So you have finally decided to buy your own house? With this single decision a chain of other decisions follow, ranging from choosing the property, choosing a home loan offer to deciding the furniture for the new house. But there are many pitfalls that can turn this smooth process into a bumpy one. Here are some of those pitfalls that you should be aware of and avoid.
Topics
Look deep in your wallet before deciding the property
Evaluate market conditions
Debt liabilities
Increase the down payment
Always prepay
The family bank
The processing fee
The fine print
Look deep in your wallet before deciding the property
So you have chosen and set your heart on a house that is perfect! But have you given some deep thought to whether your wallet will be able to handle your dream? Going for a house that you can’t afford to pay for is like eating more food than you can digest. You end up with indigestion.
• Look closely at your lifestyle and financial capabilities.
• Plan for an unfortunate eventuality like loss of job or illnesses and ensure that your wallet will be able to take the pinch for a few months at least.
• Look at your other debt liabilities before going in for the home loan
Evaluate market conditions
• Understand the real estate market and evaluate if the property prices are stable and not likely to fall further
• Do your research on home loan interest rates, see if they are likely to decrease or increase in future depending on the existing market conditions, you may not want to lose out on a good deal because you jumped in too early
Debt liabilities
Having high credit card outstanding and a number of other loans, not only brings the eligibility for higher loan amount down, it also increases the burden of paying all of these debts off.
If your home loan EMI is around 10% to 15% bracket of your income, it would be a smart deal. It would be even better if your total debt liability is within the 10-15% range, but normally, that is not the case, so try to pay off all your high interest/long tenure debts sooner.
Increase the down payment
When you go for home loan, you have to pay around 10% to 15% of the project cost and around 85% to 90% is funded by the bank or financial institution. If you have more than the required amount for ‘down payment’ then pay more, so that your required debt is reduced significantly.
Always prepay
Also, when you have any loan try not to extend the loan to its complete tenure. As and when you have excess cash, try to prepay. For example, you could prepay from your yearly bonuses or from your savings from the salary hikes that are expected to happen periodically. Prepaying can lower the tenure and help you save on interest. However, check with your bank from when you can start prepaying, as banks do not allow prepayment during the first six months or the first year of the loan period. Even when they allow prepayment after this time frame, there still would be a prepayment penalty attached. Just make sure the interest saved does not exceed the prepayment fee that you will need to pay the bank. As long as that is taken care of, prepayment is the best way to close a loan early and save significantly on interest.
The family bank
It is not essential to opt for the same bank that your brother took his home loan from. Well, brotherly love aside it is better to do your own searching in terms of the deals offered by different banks.
Moreover, your brother's offer for the same loan amount and tenure could be different from what is offered to you, as the offers and interest rates vary according to the credit profile of the borrower. The offer that your brother got is according to his credit profile. So, it is always possible that you might be able to get a better deal from some other bank.
The processing fee
If you have nothing in writing from the bank, it is possible that you might lose the processing fee that you pay to bank in case the loan does not get approved.
So, either you get something in writing from the bank or factor in all this money for these kinds of losses.
The fine print
Most of us just close our eyes and sign on the dotted line. What we forget to read are the clauses that are in fine print in the loan agreement. You need to understand the significance and impact of these various clauses before you sign the agreement. Some these clauses to watch out for include the force majeure clause and Reset Clause on Fixed Rates. Read more on these clauses hereInstead of ending up in a financial hellhole it is better to take some time out to read through the loan agreement carefully.
Loan Guarantor — To be or Not to be
Amit Saxena (name changed) is a software professional who was asked by his friend to be the guarantor for a loan of Rs. 2 L. Being a very ‘close friend’ Amit agreed immediately. Six months through the loan the friend disappeared without any trace and Amit was left with the substantial burden of paying off the loan.
This could be a situation where you could be caught up. Many of us at one point in time or other have been asked to be a guarantor for a friend’s or relative’s loan. Our answer to the request may have been based on any reason. However, in a culture like ours where we are prone to help our friends and relatives, it is important to understand the pros and cons of being a loan guarantor.
Topics
Who is a guarantor?
When is it ok to be a guarantor for a loan?
When is it not ok to be a guarantor?
Is being asked for a guarantor an indicator of the credit worthiness of an applicant?
What can happen if the person who I have agreed to be a guarantor for defaults?
Will being a guarantor impact my chances of obtaining another loan?
How should I decide whether to be a guarantor or not?
Who is a guarantor?
A guarantor is someone who agrees to be responsible for the payment of someone else's debt should the latter default on payments. It is important to understand that being a guarantor is not a mere formality to help a borrower obtain a loan. The guarantor is equally responsible for paying off the loan.
When is it ok to be a guarantor for a loan?
Being a guarantor is always risky because you cannot guarantee another person’s behaviour. However, since it is very subjective, the decision to be a guarantor should be based on the knowledge of the borrower’s financial capability to pay off the loan.
When is it not ok to be a guarantor?
If you come to understand that the bank is asking for a guarantor because of it is unsure about the borrower’s repayment capability, it is important to take a close look and understand the borrower’s financial capability yourself.
Is being asked for a guarantor an indicator of the credit worthiness of an applicant?
While credit worthiness is one of the major reasons a person is asked for a guarantor, it also does not necessarily mean that the borrower’s credit worthiness is being questioned. It could be based on other reasons such as:
• The applicant has a transferable job
• The applicant job’s involves frequent travel abroad
• Loan is applied at a place other than the applicant’s permanent address
What can happen if the person who I have agreed to be a guarantor for defaults?
When you sign on the dotted line and agree to become a guarantor, you are legally bound to pay off the debts if the primary borrower defaults. If the borrower does default, then:
• Banks will hound you to clear the debts
• Personal assets such as bank accounts, cash as well as property could be attached (except for provident fund and agricultural land which cannot be attached under any court decree) and you could turn bankrupt
• Your credit standing could get affected; which means that if you need any credit in future, your chances of getting the same could be dim.
Will being a guarantor impact my chances of obtaining another loan?
Yes, it will. Most banks and financial institutions look at the loan that you are a guarantor for, as a loan that you hold. They will therefore deduct that much amount from your loan eligibility. Also, if the borrower has defaulted on some payments during the course of the loan, this also shows up on the guarantor’s credit history. This can additionally reduce your chances of getting a loan.
How should I decide whether to be a guarantor or not?
An important question to ask your self when you are asked to be a guarantor is ‘Am I ready to repay the loan?’ If the answer is yes, go ahead, be a guarantor. If no, then you have to base your decision on a stronger reason than ‘He is a close friend’.
On a final note, if you do become a guarantor, you have to understand that there is no turning back. You cannot revoke your guarantee after the loan has being sanctioned. So, before you do sign the dotted line, check whether the contract tells you the amount you are guaranteeing, the situations in which you will have to repay the loan and if the amount to be borrowed can be increased without you being told.
Thursday, March 18, 2010
Basics of a Personal Loan
Personal loans are the one of the most widely chosen options, in case you are in a spot and need some urgent cash. However, personal loans are tricky and you need to know as much as possible about their basics before applying for one. Let’s start with some common questions.
Topics
What is a personal loan?
Who is eligible for a personal loan?
What kinds of interest rates are offered on personal loans?
What is the average interest rate for personal loans?
What documents are required for personal loans?
How is a personal loan repaid? Is prepayment of a loan possible?
How is a personal loan different from credit card cash advances and loan against property?
What is a personal loan?
Personal loan is credit that is granted to the borrower for personal use. These loans are usually unsecured (no security or collateral required/asked) and is based solely on the borrower's integrity and ability to pay.
Who is eligible for a personal loan?
The eligibility criteria and their specific details may differ from banks to bank based on their perception of the risks associated with given out personal loans. However, nearly all banks divide the potential borrowers into three categories:
• Salaried individuals
• Self employed individuals
• Self employed professionals
Other factors which are taken into consideration are, age, residence, work experience, repayment capacity, past obligations and place of work.
What kinds of interest rates are offered on personal loans?
Personal loans are offered in:
• Fixed rate
• Floating rate
• Flat rate
Of the three, flat rates turn out to be the most expensive since the other two are calculated on a reducing balance basis.
What is the average interest rate for personal loans?
The interest rate for a personal loan is decided on the basis of your credit repayment capability and history. Depending on this, interest rates could be anywhere between 14% and 25%, depending on the financial institution.
What documents are required for personal loans?
Personal loans require the least number of documents, making it the fastest to be approved. Typically, financial institutions would require proof of identity, residence, income and also 3 to 6 months of your bank statements. Some banks also require guarantors and the same set of their documents.
How is a personal loan repaid? Is prepayment of a loan possible?
Normally, personal loans are offered between 1 to 5 years. The loan is repaid with Equal Monthly Instalments (EMIs). Prepayment is possible but will generally carry a significant prepayment charge.
How is a personal loan different from credit card cash advances and loan against property?
Personal Loan
Credit card Cash Advance
Loan Against Property
Unsecured loan
Unsecured Loan
Secured Loan
Between 15% and 25%
For rollover credit (amount allowed to be rolled over and paid later) interest can go up to 35%
Between 12% and 15.75%
EMIs are higher because of high interest rate
Minimum monthly payments can be made. However, the interest keeps on adding up
Since the rate of interest is lower, frequently LAP Equated Monthly Installments (EMI) turns out cheaper
Maximum loan eligibility is determined primarily by an individual's income
Maximum amount is determined primarily by the credit limit on the card
Maximum loan eligibility is determined primarily by the value of the property and income
Tenure between 1 to 5 years
Can be paid off monthly
Tenure maximum of 15 years
These are some basics that you should know when obtaining a personal loan. These days, securing a loan is easy. Repayment is the tough bit. When you don't repay on time, the recovery agent may come knocking at your door.
When getting a personal loan it is important to ask yourself ‘Will I be able to pay it off?
Some things which can help you pay back your personal loans are:
Pay off your credit cards: Try to pay off your credit cards as soon as possible, since credit card debts inadvertently hamper loan payments.
Budget your spending: Once you have taken a loan, ensure that you budget your spending, so that if in any unforeseen circumstance you cannot make a monthly payment, your savings will help you out.
Personal loans if not utilized and repaid properly, can become a curse in disguise. Make your decisions prudently to ensure a safe financial future.
Topics
What is a personal loan?
Who is eligible for a personal loan?
What kinds of interest rates are offered on personal loans?
What is the average interest rate for personal loans?
What documents are required for personal loans?
How is a personal loan repaid? Is prepayment of a loan possible?
How is a personal loan different from credit card cash advances and loan against property?
What is a personal loan?
Personal loan is credit that is granted to the borrower for personal use. These loans are usually unsecured (no security or collateral required/asked) and is based solely on the borrower's integrity and ability to pay.
Who is eligible for a personal loan?
The eligibility criteria and their specific details may differ from banks to bank based on their perception of the risks associated with given out personal loans. However, nearly all banks divide the potential borrowers into three categories:
• Salaried individuals
• Self employed individuals
• Self employed professionals
Other factors which are taken into consideration are, age, residence, work experience, repayment capacity, past obligations and place of work.
What kinds of interest rates are offered on personal loans?
Personal loans are offered in:
• Fixed rate
• Floating rate
• Flat rate
Of the three, flat rates turn out to be the most expensive since the other two are calculated on a reducing balance basis.
What is the average interest rate for personal loans?
The interest rate for a personal loan is decided on the basis of your credit repayment capability and history. Depending on this, interest rates could be anywhere between 14% and 25%, depending on the financial institution.
What documents are required for personal loans?
Personal loans require the least number of documents, making it the fastest to be approved. Typically, financial institutions would require proof of identity, residence, income and also 3 to 6 months of your bank statements. Some banks also require guarantors and the same set of their documents.
How is a personal loan repaid? Is prepayment of a loan possible?
Normally, personal loans are offered between 1 to 5 years. The loan is repaid with Equal Monthly Instalments (EMIs). Prepayment is possible but will generally carry a significant prepayment charge.
How is a personal loan different from credit card cash advances and loan against property?
Personal Loan
Credit card Cash Advance
Loan Against Property
Unsecured loan
Unsecured Loan
Secured Loan
Between 15% and 25%
For rollover credit (amount allowed to be rolled over and paid later) interest can go up to 35%
Between 12% and 15.75%
EMIs are higher because of high interest rate
Minimum monthly payments can be made. However, the interest keeps on adding up
Since the rate of interest is lower, frequently LAP Equated Monthly Installments (EMI) turns out cheaper
Maximum loan eligibility is determined primarily by an individual's income
Maximum amount is determined primarily by the credit limit on the card
Maximum loan eligibility is determined primarily by the value of the property and income
Tenure between 1 to 5 years
Can be paid off monthly
Tenure maximum of 15 years
These are some basics that you should know when obtaining a personal loan. These days, securing a loan is easy. Repayment is the tough bit. When you don't repay on time, the recovery agent may come knocking at your door.
When getting a personal loan it is important to ask yourself ‘Will I be able to pay it off?
Some things which can help you pay back your personal loans are:
Pay off your credit cards: Try to pay off your credit cards as soon as possible, since credit card debts inadvertently hamper loan payments.
Budget your spending: Once you have taken a loan, ensure that you budget your spending, so that if in any unforeseen circumstance you cannot make a monthly payment, your savings will help you out.
Personal loans if not utilized and repaid properly, can become a curse in disguise. Make your decisions prudently to ensure a safe financial future.
The dream home bargain
Are you a person who always looks for the steal deal? Someone who judiciously budgets your expenses to get the best bet out of everything life can offer you? Well, then you probably must be putting in a lot of research on where you shop, when you shop and how you shop for it. Right from the precious antique furniture piece to the lovely second hand, still in mint condition Fiat you own, everything has been bought with a great deal of thought, calculations, research and background check.
Now you have decided to opt for your own house. As usual your mind is ticking about how to make this one the steal deal of a lifetime. Well, we got news for you.
Have you ever considered a home auction that is periodically conducted by several banks? You actually can get a house which is lesser by nearly 20% of the current market value. Let us help you get started on some research for you to build the plan for your steal.
Topics
How does it work
Why it could be a steal
The market for auctioned properties
The emotional side of it
How does it work
The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (54) of 2002), empowers the banks and financial institutions with the right to recover the mortgaged property in case of loan defaults, without the intervention of the court. This means the lenders can take immediate action and bring into effect the take over of the property in question quickly. Though it seems to be at the expense of the home loan defaulter, who is not examined keenly for reasons behind the defaults, nevertheless it appears to be a good opportunity for people to buy a property for a very reasonable amount of money.
Why it could be a steal
Once the lender takes control of the property, an independent valuation is conducted with the help of an independent chartered surveyor who fixes two values for the property. One is the market value of what the property is actually worth and another is termed as the distress value, which is around 15-20% lower than the market value. Due to the circumstances under which the auction is conducted, the property is almost always quoted with the distress value for the minimum bidding price at the auction. At the auction of course the prices can go up according to the bids and the location of the property. This gives the prospective new buyer an opportunity to win an auction for a very good deal as opposed to buying a property at the existing market value.
The market for auctioned properties
It is still a very unorganized market, which is just beginning to open up as a venue for a prospective home buyer. More often than not it is currently more possibly a property investor's market rather than an end user market. Also, the proportion of commercial properties auctioned could be much higher compared to the residential properties auctioned.
Listed below are some pointers to guide you on the process and background check:
A. Scrutinize property sections of newspapers
Many nationalized banks periodically advertise in the popular dailies regarding auction dates, venue and the location of properties to be put up for sale.
B. E-auction is also an option
Some banks do announce it by the way of e-auctions, as it is a faster, more transparent medium to choose the highest bidder. It reaches out to a more wider target audience and it helps the banks sell these properties at an effective price, which will help them recover the costs incurred through the loan more efficiently.
C. Secure legal aspects
As a prospective bidder you will be allowed to check the property you are planning to bid beforehand, once a caution fee has been collected from you for participating in the auction. Do make arrangements for a legal counsel to accompany you for this visit and help you with all the legal aspects of the transaction. Though you are making a business transaction with the banks, which by itself means you will receive a legally safe and registered property, you still need to do your share of the homework.
With the help of your legal counsel, investigate the title of the documents and do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to sorted out before your make your winning bid. Verify all municipal records, tax records, whether the current owner has sole ownership and if it can be transfered to you in accordance with the rules specified in the Transfer of Property Act.
D. Be prepared for additional costs
The properties auctioned are disposed in the state they were first taken over by the banks. Hence, there might be some costs like outstanding payments due in terms of house tax, electricity, repairs, renovation etc. that need to be incurred once you purchase the property. Factor in all these aspects when you make the bid.
The emotional side of it
When one looks at it from the perspective of an auction for the homes of defaulters, one does feel a wave of emotion about the unconventional route to buy a home. One may wonder about the loss of one becoming the gain of another. However, you need to treat it as nothing more than a sale transaction because you do not have to be affected over somebody else's mismanagement of finances. Moreover, not all houses are given up for auction by home owners unable to pay the loan, it could be a situation where the individual giving up the house to the bank considers it as a fixed asset that could be liquidated in an hour of need. The excess funds from selling the house if any, would go to the previous house owner, who gave it up to the bank. Moreover, all sale transactions happen through the bank, so you need not have worries over the technical aspects of the sale. However you need to get your routine checks in place to see that you derive the benefits that ideally accompany such a steal deal.
Now you have decided to opt for your own house. As usual your mind is ticking about how to make this one the steal deal of a lifetime. Well, we got news for you.
Have you ever considered a home auction that is periodically conducted by several banks? You actually can get a house which is lesser by nearly 20% of the current market value. Let us help you get started on some research for you to build the plan for your steal.
Topics
How does it work
Why it could be a steal
The market for auctioned properties
The emotional side of it
How does it work
The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (54) of 2002), empowers the banks and financial institutions with the right to recover the mortgaged property in case of loan defaults, without the intervention of the court. This means the lenders can take immediate action and bring into effect the take over of the property in question quickly. Though it seems to be at the expense of the home loan defaulter, who is not examined keenly for reasons behind the defaults, nevertheless it appears to be a good opportunity for people to buy a property for a very reasonable amount of money.
Why it could be a steal
Once the lender takes control of the property, an independent valuation is conducted with the help of an independent chartered surveyor who fixes two values for the property. One is the market value of what the property is actually worth and another is termed as the distress value, which is around 15-20% lower than the market value. Due to the circumstances under which the auction is conducted, the property is almost always quoted with the distress value for the minimum bidding price at the auction. At the auction of course the prices can go up according to the bids and the location of the property. This gives the prospective new buyer an opportunity to win an auction for a very good deal as opposed to buying a property at the existing market value.
The market for auctioned properties
It is still a very unorganized market, which is just beginning to open up as a venue for a prospective home buyer. More often than not it is currently more possibly a property investor's market rather than an end user market. Also, the proportion of commercial properties auctioned could be much higher compared to the residential properties auctioned.
Listed below are some pointers to guide you on the process and background check:
A. Scrutinize property sections of newspapers
Many nationalized banks periodically advertise in the popular dailies regarding auction dates, venue and the location of properties to be put up for sale.
B. E-auction is also an option
Some banks do announce it by the way of e-auctions, as it is a faster, more transparent medium to choose the highest bidder. It reaches out to a more wider target audience and it helps the banks sell these properties at an effective price, which will help them recover the costs incurred through the loan more efficiently.
C. Secure legal aspects
As a prospective bidder you will be allowed to check the property you are planning to bid beforehand, once a caution fee has been collected from you for participating in the auction. Do make arrangements for a legal counsel to accompany you for this visit and help you with all the legal aspects of the transaction. Though you are making a business transaction with the banks, which by itself means you will receive a legally safe and registered property, you still need to do your share of the homework.
With the help of your legal counsel, investigate the title of the documents and do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to sorted out before your make your winning bid. Verify all municipal records, tax records, whether the current owner has sole ownership and if it can be transfered to you in accordance with the rules specified in the Transfer of Property Act.
D. Be prepared for additional costs
The properties auctioned are disposed in the state they were first taken over by the banks. Hence, there might be some costs like outstanding payments due in terms of house tax, electricity, repairs, renovation etc. that need to be incurred once you purchase the property. Factor in all these aspects when you make the bid.
The emotional side of it
When one looks at it from the perspective of an auction for the homes of defaulters, one does feel a wave of emotion about the unconventional route to buy a home. One may wonder about the loss of one becoming the gain of another. However, you need to treat it as nothing more than a sale transaction because you do not have to be affected over somebody else's mismanagement of finances. Moreover, not all houses are given up for auction by home owners unable to pay the loan, it could be a situation where the individual giving up the house to the bank considers it as a fixed asset that could be liquidated in an hour of need. The excess funds from selling the house if any, would go to the previous house owner, who gave it up to the bank. Moreover, all sale transactions happen through the bank, so you need not have worries over the technical aspects of the sale. However you need to get your routine checks in place to see that you derive the benefits that ideally accompany such a steal deal.
The 8% interest rate magic – is the promise good?
The current hot trend in the home loans segment is the fixed cum floating interest rate schemes crowding the loan marketplace. The magical 8% home loan scheme that first came into being sometime in the beginning of this year has created quite a stir in this segment and quickly became a sort of benchmark to promote discounted festive loan offers even below this rate for the first six months to a few years of the loan tenure by various banks. After this time period, it reverts to the prevailing floating home loan rate in the market.
Let us consider the factors involved in this type of interest rate scheme and its implications.
First time home buyers will be tempted to buy a house right now as the property prices have also dipped and the market is in recovery stages now. In an effort to revive the realty market and the lending market which had seen a slump in the not so recent past, such loan offers could seem the ideal bet.
However, as a loan applicant you need to evaluate if it makes sense for the home buyer to opt for these fixed cum floating rate loan offers. Also, should existing home loan borrowers shift to this apparently attractive loan rate scheme? To understand how relevant it is for a new home loan customer and an existing home loan borrower who wishes to transfer his home loan to another bank offering a fixed cum floating interest rate scheme, let us first consider the significance of the savings from these offers over time. Is the offer indeed attractive like it appears upfront?
Let us consider an example to understand this better. Banks will provide an amortization table, which will help you calculate the costs involved. Please note interest rate projections in the calculation are just an indication and may not be what it translates to in reality – could be less or more.
A fixed cum floating rate loan offer: Rs.30 L for 20 years at 8% interest rate frozen for the first year and then follows a floating home loan rate of 10.25%.
For the first year at a frozen rate of 8% the money outflow on the loan : Rs.3L
After one year when the interest rate is changed to the current floating rate of 10.25% : Rs. 66.8 L
Total money outflow over 20 yrs + Processing fee Nil = Rs. 69.8 L
Total Interest paid out for the loan – 39.8 L
An existing floating loan offer : Interest rate of 9.75% for the same loan amount of Rs.30 L and tenure of 20 yrs and a processing fee of 1% of the loan amount, which is Rs. 30,000.
Total money outflow over 20 yrs = 68.3 L + 1% processing fee (Rs.30,000) =68.6 L
Total interest paid out for the loan = 38.3 L
\
So opting for a pure floating rate loan will actually offer you a saving of Rs. 1.2 L even after including the processing fee.This example makes it clear that the interest rate scheme where 8% is frozen for one year, may not actually be as profitable as it appears upfront. In fact you might save more opting for a home loan, which is a little bit higher than the 8% scheme offered.
This article is a sample case study stressing on the fact that one should look beyond introductory offers to arrive at the actual total loan cost to truly compare various home loan offers from banks. In this instance, it is clear that an introductory offer of 8% for a year in a 20 year floating home loan rate need not necessarily be better than a 9.75% or an 8.75% floating home loan rate, with other conditions being constant. This is subject to the fact that when the floating loan rates are revised periodically – they should not differ too much between the various banks, which will again affect how the total loan cost between banks differ.
One also needs to consider, will there be better or more expensive offers after a while on both the property prices and home loan interest rates that you can either gain from or lose out on by taking up this offer? These and more questions that may arise need to be given thought, apart from total loan cost before you consider taking up such loan offers.
Let us consider the factors involved in this type of interest rate scheme and its implications.
First time home buyers will be tempted to buy a house right now as the property prices have also dipped and the market is in recovery stages now. In an effort to revive the realty market and the lending market which had seen a slump in the not so recent past, such loan offers could seem the ideal bet.
However, as a loan applicant you need to evaluate if it makes sense for the home buyer to opt for these fixed cum floating rate loan offers. Also, should existing home loan borrowers shift to this apparently attractive loan rate scheme? To understand how relevant it is for a new home loan customer and an existing home loan borrower who wishes to transfer his home loan to another bank offering a fixed cum floating interest rate scheme, let us first consider the significance of the savings from these offers over time. Is the offer indeed attractive like it appears upfront?
Let us consider an example to understand this better. Banks will provide an amortization table, which will help you calculate the costs involved. Please note interest rate projections in the calculation are just an indication and may not be what it translates to in reality – could be less or more.
A fixed cum floating rate loan offer: Rs.30 L for 20 years at 8% interest rate frozen for the first year and then follows a floating home loan rate of 10.25%.
For the first year at a frozen rate of 8% the money outflow on the loan : Rs.3L
After one year when the interest rate is changed to the current floating rate of 10.25% : Rs. 66.8 L
Total money outflow over 20 yrs + Processing fee Nil = Rs. 69.8 L
Total Interest paid out for the loan – 39.8 L
An existing floating loan offer : Interest rate of 9.75% for the same loan amount of Rs.30 L and tenure of 20 yrs and a processing fee of 1% of the loan amount, which is Rs. 30,000.
Total money outflow over 20 yrs = 68.3 L + 1% processing fee (Rs.30,000) =68.6 L
Total interest paid out for the loan = 38.3 L
\
So opting for a pure floating rate loan will actually offer you a saving of Rs. 1.2 L even after including the processing fee.This example makes it clear that the interest rate scheme where 8% is frozen for one year, may not actually be as profitable as it appears upfront. In fact you might save more opting for a home loan, which is a little bit higher than the 8% scheme offered.
This article is a sample case study stressing on the fact that one should look beyond introductory offers to arrive at the actual total loan cost to truly compare various home loan offers from banks. In this instance, it is clear that an introductory offer of 8% for a year in a 20 year floating home loan rate need not necessarily be better than a 9.75% or an 8.75% floating home loan rate, with other conditions being constant. This is subject to the fact that when the floating loan rates are revised periodically – they should not differ too much between the various banks, which will again affect how the total loan cost between banks differ.
One also needs to consider, will there be better or more expensive offers after a while on both the property prices and home loan interest rates that you can either gain from or lose out on by taking up this offer? These and more questions that may arise need to be given thought, apart from total loan cost before you consider taking up such loan offers.
Agreeing to the Loan Agreement
Sameer Tiwari, a Pune based mechanical engineer, thought he had made a “prudent decision” by opting for a fixed rate, home loan five years ago from a reputed national bank.
Three years after the date of disbursement, Sameer received a letter, which said it was time for renewal of his loan and that the interest on his fixed home loan had been increased by 0.5 per cent. On checking with the bank, he learned that there was a clause in the agreement that said the fixed rate was only for a period of three years and not for the entire tenure!
This letter brought endless, sleepless nights to Sameer and his family… now, they had to recalculate and replan all their income sources and planned expenses because the "fixed EMIs (Equated Monthly Instalments)" will increase!
Topics
What is a loan agreement?
The agreement and the fine prints…
What is a loan agreement?
A loan agreement is a ‘contract’ entered into between the borrower and the lender (banks and financial institutions) that regulates the terms of a loan. The loan agreement comes into picture immediately after the bank appraises your credit and the property that you have identified.
The agreement and the fine prints…
In the euphoria to acquire that dream house, various clauses in the loan agreement are often overlooked. However, these clauses have a significant bearing on areas ranging from interest rates to repayment schedules. Reading home loan agreements is generally viewed as a sheer formality and one always tends to ignore points that the agreement mentions. Moreover, the legal language used in the document often seems more alien than human! In any case, not reading a loan agreement thoroughly can land you in a soup. Here are some clauses, which should be searched for inside a loan agreement and be clarified with your HFC (Housing Finance Company):
• Reset Clause on Fixed Rates: Banks have introduced the reset clause in their fixed rate, home loan agreements so that they can increase interest rates in case the market rates increase in future. This effectively makes fixed rate loans equivalent to floating rate ones. This gives the banks an escape from interest rate surges but is a disadvantage for the borrower who is mostly unaware about such content in their agreement. Typically, the period for such reset clause varies from two to five years depending on the bank or housing finance company you borrow from. So read this clause in your loan agreement carefully.
• Force Majeure Clause: There may be certain loopholes in your home loan agreement that allows the bank or home loan company to unfix and raise the fixed interest rate under exceptional circumstances. This will be mentioned under the ‘force majeure’ clause of your agreement. However, the differentiation between ‘exceptional circumstances' and normal circumstances is always a tough task.
For e.g. A cut in banks' prime lending rate (PLR) is not automatically translating into reduction of all PLR-linked loan rates. The reason being cited is that the bank’s margins are under severe stress due to lending rate cuts. They feel interest rates on some existing sub-PLR loans do not even cover their cost of funds and any further fall in those sub-PLR loans will worsen the matter. Therefore, some public sector banks have revised the existing loan contracts in case of select sub-PLR borrowers, by using the ‘force majeure’ clause, meaning a ‘situation beyond control’.
• Defining a Fault: A 'fault' for a layman often means a non-payment of an EMI during the loan tenure. However, your bank or HFC may have a different meaning for this term. The home loan agreement of few banks defines fault as a case when the borrower expires, the borrower is divorced (in case of more than a single borrower), or the borrower is/are involved in any civil litigation or criminal offence. Therefore, you must be clear what your lender means by the term ‘fault’.
• Security cover at times of falling property rates: This clause states that a bank is eligible to demand additional security when property prices fall. Even if you are loyal on your EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security then he/ she may be declared a defaulter by the lender.
• Floating is Fixed and vice versa: Floating rate as well as fixed rate home loans are linked to the Benchmark Prime Lending Rate (BPLR) of a bank or the HFC from which you take a home loan. Hence, if the BPLR is 13.5 per cent and floating rate home loans are at a discount of 1.5 per cent to the BPLR, then the interest rate on a floating rate home loan is 12 per cent. So whenever the BPLR is raised, then the interest to be paid on the floating rate home loan goes up. The vice versa also holds true. However, banks and HFCs do not show the same alacrity to reduce the interest rates, which they might have shown when increasing it. When interest rates come down, banks and HFCs offer lower rates to new customers but existing customer continue paying the higher interest rates. Check with the bank or HFC regarding the details about such clauses.These clauses are overlooked by most home loan borrowers and some of them eventually end up paying interest rates, fees, or hidden charges completely out of the blue. It is imperative that you have a thorough understanding of such clauses with your bank or HFC.
Three years after the date of disbursement, Sameer received a letter, which said it was time for renewal of his loan and that the interest on his fixed home loan had been increased by 0.5 per cent. On checking with the bank, he learned that there was a clause in the agreement that said the fixed rate was only for a period of three years and not for the entire tenure!
This letter brought endless, sleepless nights to Sameer and his family… now, they had to recalculate and replan all their income sources and planned expenses because the "fixed EMIs (Equated Monthly Instalments)" will increase!
Topics
What is a loan agreement?
The agreement and the fine prints…
What is a loan agreement?
A loan agreement is a ‘contract’ entered into between the borrower and the lender (banks and financial institutions) that regulates the terms of a loan. The loan agreement comes into picture immediately after the bank appraises your credit and the property that you have identified.
The agreement and the fine prints…
In the euphoria to acquire that dream house, various clauses in the loan agreement are often overlooked. However, these clauses have a significant bearing on areas ranging from interest rates to repayment schedules. Reading home loan agreements is generally viewed as a sheer formality and one always tends to ignore points that the agreement mentions. Moreover, the legal language used in the document often seems more alien than human! In any case, not reading a loan agreement thoroughly can land you in a soup. Here are some clauses, which should be searched for inside a loan agreement and be clarified with your HFC (Housing Finance Company):
• Reset Clause on Fixed Rates: Banks have introduced the reset clause in their fixed rate, home loan agreements so that they can increase interest rates in case the market rates increase in future. This effectively makes fixed rate loans equivalent to floating rate ones. This gives the banks an escape from interest rate surges but is a disadvantage for the borrower who is mostly unaware about such content in their agreement. Typically, the period for such reset clause varies from two to five years depending on the bank or housing finance company you borrow from. So read this clause in your loan agreement carefully.
• Force Majeure Clause: There may be certain loopholes in your home loan agreement that allows the bank or home loan company to unfix and raise the fixed interest rate under exceptional circumstances. This will be mentioned under the ‘force majeure’ clause of your agreement. However, the differentiation between ‘exceptional circumstances' and normal circumstances is always a tough task.
For e.g. A cut in banks' prime lending rate (PLR) is not automatically translating into reduction of all PLR-linked loan rates. The reason being cited is that the bank’s margins are under severe stress due to lending rate cuts. They feel interest rates on some existing sub-PLR loans do not even cover their cost of funds and any further fall in those sub-PLR loans will worsen the matter. Therefore, some public sector banks have revised the existing loan contracts in case of select sub-PLR borrowers, by using the ‘force majeure’ clause, meaning a ‘situation beyond control’.
• Defining a Fault: A 'fault' for a layman often means a non-payment of an EMI during the loan tenure. However, your bank or HFC may have a different meaning for this term. The home loan agreement of few banks defines fault as a case when the borrower expires, the borrower is divorced (in case of more than a single borrower), or the borrower is/are involved in any civil litigation or criminal offence. Therefore, you must be clear what your lender means by the term ‘fault’.
• Security cover at times of falling property rates: This clause states that a bank is eligible to demand additional security when property prices fall. Even if you are loyal on your EMI payments, this clause demands a security cover in addition to your loan amount and if a borrower fails to provide such a security then he/ she may be declared a defaulter by the lender.
• Floating is Fixed and vice versa: Floating rate as well as fixed rate home loans are linked to the Benchmark Prime Lending Rate (BPLR) of a bank or the HFC from which you take a home loan. Hence, if the BPLR is 13.5 per cent and floating rate home loans are at a discount of 1.5 per cent to the BPLR, then the interest rate on a floating rate home loan is 12 per cent. So whenever the BPLR is raised, then the interest to be paid on the floating rate home loan goes up. The vice versa also holds true. However, banks and HFCs do not show the same alacrity to reduce the interest rates, which they might have shown when increasing it. When interest rates come down, banks and HFCs offer lower rates to new customers but existing customer continue paying the higher interest rates. Check with the bank or HFC regarding the details about such clauses.These clauses are overlooked by most home loan borrowers and some of them eventually end up paying interest rates, fees, or hidden charges completely out of the blue. It is imperative that you have a thorough understanding of such clauses with your bank or HFC.
Will it be the axe for prepayment penalty?
Ramesh has been paying EMIs on his home loans for almost 5 years now and now he wants to prepay his home loan! But he is worried about the prepayment penalty that his bank would impose on him! But why would the banks or the lenders mind when you pay back early? Do you stand to lose out on this deal or do you gain? Why and when people should opt for prepayment?
What is prepayment? Why and when do people opt for it?
It’s just what the name implies: prepaying all or part of the loan amount before it is actually due. However, it is more complicated that it sounds! First, you will have to check your retail loan documents to find out if prepayment is allowed and the percentage of outstanding loan amount that you will paying towards prepayment penalty charges, if any.
You might want to prepay your home loan for two simple reasons. First, you could save on the net interest payable as longer loan tenure means more interest paid. The second reason is that you can own the asset earlier than planned.
You could decide to prepay your loan if you have the capacity to make larger payments or if you have had a promotion or received a bonus.
Why do banks charge penalty for prepayment?
Well, banks and lenders lend money in the form of loans only to make money out of service fees and interests. And this requires the loan to be open for a fairly longer duration to give profits. They cannot stop your legal right from making a prepayment. But at the same time prepayment would mean upsetting their profit calculations from interests. Hence, the banks and lenders impose a prepayment penalty to compensate a portion of the lost profit. Usually your loan agreement would have a clause defining your obligations and interest in case of prepayment in part or in full.
RBI’s current stand on this penalty
Recently the Reserve Bank of India (RBI) has hinted at drafting a policy to restrict banks from imposing prepayment penalty of retail loans. The proposed move follows many such complaints from loan borrowers paying EMIs based on the floating rate of interest. They feel that they are missing out on the benefits of periodical rate cuts in interest.
Recently, the anti-monopoly body Competition Commission of India (CCI) is dealing with complaints from loan borrowers against collecting prepayment penalties on home loans from major lenders in the country.
Prepayment penalties by different banks in India
Public sector banks charge 1 to 1.5 percent as prepayment penalty on outstanding loan amount and in the case of private banks it is between 2 and 4 percent.
What is prepayment? Why and when do people opt for it?
It’s just what the name implies: prepaying all or part of the loan amount before it is actually due. However, it is more complicated that it sounds! First, you will have to check your retail loan documents to find out if prepayment is allowed and the percentage of outstanding loan amount that you will paying towards prepayment penalty charges, if any.
You might want to prepay your home loan for two simple reasons. First, you could save on the net interest payable as longer loan tenure means more interest paid. The second reason is that you can own the asset earlier than planned.
You could decide to prepay your loan if you have the capacity to make larger payments or if you have had a promotion or received a bonus.
Why do banks charge penalty for prepayment?
Well, banks and lenders lend money in the form of loans only to make money out of service fees and interests. And this requires the loan to be open for a fairly longer duration to give profits. They cannot stop your legal right from making a prepayment. But at the same time prepayment would mean upsetting their profit calculations from interests. Hence, the banks and lenders impose a prepayment penalty to compensate a portion of the lost profit. Usually your loan agreement would have a clause defining your obligations and interest in case of prepayment in part or in full.
RBI’s current stand on this penalty
Recently the Reserve Bank of India (RBI) has hinted at drafting a policy to restrict banks from imposing prepayment penalty of retail loans. The proposed move follows many such complaints from loan borrowers paying EMIs based on the floating rate of interest. They feel that they are missing out on the benefits of periodical rate cuts in interest.
Recently, the anti-monopoly body Competition Commission of India (CCI) is dealing with complaints from loan borrowers against collecting prepayment penalties on home loans from major lenders in the country.
Prepayment penalties by different banks in India
Public sector banks charge 1 to 1.5 percent as prepayment penalty on outstanding loan amount and in the case of private banks it is between 2 and 4 percent.
Selling your property? Know your rights
Reena owned a duplex apartment in a posh locality in Mumbai. She had purchased the property when she held a well-paying job. But during the recession, she lost her job and so found it difficult to maintain the property. As she couldn't look after the flat, she decided to sell it. But as she was a first time seller, the buyer as well as broker exploited her ignorance. She was forced to sell her property for a loss.
So if you are in this situation, what should you do? Answer - familiarize yourself with Transfer of Property Act. The rights and duties you have are outlined in the Transfer of Property Act. When you decide to sell your property, you enter in a contract with the buyer of your property. But in case you have failed to prepare such a contract, your rights and duties are clearly defined by this act. Here we take a look at what this act entails for you.
When you are selling the property, it is your moral duty to tell all the details like the problem with the property or clear title of the property, to the buyer. Usually, these details should be the ones that are mostly ignored but vital to the buyer.
You should hand over all the papers related to the property to the buyer, as soon as you get the full amount from him. You need to carry out a suitable delivery of property to the buyer, once you get the money. Also till you actually hand over the property, look after the property and property documents very carefully.
You should be ready to hand over the property to the buyer or his representative, whenever directed. Until the sale is not finished, you are obliged to bear all government charges and rent due to the property as well as the interest on loans on property, if any.
You should be ready to hand over all the paperwork related to the property to the buyer, whenever asked. But you are exempted from this rule under 2 circumstances: either you have clarified in the agreement with the buyer that you'll retain a portion of the property or you have sold the property to various buyers, in which case, the buyer who has bought the property with the highest value can keep the papers. In the latter case, you can show the documents and handover true copies or extracts according to the demands from other buyers.
But don't worry. The act does not outline your duties. It also confers on you certain rights. For one, any income accrued from the property is yours till you don't actually handover the property to the buyer. Also till you don't get the full amount, you can collect the charges on the property for the outstanding amount. Moreover you can collect interest on the amount due from the date on which you have handed over the possession to the buyer.
It is important for you to acquaint yourself with these rights and duties before you decide to sell your property. Your deal will go smoothly without any hiccups. Had Reena been aware of this act, she could have saved herself from being exploited.
So if you are in this situation, what should you do? Answer - familiarize yourself with Transfer of Property Act. The rights and duties you have are outlined in the Transfer of Property Act. When you decide to sell your property, you enter in a contract with the buyer of your property. But in case you have failed to prepare such a contract, your rights and duties are clearly defined by this act. Here we take a look at what this act entails for you.
When you are selling the property, it is your moral duty to tell all the details like the problem with the property or clear title of the property, to the buyer. Usually, these details should be the ones that are mostly ignored but vital to the buyer.
You should hand over all the papers related to the property to the buyer, as soon as you get the full amount from him. You need to carry out a suitable delivery of property to the buyer, once you get the money. Also till you actually hand over the property, look after the property and property documents very carefully.
You should be ready to hand over the property to the buyer or his representative, whenever directed. Until the sale is not finished, you are obliged to bear all government charges and rent due to the property as well as the interest on loans on property, if any.
You should be ready to hand over all the paperwork related to the property to the buyer, whenever asked. But you are exempted from this rule under 2 circumstances: either you have clarified in the agreement with the buyer that you'll retain a portion of the property or you have sold the property to various buyers, in which case, the buyer who has bought the property with the highest value can keep the papers. In the latter case, you can show the documents and handover true copies or extracts according to the demands from other buyers.
But don't worry. The act does not outline your duties. It also confers on you certain rights. For one, any income accrued from the property is yours till you don't actually handover the property to the buyer. Also till you don't get the full amount, you can collect the charges on the property for the outstanding amount. Moreover you can collect interest on the amount due from the date on which you have handed over the possession to the buyer.
It is important for you to acquaint yourself with these rights and duties before you decide to sell your property. Your deal will go smoothly without any hiccups. Had Reena been aware of this act, she could have saved herself from being exploited.
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