Tag Archives: mortgage

Should you buy your property on a bank loan

Many experts are of the opinion that even if you have the funds to purchase your dream house, you should still opt to buy the property through a bank loan.

There are several advantages a bank loan would offer a property buyer. A property buyer in most cases is unaware and doesn’t have the time to go about checking the authenticity of the title and various other legal documents of the property.

Banks on their part conduct a thorough check on the property and only after satisfying itself with all the legal aspects of the property process the loan application.

Apart from the fact that a bank’s due diligence amounts to a legal health check for the property, there are significant tax benefits involved in purchasing a home through a home loan. Also, more importantly, home loans are often the only financially viable means for someone from the middle class to purchase a home in the first place.

The Income Tax Act, 1961 provides tax benefits for assesses who have taken home loans. The mortgage payments done by the home loan borrowers help him get some tax deductions from his total taxable income.

The monthly mortgage payments comprises of two parts that is the principal and the interest component.  Both the principal repayment and the interest component qualify for tax deductions. Under section 80C of the Income Tax Act, the borrower can get a tax deduction for a maximum amount of Rs. 1.5 Lakh for outstanding principal paid each year under this section irrespective of his tax bracket.

Under section 24 (b), the borrower can claim tax deductions for a maximum of Rs.2 lakhs per annum for the interest paid.

Purchasing a property through a bank loan also provides for financial efficiency to the property buyer. The bank loan is available at 10.5 – 11 percent interest rate today. Also if you factor in the inflation figures of around 7 – 8 percent and the rest in tax savings, it’s a win – win situation for the buyer.

Should you shift to lower home loan rates or switch lenders?

Beautiful-Houses-Sun-House-in-Singapore-300x197

Thousands of State Bank of India’s home loan customers were in for a pleasant surprise a couple of weeks ago.

The public sector giant addressed their long-standing pet peeve by providing an option to shift to lower interest rates after paying a conversion fee of 1%.

This will mean reduction in equated monthly installments (EMIs) or loan tenures, especially if you have taken a home loan prior to 2009, when the teaser, or dual, rate schemes were announced. For years, banks and housing finance companies (HFCs) have been accused of meting out step-motherly treatment to their existing home loan borrowers.

While the lenders are eager to offer lower rates to attract new customers, the largesse is not extended to the existing customers, even when the rates are falling. SBI has addressed the issue by coming out with the conversion scheme.

Other lenders like ICICI Bank, HDFC and Standard Chartered Bank also allow such conversions, subject to conditions, in return for a fee of 0.5%-1.75% Add to this the waiver of pre-payment penalties by HFCs as well as some banks, and the old customers are better equipped to secure their best interests than ever.

However, this does not imply that switching between, or within, the banks is going to be any easier. The decision has to be taken on the basis of multiple factors and a meticulous cost-benefit analysis.

ADVANTAGE SBI CUSTOMERS?

“Overall it’s a good move by SBI as this would allow many customers to reduce the interest liability of their loans. We believe this would be more beneficial for customers with larger loan outstanding or a longer tenure,” says Kapil Narang, COO, Ameriprise India, a financial planning firm. However, this does not mean that you will gain nothing if you are repaying a smaller-ticket-size loan.

“Now, say such borrowers wish to switch to another lender to avail of the lower rate of interest, and their existing lender has waived off the pre-payment penalty. But, they may still have to incur other expenses like processing fee, pre-sanction fee, advocates’ fee for title investigation, valuers’ fees for valuation report, stamp duty for loan agreement and mortgage etc. Instead, if they opt for conversion, such charges will not come into the picture,” points out VN Kulkarni, chief counsellor with the Bank of India-backed Abhay Credit Counselling Centre.

ASSESS ALL PARAMETERS

In both the cases, it is critical to determine whether the savings on interest outgo would be substantial enough to justify the conversion. For arriving at this figure, you need to take into account several factors, including the balance tenure, loan outstanding, difference between current and new rates of interest, charges involved and the nature of the loan (that is, fixed or floating).

FIXED AND FLOATING

Probably, the first ones to be tempted by conversion offers would be those looking to alter the nature of their loans – from fixed to floating and vice-versa. Floating rate borrowers, after witnessing a sustained rise in rates over the last few months, could see this as an opportunity to move to fixed rates and bring in an element of certainty to their monthly budget.

However, this may not be advisable now, considering that fixed rates are significantly higher and interest rates are expected to start declining within a few months. On the other hand, if you have been servicing a high-interest, fixed loan, you may see floating-rate loan as a more sensible option.

“Customers with a fixed rate of 12% or more should consider switching to a floating rate because in the long run, the RBI may implement rate cuts, which will bring down lending rates,” says Narang of Ameriprise. If you have obtained a ‘teaser-rate’ home loan scheme, floated by many banks, you can adopt a wait-and-watch policy.

“Such borrowers need to take a look at the rate of interest. If it is lower than the present floating rate, they should continue till the tenure ends and take a call then, as interest rates may soften in the coming days,” says Kulkarni.

CONVERSION VS REFINANCING

Then, there would be those who have made up their minds to switch to another lender to make the most of lower rates being offered. And, it is precisely these customers that conversion schemes like SBI’s are targeted at, with an aim to keep them in the fold.

In this case, the cost-benefit analysis will depend on a combination of all the parameters mentioned so far. These factors will help you ascertain whether the savings arising out of internal conversion will be higher than transferring the loan to another bank or HFC.

“If the interest rate differential you are getting post switching your loan to another bank is substantial, it may make sense to switch, in spite of the prepayment and processing fee involved,” says Narang. For instance, say you are repaying a Rs 50-lakh loan with a tenure of 20 years, taken in January 2008, when the interest rate was 13.75%.

Today, the bank’s rate has dropped to 11% per annum, although the benefit hasn’t accrued to you. Now, you have two options: Opt for the bank’s conversion scheme after paying a charge of 1%, or switch to another lender who is offering a rate of 10.75%. If you opt for the conversion scheme, you will save Rs 16.67 lakh over the balance repayment period.

However, if you go for the refinancing option, your total savings will vary as per your existing bank’s pre-payment penalty policy. In case you have to pay this fee, your savings in case of a switch will amount to Rs 17.21 lakh, after accounting for various charges. If the penalty has been waived off, it will be Rs 18.17 lakh. Thus, in this example, your net savings will be higher in switching than in conversion.

However, remember, reduction in interest pay-out need not be the sole deciding factor. You need to look at the ancillary charges mentioned earlier, like fees to be paid to the advocate and the valuer, to estimate the effective cost of the switch on your pocket.

“While evaluating your savings from the switching option, you must look at the cumulative effect for the remaining tenure. You should also consider the service quality from the new bank and the documentation hassles involved,” adds Narang.