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.
Gift Your Family a Secure Future with Home Loan Insurance

Gift Your Family a Secure Future with Home Loan Insurance

home-loan-insuranceUnexpected late night phone calls always carry a sense of foreboding.

When I received the call that my younger brother (in his early 40s) was hospitalized for a minor heart attack, I was understandably shocked. Here was a man, with a young family, good job, who had recently invested in a luxurious home, now lying supine in a hospital.

Of course, being young and overall healthy, he sprung back up pretty soon. With stern instructions from the doctor, he got back to his routine and took the trouble to reduce the stress in his life. But one of the first things he asked me when he got better was, “What will become of my family if something happens to me. I don’t want them to be financially burdened with this new home; what can I do?”

I was quite surprised that my brother had not opted to include home loan insurance as a part of the deal. Of course, he did get an admonishing from me on trying to cut corners, but I followed it up with advice on why this should be a New Year gift to his family!

What You Should Know About Home Loan Insurance

  1. The insurance is for the loan and not for the home and its contents.
  2. This insurance covers the family’s liability to pay EMIs if something happens to the principal borrower – you.
  3. If availed of – this insurance will cover all future EMIs that need to be paid. Some insurance providers also have a provision where the principal amount is returned to the family to make their future more secure.
  4. The cost of home insurance will decrease each time based on the amount paid to the bank.

Main Criteria on Which Premium is Arrived At

  1. Your age – the older the applicant, higher the premium.
  2. Your loan amount – higher the loan, higher the premium.
  3. Your loan tenure – longer the repayment period, higher the premium.
  4. Your overall health – Since my brother had a heart attack already, he will be considered a high risk and will have to shell out a higher premium now. If you are healthy, this will not be a concern.

Questions to Ask Your Home Loan Insurance Provider

  • Is the insurance applicable for death by any cause or only by accident?
  • How easy is the claims process?
  • Does my home loan amount have to be of a certain amount?
  • Can the EMI be paid in installments?
  • What are the exceptions?
  • Is a health check-up mandatory?
  • What happens in the case of pre-payment of loan?
  • Are there tax benefits?
  • Are there any implications if the loan is a joint one?

With these considerations, my brother has already got his home loan insurance taken care of. This New Year is going to be a much secure one for his family. Perhaps, its time you ensure the same for yours.

Major Take-Aways

  • Home loan insurance is often optional, but you must take it.
  • Home loan insurance covers the loan and not the home.
  • Some providers also give your family additional monetary benefits.
  • Home loan insurance premiums may be paid in installments or at one go, but there are implications with both.
No EMI till possession – is it worth the risk

No EMI till possession – is it worth the risk

emiPramodh and Meera, currently in a rental home, are on the lookout for a good property to invest in. Like any other young couple starting out and planning a family, they have had to cut a few corners to make the initial down payment.

While hunting for homes, they came across some builders offering them the “no EMI till possession” scheme. Unsure of the benefits of such a scheme, they decided to look into what this entails. Here is what they found.

Why the No EMI scheme came about: The real estate community is often at the receiving end of volatility in prices. Blame it on the markets that affect buying power.

The onus then falls on builders to come up with innovative ways in which to promote their projects and get potential buyers to invest. One of these schemes is that of “no EMI till possession.”

By taking on the burden of EMI of the shoulders of the customer, builders make it more feasible for buyers to invest in a home. They will not have to worry about paying a rent, while also paying an EMI for a home.

What is the No EMI Scheme: Also called the subvention scheme, this is primarily a financial structuring scheme that works on the principle of 20:80. As a property buyer, Pramodh and Meera will have to pay only 20% of the property cost upfront to the builder. All EMIs will then begin only after they have taken possession of their home.

Till the time of possession, EMIs are paid by the developer to the bank, instead of the home owner doing so.

    You will have to do your research on the kind of No EMI scheme being proposed.

  • In one, the builder pays a part of interest and principal on your EMI to the bank in a reducing format for a fixed period of time.
  • In another, they pay only the interest and the principal amount is deducted from your loan account.

So what are the potential benefits that Pramodh and Meera may look forward to?

Better financial planning:

With such a scheme in place, Pramodh and Meera may plan their finances well. They will continue to pay a rent, while building up resources to pay a regular EMI after possession of their new home.

Timely completion:

Since the builders are now paying the EMIs on behalf of their buyers, the pressure to complete a project on time is higher. This works to the benefit of the buyer who will be ready to move into a home of their own and stop paying rents.

Better value for appreciation:

Paying 20% of the down payment at the time of booking and then holding onto the EMIs till the construction is complete allows the buyer to reap better benefits from appreciation.

A project may take approximately 3 years to complete. At the end of 3 years, there is a natural appreciation in price, one that the buyer will be able to benefit from more considering he has only made a down payment based on a lower price rate for the property.

What you have to be careful about

Like all interesting schemes, there is a fine print that you need to look into. Here are some points to keep in mind:

  • You need to dig deep into the financial structuring of the scheme and check on whether the builder is actually paying the entire EMI. There are chances that instead of absorbing the EMI, it may be passed down to the buyer through a higher price point. You will also have to check on whether the builder has successfully completed such a scheme in an earlier project.
  • Check to see if there is a time limit on the number of years that the developer will pay the EMI. Many builders cap the number of years at 2, irrespective of whether the construction is complete or not. This may not work in your favour.
  • Always keep in mind that if the developer defaults on the EMI payment, then you will be liable to pay the same and the bank will hold you accountable.

The best thing for Pramodh and Meera to do is to find a property that is being offered at close to market prices for that particular area. If this property is available under the “no EMI till possession scheme”, then it may be worth their while.

They will still have to do the necessary groundwork to ensure that they are making the right decisions.

 

 

Lesser Known Reasons on Why your Home Loan Application May Be Rejected

Lesser Known Reasons on Why your Home Loan Application May Be Rejected

Securing a home loan is by far an important criterion in getting the home of your dreams. While the paperwork involved may seem simple enough, there are several factors involved in the processing of a home loan. Lack of attention to smaller details may result in your home loan being rejected.

Shibu Sukumaran, Partner – Capital Core is a professional with over 13 years of experience in Home Loans and Mortgages. He explains to you the various aspects you need to look into when applying for a home loan, to ensure that it is not rejected.

Bad Credit Score:

Thanks to a multitude of advertisements and general increase in awareness, you now know that a bad credit score may result in your loan application being rejected. Before you apply for a home loan, it is best to know what a good score is. Any score above 700 is considered good. Besides your score, a bank will also look into:

  1. Past loan repayment track record
  2. Number of loan enquires
  3. Number of non-EMI based loans (credit card, gold loans, overdraft)
  4. Whether applicant is guarantor for any loan and the loan repayment track record of that particular loan

If your research shows you that you have a bad credit score, then here are some ways in which you may improve it:

  1. Reduce the number of loan enquires you make
  2. Reduce the number of unsecured loans you have (Personal loans, Credit Cards)
  3. Bring down the outstanding on your credit cards
  4. Repay by your due date time frame (avoid EMI bounce and pay at least the minimum on your credit card before the due date)
  5. Avoid being a guarantor for your relatives or friend’s loans. Any loan delinquency on their part may result in rejection of your loan application

Your Loan Application:

Before filling in your loan application form, you will need to do your due diligence. Here are a few reasons why it may be rejected. These reasons may be attributed to you not doing your homework well:

  1. You are not eligible for the loan amount you are seeking based on multiple factors such as income, age etc.
  2. Property cannot be funded as per policy (Deviation, B Khata, number of units, outside geographical limits etc.
  3. You may have loans you have not declared
  4. Your employment status may be considered unstable
  5. You have multiple loan enquiries indicating uncertainty
  6. Loans availed after present Home Loan is sanctioned
  7. Credit Card/ Loans: written off or settled.
  8. Processing fees cheque bounce

Various scenarios that may lead to home loan application rejection

Though listed above, there are several common scenarios that unwittingly lead to the rejection of a home loan application. Let’s take a look at some of them.

Credit card fraud:

There are chances you may be the victim of credit card fraud. In such cases, your loan application may be rejected. Here are some tips to safeguard yourself: 

  1. Do not settle any loans or credit cards. Always consider full closure and ensure you have closure proof from the bank
  2. Do not serve as guarantor for any loans other than for your spouse/father/mother
  3. Never apply for credit cards or loans at malls or other such public spaces
  4. Ensure you have closure communication on any loans / credit cards applied but not availed from the bank.
  5. Apply for your CIBIL report directly and clear any anomalies in the report before applying for the loan.

Applying to multiple banks simultaneously:

This is a common practice among most people who are on the look-out for a home loan.It is not a wise decision to apply to several banks simultaneously because it resultant rejection may reduce the credit score of the applicant and co-applicant. Several applications raise a red flag at the bank and they may feel that your papers are not in order or you may be purchasing multiple properties at the same time.

Unstable job scenario:

Here are a few scenarios with regards to employment and home loans that you need to consider

Scenario 1: You have resigned from your current job and are in the notice period and have a offer from a new company.

>> Here you may have applied for a loan with the offer letter of the new company and payslips of your old one. The loan may be sanctioned based on the new company offer letter but, the disbursement will happen after you join the new company and receive your first salary. The office verification will be done with the new company.

Scenario 2: You have resigned from your present job and are in notice period without an offer from a new company.

>> You should not apply for the loan, as it will be rejected.

Scenario 3: You have joined a new company but are yet to receive your first salary

>> You may apply for a loan with the details of the previous company, relieving letter, new offer letter and appointment letter. The loan will be sanctioned based on the new offer letter and disbursed after the first salary credit.

Scenario 4: Loan is sanctioned based on the present salary and then you resign from the present job.

>> You have to submit the new company appointment letter and first salary credit bank statement before the sanction letter is revised and disbursed.

Age: Based on policy there is a minimum / maximum age that is predefined for a bank. It is important that you find out what this age is before you apply for your loan.

Location:There are predefined locations which are not funded by banks. Check with the bank before applying for a loan.

Applying with co-applicants: Below is a matrix that will help you with your application. Any other combination may risk being rejected.

  1. Self + Wife
  2. Father + Self
  3. Mother + Self
  4. Father + Mother + Self + Wife
  5. Self + Brother ( is allowed if there are two units in the building )

Any other combination is a deviation and is case-specific. It will be decided on the strength of the loan application (like property, income, past loans and present, relationship with the bank etc.)

These are some of the reasons that may result in the rejection of your home loan. It would be a good idea to do your research and consult a home loan advisor before you send out your application.

How to make the most of Property & Home Loan Expos?

How to make the most of Property & Home Loan Expos?

Property Expos

Property Expos

As a potential home buyer you are on the constant look out for good opportunities for a sound investment. Hectic lifestyles make it difficult to do the groundwork that is needed to narrow down on a few potential prospects for a home. Over the years, what has gained favour among home consumers is the property and home loan exhibition. Here is how you can make the most of the next property and home loan exhibition in town.

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