Monday, February 28, 2011
Home-Loan tips: Stay With Your Banks/Housing Finance Companies For...
Home-Loan tips: Stay With Your Banks/Housing Finance Companies For...: "Stay With Your Banks/ Housing Finance Companies For Lower Loan RatesCustomer loyalty and good payment record could help reduce the interest ..."
Stay With Your Banks/Housing Finance Companies For Lower Loan Rates
Stay With Your Banks/ Housing Finance Companies For Lower Loan Rates
Customer loyalty and good payment record could help reduce the interest rate on your home loan
AMIT SHANBAUG
Vivekjyoti Gupta (40), a graphic designer based in Malad, Mumbai, was determined to do something about his home loan as he had seen the interest on it go up by around 5% in the recent past. He went to his bank to enquire about the outstanding principal amount on his home loan, as he was thinking of making a part-prepayment to bring down his monthly outgo. However, Gupta was in for a pleasant surprise: the bank official offered him an option to reduce his monthly loan payout. The official told him that though his current interest rate was around 12.5%, he had the option of reducing it to 11% by making a one-time payment of 0.5% on his outstanding loan amount.
“I had taken a loan in 2005 end when the rate of interest was something around 7.5%. But over time, the bank had increased it to 12.5%. Even when the bank was offering home loans with lower interest rates to attract new customers, our rates were never lowered,” Gupta said.
Gupta informed that just by paying a small sum, he would be able to save a huge amount which would help him in prepayment of the loan.
“When I asked the official why is the bank being so kind to me. The official told me that since I was one of their prompt customers, they are trying to reduce my interest burden,” he said.
Gupta also added that another customer who was present in the bank had told him that many of the existing customers have been shifting since the past few months to other banks offering lower rate of interest, hence the bank could be offering the incentive to retain them.
According to Satkam Divya, chief executive officer and managing director of rupeetalk-.com, a financial portal, there are lots of reasons for the banks to adopt such initiatives.
“Banks adopt these schemes as apart of their retention strategy for old customers. One strong source of funds for the banks is the repayments made by the existing customers,” he said.
Also, with the interest rates going up, there is also an increased propensity of these old customers defaulting on their monthly payments. “This could lead to an increase in the non-performing assets for the banks, which they would not want. So, by reducing the interest rates, they are, in fact, reducing the chances of default by these customers,” he pointed out.
Divya also stated that there is a possibility that rival banks could lure these same customers with attractive lower interest rates. “So the bank may as well offer to reduce the borrower’s interest burden and retain him,” he said.
According to Ramesh Bhojwani, a banking consultant, not everyone is eligible for such a reduction in the interest rates, as banks generally keep a criterion for the same and the reduction in rates too differs from banks to banks.
“Firstly, borrowers with large ticket sizes generally get in a larger reduction in the interest rates which may range anywhere from 1.25% to 1.75%. The customers with lower loan size may have to be satisfied with a lower reduction, which could be anywhere between 0.75% to 1%,” he said.
Bhojwani also added that customers who are paying a higher rate of interest are generally offered substantial relief as compared to the rest.
“Another criterion is the credit history of the customer. A customer who has been regular in his interest payments and has a good payment track record gets in a decent reduction in the interest rates,” Bhojwani informed.
Also, if the bank feels that there is a possibility that the existing customer has the potential to generate more business for them in the future like top-up loans or other loans, then the bank may prefer to pamper such a customer with lower interest rates, he said.
According to Bhojwani, the processing fees that the banks charge for such a reduction differs from bank to bank. “While some banks charge around 0.5%, others charge around 1%. There is no fixed rule on how much the bank can charge, if the customer wants, he can even try negotiating on the processing charges and if he is lucky, he can get a decent discount, there too,” he pointed out.
Bhojwani added that at most of the times, the reduction in the rates may not get him at par with the new borrower but however ensures that in case he decides to shift to some other bank, it could be a costlier proposition for him. “For example, if other banks offer around 10.5% to new customers, and the borrower is getting his interest rates lowered to just 11 or 11.5%, it still makes sense for the borrower to stay at the current bank as he would have to incur lots of expenses for shifting like foreclosure charges of the current bank and processing and other charges for the new bank,” he said.
Even the Reserve Bank of India in the past had called for greater transparency in dealing with the existing customers and even advised passing on the new loan rates to its existing customers, rather than restricting it just for new clients. It had in the past even send in an advisory to Indian Banks Association.
A senior official from the State Bank of India (SBI) informed that it is not possible for the banks to offer such options to all the old customers.
“A product pricing at any given point of time is decided with factors like the position of asset and liability in the bank at the time and cost of funds. However with time, the product could be cheaper or costlier to the new customers. If we offer such incentives to old customers with the reduction in the interest rates, then even old borrowers who are enjoying higher interest rates on their deposits as compared to new ones would need some tweaking,” he said.
The SBI official, however, informed that their bank also has a policy where in they can also offer to reduce the rates of interest of old customers. “If a customer has a very good payment track record, and has been a loyal bank customer for more than 15 years, we can be selective and offer him some reduction in his interest rate burden. But however it is not open for everyone,” he said. According to Kamlesh Rao, executive vice-president and business head of personal finance & mortgages, Kotak Mahindra Bank informed that their bank doesn’t have any scheme offered to customers wherein he can reduce his interest rate burden.
“However if the customer is genuine and has been banking with us for a very long time and had all his savings and business accounts transacted through us, we think we can make an exception for such a customer as a one of a case,” he said.
amit.shanbaug@timesgroup.com
Take the Right Top-Up to Bridge Home Loan Gap Soaring property rates can frustrate your home dreams. Use a top-up loan to sail through
Take the Right Top-Up to Bridge Home Loan Gap
Soaring property rates can frustrate your home dreams. Use a top-up loan to sail through
VIDYALAXMI
LOANS AGAINST INSURANCE OR
INVESTMENTS
“If you have an LIC policy which has acquired surrender value, then borrow directly from LIC against that insurance policy,” says Harsh Roongta, chief executive officer, Apnapaisa.com. “A borrower can repay the loan at his convenience or the insurer adjusts both the principal and the interest at the policy’s maturity,” Roongta adds. The maximum loan amount available under the policy is 90% of the surrender value (or 85% in case of paid-up policies) including the cash value of bonus. The rate of interest charged on loans is at 9% to be paid half-yearly. The minimum period for which a loan can be granted is six months from the date of its payment. In case the policy becomes a claim either by maturity or death within six months from the date of loan, interest will be charged only up to the date of maturity/death.
You can borrow against your PPF investments from the third year of the investment. Similarly, you can borrow against your mutual funds investments and ELSS (only after the three-year lock-in period is over). The interest rate on these loans is in the range of 11-13%. You cannot borrow against ELSS in the-lock in period as per existing stipulations. You can opt for partial liquidation of units, but it shouldn’t affect the goal for which you are investing. Ensure you reinvest in future if you are drawing down funds from your investments.
LOANS AGAINST GOLD
Loans against gold are cheaper and better substitutes to personal loan due to lower interest rates. For one, the interest rates on personal loans are not standardised. They vary from bank to bank and within the bank, it depends on a host of factors including the borrower’s salary, profession and purpose of loan.
For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But the loans against gold are available for as low as 11%. Any day a secured loan such as loans against gold, investments or property is cheaper because they are backed by some assets. Also, within the gamut of secured loans, loans against gold have their own advantages. “Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loans come at a lower cost than other forms of personal loans. Moreover, you get higher loans against your gold compared to loans against securities,” says Pankaj Mathpal, certified financial planner, managing director, Optima Money Managers. “For loans against securities, you can get a loan of only up to 50% of the value of your shares or your equity mutual funds. You can consider loan against property only when you need a big amount as it doesn’t make financial sense to mortgage your big property,” he adds.
So if the value of your shares is 1 lakh, you are likely to get a loan of only up to 50,000 against them. In case of gold loans this proportion is greater. Banks and NBFCs such as Muthoot Finance, Muthoot Pappachan Group, Manappuram Finance are active players in this loan segment. Banks usually lend against gold ornaments but NBFCs offer loans against gold ornaments, coins and bars. Once you pledge the gold, you would get a loan amount of 70-95% of its value. The bank/NBFC keeps the gold in its possession until you pay off the dues.
“The gold jewellery is sealed in a tamper-proof manner in front of the customer and kept in the bank’s safe deposit,” Pillai adds. In fact, the Reserve Bank of India (RBI) has introduced specific guidelines and standard practices for bank lockers. The maximum tenure for these loans is three years and the interest rate falls in the range of 11-20%. The customer needs to come to the branch to collect the jewellery. The process is simple and delivery of jewels is done across the table at the branch on repayment of the dues.
LOANS AGAINST PROPERTY
The assumption here is that you have another house, which you do not want to sell. You can borrow up to 50% of that property’s value and the rates vary in the range of 12-15%. But a loan against property is a time-consuming process. “A bank has to survey the property, look at title deeds and other crucial documents to ensure the property is free from encumbrance,” Roongta adds.
“You can consider loan against property if you need a big amount as it doesn’t make financial sense to mortgage your big property for small loan more over you will not get loan against the property which is already mortgaged and there is outstanding balance against the loan raised for buying the property,” says Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisories.
If you plan to sell the property but have not identified a potential buyer, then you can opt for a bridge loan and make a down payment and buy your new house. This loan comes in handy when you do not want to take a longterm home loan, by giving you enough time to sell your existing property to pay off the loan.
However, it is mandatory for you to identify the new house. If the borrower is unable to find a buyer for the old flat within the stipulated period, which is usually six to 12 months, the lending entity has the option to convert the bridge loan into a mortgage loan. But remember, the house in which you live is not considered to be an asset. Buying a bigger house and building corpus for your child education both are different goals and you should not stop your investment for your child’s education because you pay a higher EMI on account of top-up loan. In other words, higher EMIs due to a top-up loan should not impact your investment planning and hamper your other financial goals. So borrow sensibly.
vidyalaxmi.v@timesgroup.com
Saturday, February 5, 2011
Should You Go For Pre-Approved Loans?
Pre-sanctioned home loans appear attractive, but they may not suit everybody. Take a closer look before going for one
Preeti Kulkarni
The Working: The procedure for a pre-approved loan is largely similar to a regular home loan application — you need to submit the documents asked for to the bank along with the processing fee. These will include — depending on
whether the applicant is a salaried individual, self-employed professional or entrepreneur — identity and residence proofs, the latest salary slip, Form 16, past six months’ bank
statement, past three years’ income-tax returns (self and business) as well as profit/loss statements and balance sheet, certificate and proof of business existence and so on. However, a desirable income level is not the only criterion. Your repayment capacity, too, is a critical parameter. “We take into account the loan-seeker’s income-toobligation ratio. Hypothetically, if the applicant’s income is . 1 lakh, his total repayment outgo should not be more than . 55,000-60,000,” explains Kamlesh Rao, executive vice-president, retail assets, Kotak Mahindra Bank.
Even after your loan is sanctioned, the disbursal will take place only after you identify a property that passes the lender’s due diligence test. “There is no typical period within which the loanseeker is required to avail of the disbursement. However, we keep the file open for six months and if the applicant does not act within this period, we send reminders to the individual,” informs an HDFC spokesperson. The validity period varies with each bank. For instance, State Bank of India, which has been publicising this facility of late, requires the borrower to identify the property within 60 days for the sanction to be valid. “Interest rate, though, cannot be locked-in — the rate prevalent at the time of disbursal will be the effective rate,” says the HDFC spokespersonson. Adds Kotak Mahindra’s Rao: “In the case of a sanction, the validity could range from 1-3 months. We, at Kotak, prefer a period of one month.” While the interest rate may change at the time of disbursal, the spread over the bank’s base rate will not be altered for the borrower, unless a significant period of time has elapsed.
Benefits For The Borrowers: Buying a property typically involves a mountain of paperwork — with the builder and, later, with the lender. Availing of a pre-approved loan would mean that at least one part of it is taken care of. “The borrower’s creditworthiness is established already and this helps in negotiating on rates with the builders. Secondly, your total transaction turnaround time comes down,” explains Rao. Also, banks provide advice to home-seekers on properties that may meet their criteria. Moreover, lenders have tie-ups with builders for various projects. “In the event of the
borrower (with a preapproved home loan) finding it difficult to make a decision, the bank may direct him/her to the right kind of project. Thus, if both the loan as well as the project is pre-approved, the processing procedure will be much shorter,” he adds.
So, if you have identified a good deal which is dependent on how soon you arrange for funds, a pre-approved home loan will come in handy. “For the borrower, the key advantage is that he knows his eligibility. Some builders acknowledge those with pre-approved home loans as serious buyers, and this may strengthen your bargaining power when you sit across the table to negotiate,” reasons the HDFC spokesperson. Such schemes also merit consideration incase the bank’s procedure of disbursing the loan is likely to be a long drawn out one.
Tread Cautiously: However, bear in mind that it is certainly not a win-win situation always. What you stand to lose if you decide to defer your purchase or avail of a loan from another lender is the processing charge. “The processing fee is not refunded under any circumstance. In case of HDFC, it is 0.5% of the loan amount or . 10,000, whichever is lower,” informs the HDFC spokesperson. “We retain 0.25% of the loan amount or . 5,000,” says Rao. Therefore, you need to factor in the uncertainty regarding the actual disbursement while signing up for such loans. Even if you do make the decision within the prescribed cut-off date, the disbursal may be stalled in case the bank does
not find the property to be suitable. “I
don’t see much value in such schemes,
unless you are unsure of the amount of loan that you may be eligible for,” says Harsh Roongta, CEO of Apnapaisa.com. “The processing fee may have to be forgone in such cases. If no processing fee is levied, you can consider going ahead.”
In short, though these schemes score high on utility, they may not be suited for all. You could consider these schemes if you are comfortable with the prevailing rate of interest, the amount required for down payment is in place and you have already narrowed downyoursearch to a particular locality, the size as well as the kind of apartment and the developer. If you are starting from scratch, it would be probably safer to finalise the property before proceeding with the loan-related paperwork.
READY RECKONER
The pre-approved home loan procedure is largely similar to that of a regular home loan
Documents required include identity and residence proofs, latest salary slip, Form-16, past six months’ bank statement and past three years’ income-tax returns
Even after the loan is approved, the disbursal will take place only after the property passes the bank’s scrutiny
The period during which you have to avail of the disbursal can range from 1-6 months, depending on the bank
The key advantage of obtaining such loans is that the total time taken to close the transaction comes down considerably
However, if your chosen property doesn’t pass the suitability test or you fail to seal a deal before the deadline, you may have to forgo the processing fee .
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