Properties, Homes & more

Suddenly, it’s raining home loans! Banks, which were, until recently, reluctant to open their purse strings to home loan customers, are busy chasing them with teaser rates - where the interest rate is kept lower in the initial few years.

However, advisers warn individuals against obtaining such a loan only because of the lower interest rate, as it could have serious impact on their finances if the interest rates were to shoot up when the floating rate kicks in after the initial years. All prominent banks have introduced teaser home loan rates as they are flush with money due to lack of demand from companies for funds.

Ideally, one should buy a house only because one needs it and can afford it. Lower interest rate shouldn’t be the reason one should be going for a housing loan. ‘Taking a decision on the basis of current interest rate wouldn’t be right and wise, especially if you are going to switch to the floating rate after the initial period. The reason is: the teaser interest rate may be only 8% or max 8.5% in the first year or for the first three years, but after the initial period is over, you would be paying prevailing floating rates, which is not so easy to predict. And it may not be in your favour as well!

A lot of people make (incorrect) assumption about the future rate on the basis of the current benchmark rates. This method of reaching indicative rate only proves to be costly for them in the long run. For example, because of some unforeseen events, if the interest rate hardens suddenly, people might find it difficult to service their home loan, as the EMIs could shoot up beyond their ability to take care of them. So take a very serious look at your cash flow & finances before opting for such a teaser loan.

A loan tenure is the duration of that loan. In case of housing loans, generally, the tenure is long. It may vary anywhere between five and 20 years. Most borrowers prefer to borrow for a longer period of time. The reason is quite obvious. The amount borrowed is quite large. Also, the amount of monthly repayment through equated monthly installments (EMIs) depends on the tenure of the loan – the longer the tenure, the lower will be the EMI and vice versa. On shorter loan tenures, the interest amount paid will be lesser as against the longer tenure loans, where the interest amount increases over time.

There are various factors that influence the determination of a loan tenure. The first factor is the income of the borrower. The disposable income of the borrower makes a lot of difference and is, usually, the deciding factor. The reason is that it is from this part of the income that a borrower will be repaying EMIs. So, if the net disposable income is low, it is advisable to go in for a longer tenure loan rather than opting for short tenure one (assuming the loan amount remains same). This way the EMI portion is reduced. The loan amount is spread over a longer period of time. The immediate burden on the borrower is lower. This is despite the fact that the borrower is required to pay interest through the extended period of borrowing – means higher interest being paid by the borrower.

The other factor is the amount of loan. The amount borrowed determines whether one should opt for a longer or shorter tenure. In case the amount borrowed is huge, the borrower may prefer to go for longer tenure. Generally, short tenure loans attract lower rates of interest as compared to longer ones. This is because banks can estimate the near-term interest rate movements more accurately as compared to movements in the long term. So, in case one has adequate liquidity and resources to repay the loan faster, it is advisable that he should opt for a shorter duration loan and thus take advantage of the lower interest rate.

Another factor that influences the loan tenure is the objective of the borrower. Whether a borrower is intending to take the loan to purchase a property for his own use or as an investment has a bearing. Generally, if a borrower is borrowing for the purpose of investing, he may just go for a shorter duration loan so as to avoid the exit charges payable in case of early termination of the loan, and to maintain liquidity of his capital.

Another important element to be considered is the future income of the borrower. In case the borrower is expecting an increase or reduction in his income, he has to decide on the tenure accordingly. For example, in case a person is to retire in another five years, he may look at a maximum of five years’ tenure, and may not like to stretch it beyond his retirement age. On the other hand, a 30-year-old can think of a longer tenure loan, stretching up to 15-20 years, because gradually his income would also be increasing. So, one may opt for a longer duration loan and reduce the present burden. None of these factors can be individually taken to decide on the loan tenure.

All these factors are interlinked and need to be analysed in totality so as to arrive at an ideal loan tenure.

Continued from Part 1…

There are many important points to be looked into before signing on the dotted line… In this 2-part series, I will cover 9 important points that must be carefully considered.

1. Look deep in your wallet before deciding the property
2. Look closely at your lifestyle and financial capabilities
3. Evaluate market conditions
4. Higher loan amount increase burden of debts

(Please refer Part 1 for discussion on these 4 points)

5. 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.
6. Prepayment is the best way to save on interest Always make an effort not to extend a loan beyond its tenure. As and when you have excess cash, try to prepay (huge loan first). For example, you could prepay from your yearly bonuses or salary hikes. Prepaying can lower the tenure and help you save on interest. However, check with your bank from when you can start prepaying, as banks usually do not allow prepayment during the first year of the loan period. Also check if there is a prepayment penalty. The idea is to make sure that the interest saved does not exceed the prepayment fees.
7. It is not a family bank, unlike family doctor It is not essential to opt for the same bank that your brother took his home loan from. It is advised that you should 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 (and mostly, would be) different from what is offered to you, as it varies according to the credit profile of the borrower.
8. 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.
9. Read the home loan agreement (fine print) carefully 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. Important clauses to watch out for are: the Force Majeure clause and Reset Clause on Fixed Rates.

So you have finally decided to buy your own house… With this single decision follows a chain of other decisions, ranging from choosing the property, choosing a home loan offer to deciding the furniture for the new house. However, believe me this is not as simple as it sounds… There are many important points to be looked into before signing on the dotted line… In this 2-part series, I will cover 9 important points that must be carefully considered.

1. Look deep in your wallet before deciding the property Now that you have set your heart on a house that is perfect for you, have you carefully thought of whether your wallet will be able to handle the cost of your dream home? 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, and in this case the indigestion may cost you dearly!
2. 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. Pay attention to your other debt liabilities before going in for the home loan.
3. 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.
4. Higher loan amount increase burden of debts 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.

Concluded in Part 2.

Kotak Mahindra Bank joins rate war, offers 8.49% fixed rate for home loans. After banking biggies - SBI, ICICI and HDFC - it is now the turn of Kotak to announce its special home-loan scheme, offering an 8.49% fixed interest for first 30-months.

The special offer can be availed for all new loans irrespective of the loan amount, but will be limited till January 31, 2010, the bank said in a press release. The private sector lender will charge floating rates (prevailing at that time) on these loans after the 30-month period, which will be decided based on the retail prime lending rate, the bank said. While the fixed duration loan rate will remain the same irrespective of the loan amount, the floating rate will vary with the loan amount, the bank said.