Switching Loans at the Right Time = Great Savings

Switching Loans at the Right Time = Great Savings

Home-loanA colleague at office approached me one day looking quite upset. Here was a young man, in a well to do job, a lovely family and a brand new home who seemed to be carrying the weight of the world on his shoulders.

Buying a home was all well and good he said, but the financial burden seemed to be taking its toll. He asked for advice on managing his home loan better and we sat down immediately to evaluate his case. It was quite apparent that my colleague had not contemplated switching home loans.

The largest outflow of cash for a household is a home loan EMI. It is a commitment made for a significant amount of time and one that dictates household finances as well.

With interest rate cuts yet to be implemented by the Reserve Bank of India (RBI), this may be a time when you may be considering shifting your home loan to another vendor.

The primary reason to shift your home loan is for a better interest rate that will ensure you savings in the mid and long term.

Like any other major task on hand, it is imperative that you research all the aspects of shifting your loan. Here is a detailed process that you may adopt for the job on hand.

1. Is the time right to move your home loan?

This is the first question that you must ask yourself. Conduct a cost-benefit analysis to help with the decision making. Some points to keep in mind are:

  • The focus must be on reducing the interest payable and a switch may be considered only in the difference in interest rates is 0.75% to 1%.
  • Lower your loan tenure, higher must be the rate cut and vice versa. If you have five or less years on your tenure, the new interest rate must be at least 1%. For a tenure of above a decade, 0.75% should be a starting figure. Anything over 15 years will benefit from rate cuts that are 25 to 50 basis points.

2. Consider an internal switch

If your calculations say that it is a good idea to make a switch, then check with your existing lender if they are willing to move you to a lower interest rate.

Most banks may consider this for a good customer, especially since they don’t want to lose you. The lack of paperwork involved is an added benefit for you.

3. Evaluate the terms and conditions of your new lender

Shifting a loan is not a simple task. Your credit-worthiness will be re-evaluated and your repayment record will be looked into. Even a single default can result in your application being denied. Also keep in mind that:

  • In case of a property being constructed, it has to be on the pre-approved list of the lender.
  • If the construction is not on schedule, the new bank may deny your application.
  • Evaluate the margin requirement (the share of the loan that you pay – 20 to 25%) – if it is high and your loan is a new one, you may end up spending more money to make the switch.
  • Fees involved will include processing fees (which may sometimes be waived), valuation fees, stamp duty and possibly others specific to your new bank

4. Switching your loan

Once you have gone through this part of the evaluation process and have decided to go ahead with the switch, you will need to:

  • Get a no-objection certificate (NOC) from your current bank.
  • Get a schedule of repayment of your outstanding amount.
  • Submit this documentation to your new lender for their evaluation.
  • On approval by the new bank, your outstanding principal will be paid to your current financier.
  • The bank in turn will hand over your property documents to your new lender.

You will now begin paying your home loan to the new vendor with better interest rate. Make the switch only if your calculations show that it worth the change.

 

Takeaways

  • An ideal situation to switch home loans is when the new interest rate is between 0.75% and 1% lower than your current rate.
  • Internal loan switches are a possibility.
  • Your switch will be subject to approval from the new lender. This is based on a complete re-evaluation of you as a credit seeker.
  • Switching loans involves a significant amount of paperwork.
Simple Considerations Before Applying for Your Second Home Loan

Simple Considerations Before Applying for Your Second Home Loan

two-white-housesToday was a happy day for a family friend – He and his wife have just been handed the keys to their new home. Having helped them through the process, the mix of happiness and relief on their faces was something I totally understood.

With the house warming ceremony done, we all sat down and were relaxing, when my friend suddenly asked me, “Do you think I will be eligible for a second home loan anytime soon?”  The question did not really surprise me as there are several young couples that are investing in a second home, as early as at 40 years of age.

If you are in the same boat as my friend, perhaps this article will help you plan your second home loan better. There are few factors that you will have to ascertain before you take the plunge:

Today was a happy day for a family friend – He and his wife have just been handed the keys to their new home. Having helped them through the process, the mix of happiness and relief on their faces was something I totally understood.

With the house warming ceremony done, we all sat down and were relaxing, when my friend suddenly asked me, “Do you think I will be eligible for a second home loan anytime soon?”  The question did not really surprise me as there are several young couples that are investing in a second home, as early as at 40 years of age.

If you are in the same boat as my friend, perhaps this article will help you plan your second home loan better. There are few factors that you will have to ascertain before you take the plunge:

1. Can you afford a second home?

The economy is a volatile one and this is the first questions you have to ask yourself. If you are currently paying the EMI on a home loan, a new loan will be an added financial burden. Ask yourself the following:

  1. Do I need a second home?
  2. Will my income over the next couple of years grow to accommodate this additional expense?
  3. Is my job secure?
  4. Will I be able to absorb the effects of taxation laws such as municipal tax and rental yield tax?
  5. Will my returns on this investment balance the financial burden of a second home loan?

2. Are you eligible for a second home loan?

Remember that the terms of a second loan may not be similar to your first. The upfront amount you have to pay will be higher since banks will back you up to 75% of the second home value only. The interest rates will be higher too.

3. What loan amount you will receive?

This will depend entirely on the bank’s discretion which will take your current EMI and your monthly income into consideration.

4. Can you handle the additional taxes?

When you buy a second home, it is assumed that it is not for personal use. Thus taxation laws are applicable.

Once you have your answers to these above questions figured out and are willing to go ahead, note that banks will examine your application for a second loan on the same criteria. There is a tax benefit from your second home loan as well, but this will be based on the calculations of income from this new property. The benefits will be:

  • Since the property is considered to be rented out, you will be allowed the full interest on the second home loan as a tax deduction. You will not have the ceiling limit applicable as with the self-occupied property.
  • With regard to the principal, all your properties together will be eligible for a Rs 1 lakh deduction.

These are the basics of getting a second home loan and are exactly the points of advice I gave my friend as well.

Major Take-Aways

 

  • You can consider applying for a second home loan soon after your first.
  • Question your intentions based on affordability, taxation implications and loan eligibility.
  • Benefit from second home loan taxation laws.
6 Reasons to Not be Lured into Switching your Home Loan Provider

6 Reasons to Not be Lured into Switching your Home Loan Provider

home-loan-repayment-505_052512063100Doesn’t it feel like a jab in the ribs when your colleague, who has recently purchased a home, is shelling out less interest than you are paying on your five-year old home? The first thing you want to do is sit with multiple tabs on your Internet browser and re-evaluate your options.

So you zero in on bank Y, which is offering better rates than bank X. Logic says you should plan on porting, or in layman’s terms ‘switching’, your home loan to the bank offering the lower rate. However, keep in mind that you will have to cross a few speed bumps before you make the switch.

1. The not-so-obvious Hidden Charges

Good news – RBI has directed banks to do away with the prepayment penalty on home loans with floating interest rates. Bad news – you still have to pay processing fees, franking charges, notarization charges, and the insurance premium.

What is even more disheartening is that the insurance premium you paid with bank X may not carry over to the new loan.

When you approach the new bank, ask for a waiver or discount. Most banks will do so to acquire new customers. Nonetheless, like the voice in the TV ad says, “read the documents carefully”.

2. Don’t Fret, Interest Rates will Fluctuate

Banks set a base rate or a prime lending rate and home loan interest rates are set against this base rate as a benchmark. In some cases, it will be more than the benchmark rate and in some cases it will be less. This is mostly based on RBI guidelines, market conditions and the bank’s strategy to acquire new customers.

For example, at the time of availing the loan, you may have come to an agreement with the bank that you will pay 1.5% less than the base rate. So if the prevailing interest rate is 14%, your home loan interest rates will be at 12.5%. However, a little while later, person ABC may get a loan from the same bank at 2.5% less than the base rate. This means ABC will end up paying 1% less than what you are paying.

This will be a never ending game based on market trends and it is best not to be disheartened by what you are paying. Hey! There are probably many people out there who are paying more than you!

3. Refinance is an option too!

In the case of fixed interest rates, there will be no changes in the interest rates, but in the case of floating rates, the amount you shell out to the bank will vary on a yearly basis. Sometimes the variation could also be monthly as the base rate varies according to the dips and swells in the financial market.

The ray of hope is that banks don’t like losing out on customers (who does?). Hence, many banks offer their existing customers the option of paying a conversion fee and refinancing their existing home loan. However, banks do not go tom toming about this option to their customers. As a matter of fact, many banks may not even offer this choice.

4. Get your paperwork right, the first time

Let’s face it. We are a generation of auto logins who don’t even have the patience to fill in passwords. So imagine the truckload of paperwork awaiting your attention while porting your home loan to a new bank.

Not only will you need to have all your paperwork in place, you will also have to furnish a statement to bank Y explaining why you are availing of a new loan from them.

Banks, as a rule, do not like to make frequent adjustments to EMI or tenure. The connected ECS adjustments require even more paperwork. This may take up most of the weekend and turn your popcorn-and-movie-marathon weekend into a pile-of-endless-paperwork nightmare.

5. Are you a good bet for the bank?

Remember that bank Y may not welcome you with open arms without a little recheck even if your loan has been approved by your current lending bank.

You could be switching your loan account because the builder has not delivered the apartment/home on time or work has stalled and you need an extension. But Bank Y may be hesitant to finance a dubious builder.

Also, if you have already repaid a hefty chunk of the loan amount, bank Y may not gain much from acquiring your account. It may consider you a risk not worth taking on after all.

6. Beware of the Reset Clause

Even in a fixed interest rate loan, banks sometimes include something known as a reset clause. The reset clause allows banks to review rates at the end of a certain number of years.

For instance, if the interest rates are rising, a bank may invoke the reset clause, which allows it to revise the rates on your fixed rate loan. In most cases, you will not be able to remove this clause from your initial loan agreement. Your best choice is to look for a bank that does not include this clause in their loan agreement.

These are some of the important hurdles that you need to take into account while thinking of porting your existing home loan to another bank. However, these are not insurmountable hurdles and can be addressed with a little forethought, lots of patience and meticulous planning.

How to Get Lower Rates for Your Home Loan

How to Get Lower Rates for Your Home Loan

Home-loan-interest-2The market is fluctuating, interest rates are coming down, but the EMIs you have been paying for the home loan you took out five years ago is still the same?

Do you feel the pinch when you see your hard-earned money going down the drain? Is it time to think about refinancing your home loan at a lower rate? I say it is!

So how do you go about getting your bank to agree to lower your interest rates? Take a look.

1.Do not default on your monthly EMIs on your existing loan(s)

Now this may seem like a reiteration of the same advice given by hundreds of other banking and mortgage sites, but that does not take away from this basic truth.

The crux of the matter is that banks do not like defaulters. Even one defaulting of your monthly payment will bring down your CIBIL scores. And you need good CIBIL scores before you go knocking at your bank’s door for a refinancing of your existing loan.

Rule of thumb – Make sure that not just your home loan repayment history, but your credit history is impeccable too. Do not go overboard with a shopping spree and then forget to repay your credit loans on time.

2.Approach the bank when the market rates are lower than your EMIs

Suppose you are paying a fixed interest rate of 9.5% for your home loan for the next 3 years and the market rates have gone up to 10.2%. Then it is not the right time to approach your bank. You should be approaching your bank at a time when the interest rates are actually lower than what you are currently paying. In fact, the best time to approach your bank would be during property expos or loan melas. Interest rates and terms tend to be flexible around that time.

If you are paying a floating rate then the EMIs you pay will more or less be the same as the current market rates.

A word to the wise – Wait for the market rates to have gone down and stayed low for a couple of months before you approach your bank executive. You do not want to go running to the bank every week the market fluctuates.

3.Have your financials ready and up-to-date

What do I mean by this? Your paper work for applying for a refinance should be up-to-date. Your will need to have your account details including those with other banks and details of other loans with you. Your tax receipts should also be ready and paid on time. Refinancing a loan requires almost the same kind of paper work like the first-time round you took out the home loan.

Experts come handy: Get a financial adviser to go through your paper work, if you can afford it. They can give you a heads up on whether your bank will agree to refinance your home loan or not.

4.Ask, ask and ask, and you shall receive

Sometimes your bank will turn you down when you ask for a lower interest loan. In that case do not be disheartened, but keep pestering the bank executive every quarter.

Modern banking practices are a lot more flexible than they were a few years ago. Bargaining is an art not confined to the shopping districts anymore, but works in the corridor of banking finances too. And your bank executive is not always going to call you and let you know when there is a change in the bank’s policies regarding loan rates. It is up to you to be proactive and save yourself some money by being up-to-date.

Do not spam your bank emails – It might be a good idea to read the e-mails, promotion mails and flyers that your bank sends you instead of diverting them to the spam filter. Banks do let their customers know about their change of policies through these promotional mails.

5.Play the “I will switch banks” card

Sneaky? Yes, it is! But hey, it is your hard-earned money. You do not have to give away money for free to your bank when there are better options out there. Most banks do not like to lose customers. So they will be ready to make the switch. There might be a small fee involved in switching over from a higher to a lower rate.

There is usually a processing fee and other miscellaneous expenses that will accrue when you switch loans. In most cases this will be added to the existing loan amount. So wait for the next property expo that hits the city. During property expos, especially those organised by banks, the vendors tend to give concessions in the processing fee and/or rate of interest.

Hone your people skill – If you are really charming and verbose, then you may even get away with not paying the processing fee. So hone up on your people skills.

A little reverse psychology never hurt anyone – after all, it is not just bank executives who can turn on the charm when they need you to start a new account. Remember that when you switch loans within the same bank the paper work is less of a hassle than if you switch between two banks.

6.Approach private bank(s) at first

Another devious, or smart plan, is to approach a reputable private bank for your home loan. Their initial disbursement is faster than your average public sector bank, but their rates might be high. However, you do not have to run from pillar to post to get the loan sanctioned, because private banks are usually competitive and efficient about sending their personnel to you and getting the paperwork done at your place.Stay with the private bank for 6-12 months, and then switch to a public sector bank that offers a lower interest rate.

Additionally, try approaching the new players in the field like YES bank, PNBHFL, L & T Finance, Deutsche Bank, etc. which have entered the Indian market fairly recently. The new players in the field will have better offers than the older banks and financial institutions. Do your homework and take out a home loan from one with a good track record, both in terms of disbursement of loan and in terms of ease of repayment.

Be smart; think long term – While private banks may not be as insistent about having all the paper work in place at the initial stages, if you do plan to switch banks make sure to invest in a property and deal that is above board and legal. Public sector banks are very stringent about rules like building approval plan, encumbrance certificate, etc. So, if the home loan you take out from the private bank is under the scanner for whatever reason, the public sector bank will balk at taking over the loan.

So, gear up your loin clothes (metaphorically) and get ready to speak to your bank executive if you feel it is time to refinance your existing home loan to a lower interest rate one. May be that extra money you save could go into your long term savings and towards buying a vacation home?

5 Costs You Should Not Overlook While Buying Your Home

5 Costs You Should Not Overlook While Buying Your Home

Home Costs and Overheads

People in every profession have certain words or expressions which they use freely amongst themselves but which may be difficult to be understood by others.Real estate business too has its jargon and if you are new to this world, a first time buyer maybe, you will face difficulty in understanding its literature which will be a hindrance for you to do your research in finding your dream property.

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