurav Khurana | June 13, 2015 Last Updated at 22:26 IST | Business Standard
In India, 80 per cent of car buyers avail of a loan to buy their dream car. The car loan market is growing at a rapid pace and the leading financial institutions are launching innovative and attractive schemes for the buyers.
Buyers have a variety of offers and repayment schemes to choose from depending on their needs. For elasticity in loan repayment, there are options such as the Tata Balloon Scheme, a bullet scheme. Then, there are external top-up options from HDFC or Tata Capital for those looking for money against their cars.
The balloon scheme
Tata Balloon Scheme is for customers who can periodically repay a larger instalment for their car loan. It allows customers to repay a fixed amount in two different formats 11- 1 and 1-11. For a loan tenure of one year, if the criterion is 11-1, a customer pays 11 smaller installments first and then one larger installment at the end of the year. This plan is especially beneficial for those who expect cash flows at the end of a certain period – for example, salaried employees who expect a bonus during a certain month. The other format allows customer to pay one large instalment followed by 11 smaller instalments.
Let’s take an example to understand this. Thirty-year-old Karan Singh works in an IT company and has availed of a car loan of Rs 1 lakh. If he avails of a normal repayment scheme, he will pay a fixed equated monthly instalment (EMI) of Rs 8,840 for one year. On the other hand, if he avails of a balloon scheme using the first format, he will pay 11 smaller installments of Rs 7,553 and one larger instalment of Rs 23,800. In the second format, he will pay one larger instalment of Rs 22,800 followed by 11 smaller installments of Rs 7,500 each.
As can be seen from the table, the balloon scheme has two sides to it. Depending on the format chosen, either the borrower or the bank will benefit. If you pay the larger EMI first and the smaller later, the borrower stands to gain. If you pay the smaller EMIs first and the larger EMI towards the end, you will end up paying more interest compared to a normal loan scheme. So, borrowers wanting to avail of the Tata Balloon Scheme will do well to choose the 1-11 format.
The top-up option
Those who have taken a car loan but are not able to pay their next EMI, can avail of an external top- up loan from banks. They can get a loan against the financed car to get their engrossment brought to a close. So, the scheme has two benefits: foreclosure of your previous car loan and an additional loan at a rate (about 15 per cent) which is cheaper than a personal loan (17-18 per cent).
HDFC, for example, has a special scheme if you are looking for cash against your car. The bank will foreclose your running car loan and initiate it with the additional amount. HDFC will calculate your eligibility and provide you finance according to your eligibility. To avail this scheme, 18 EMIs of your car loan should be paid and your EMI track record should be clean. The formula to calculate the eligibility is:
EMI amount*tenure paid*multiplier (1.5) = loan amount
This will be your additional loan amount.
Let’s take an example to understand this. Pankaj Rao has a running car loan of Rs 5 lakh from a bank ‘X’. He has repaid Rs 3 lakh to the bank by paying 20 EMIs. Rao requires another Rs 2 lakh to close the loan. According to the eligibility criterion, he can get a top-up of Rs 4.5 lakh. After availing this top-up, HDFC will close his running loan by repaying remaining Rs 2 lakh and also provide him an additional Rs 4.5 lakh. Thus, Rao will become a customer of HDFC by availing a total loan amount of Rs 6.5 lakh. Though the process is a bit lengthier, the top-up scheme can help borrowers purchase their dream car as well as get an additional loan.
NBFCs are more lenient regarding top-up schemes. Tata Capital, for instance, is a recent entrant into the market. If you have not defaulted in paying 18 EMIs for your existing car loan, you can get a funding of 120 per cent against your car from Tata. If you have a clean track record of paying 12 EMIs, you become eligible to get 100 per cent funding.
By availing such options, one can enjoy a certain amount of flexibility during repayment. Borrowers should, however, acquaint themselves with different aspects of these schemes to ensure that they choose the right option and do not fall into a debt trap. For instance, if you are opting for 11-1 balloon scheme, be certain that you will be able to pay a larger lumpsum at the end of 11 months.
The writer is CEO, Dialabank
Source : http://goo.gl/DMhrvN
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