Prashant Bendale – I & Finance

Why SBI home loan is still the cheapest option?

As promised in our last article, we will take a look at some more attractive options offered by the banks for home loan borrowers. Today’s article will take a qualitative and quantitative look at the current offers from SBI (State Bank of India), ICICI bank & Axis bank.

State Bank of India’s home loan offering is a plain vanilla scheme with slightly lower interest rate than other banks whereas ICICI bank came up with an innovative plan of 1% cash back on every EMI you pay. Cash back will be deposited in the borrower’s ICICI bank account or can be adjusted against the outstanding loan amount. Axis bank started a new scheme called as ‘Happy Ending Home Loan’. In this offer a home loan borrower will get 12 EMIs waived off if his loan account is active for minimum 15 years.

Let’s take a look at the following illustration which proves that borrowing from SBI is still the cheapest option.

Home Loan Comparison – SBI, ICICI, AXIS
	State Bank of India	ICICI Bank	Axis Bank
Loan Amount	40,00,000	40,00,000	40,00,000
Interest Rate (%) *	10.15	10.5	11
Tenure (months)	240	240	240
EMI	38,999	39,935	41,288
Interest Payment	5,359,816	5,584,447	5,909,009
Total Payment (Principal + Interest)	9,359,816	9,584,447	9,909,009
Discount	0	95,844	4,95,450
Actual repayment	9,359,816	9,488,602	9,413,558
Difference in actual repayment compared to SBI	0	128,787	53,742

* Please note that Interest Rate mentioned in the above table are as per latest values known from our sources for the illustrated loan amount. You should call individual banks to know the interest rate offering for your loan case.

ICICI Bank’s Cash Back Offer

Cash back will be credited to your account only after completing 3 years, thereafter every 1 year till the closing of home loan. This offer also does not include the pre-EMI you’ve paid. Cash back will be credited only to ICICI bank account. This offer does not apply for the prepayment made towards the loan.

Axis Bank’s EMI Waiver Offer

One can get benefit of EMI waiver only if minimum tenure at the time of disbursement is 20 years. Also if you are making part payments in-between, tenure should not fall below 15 years otherwise you will not be eligible for this benefit. Most of the people close their home loan in 8-10 years. So one need to make a decision whether you really want to keep your home loan for such a long time to get this benefit.

Disclaimer: I do not intend to recommend any particular product based on this review. The above analysis is to enable the readers take into account all the aspects of individual products and make a more informed decision.

Home Loan – Processing Fee vs Interest Rate

During this festival season, many of the banks are coming up with lucrative home loan offers to attract home loan borrowers. Offerings include options like a lower interest rate, processing fee waiver, cash back or EMI waiver options. Remember that a home loan is a long term commitment. So before finalizing any home loan scheme, pay attentions to some basic facts. In this article we will take a look at the use case to help you choose between zero processing fees and lower interest rate. In the next article we will take a look at other options like cash back and EMI waiver.

The processing fee is a one time expenditure. It is used by bank to complete loan processing formalities and it is non refundable. Generally it is in the range of 0.25% to 0.50% of the loan amount. Few banks are even offering zero processing fee to lure customers. Given the option between lower interest rate and zero processing fee, it is advisable to go for lower interest rate in most cases. Let’s take a look at following illustration.

Bank A offering a 10.5% interest rate with 0% processing fee and Bank B is offering a 10.4% interest rate with 0.5% processing fee.

Home Loan – Processing Fee vs Interest Rate
	Bank A	Bank B
Loan Amount	40,00,000	40,00,000
Interest Rate (%)	10.5	10.4
Processing Fees (%)	0	0.5
Tenure (months)	240	240
EMI	39,935	39,667
Interest Payment	55,84,446	55,20,047
Total Payment	95,84,446	95,40,047
Saving in total Payment	44,399

Even though Bank A is offering 0% processing fee, in long term taking a loan from Bank B is beneficial due to slightly lower interest rate.

So if you are in a dilemma about choosing between lower processing fee and lower interest rate, reuse our Loan Transfer Calculator as shown below. The illustration below shows how to get the savings amount for the values shown in the above table. Know your savings by entering values on the same lines.

Debt Fund- Dividend vs Growth

In my last article, we saw how debt fund can be used as an alternative to bank fixed deposit. Now lets take a look at what options are available while investing in debt funds. For investment in debt funds, one can choose between dividend payout and growth option.

In dividend payout option, any profit made by the fund is given back to the investor in the form of dividend e.g. If the face value of the fund is 10, NAV is 50 and it declares the dividend of 40%, then the investor will get a dividend of Rs 4. However NAV of the fund will drop down accordingly. Generally dividends are declared periodically but these are not guaranteed.

In growth option, fund house does not declare any dividend instead they reinvest any profit made.

With dividend payout option, liquidity (getting cash) is possible in two forms, selling units and periodic dividend. In this option you do not have to pay additional income tax on the dividend as DDT (Dividend Distribution Tax) is already deducted by the fund house at the time of declaring dividend.

However in growth option, one can get cash only after selling units of the fund. In this option, one need to pay income tax on the profit earned although for long term investment in growth option, one can get the benefit of indexation.

So if you need money periodically, you can choose the dividend payout option else go for growth option as it is a better way of wealth creation.

Debt Fund: An alternative to bank Fixed Deposit

Many people have an inclination towards bank Fixed Deposit as an investment option. Very few people know that investment in Debt Fund can be more tax efficient than bank Fixed Deposit. Interest earned on bank FD is added to your yearly income and taxed as per applicable tax slabs. However if you stay invested in debt fund for more than one year, it is considered as long term capital gain. In current scenario, it is taxed at 10.3% without indexation. You can even take the benefit of indexation to lower your tax.

Let’s look at the following comparison

If a person has invested Rs 1,00,000 for 5 years in Bank FD vs Debt fund

Fixed Deposit vs Debt Fund
	Fixed Deposit	Debt Fund
Investment	1,00,000	1,00,000
Tenure (years)	5	5
Interest Rate (%)	9	9
Interest Earned in 5 years	56,568.000	56,568.000
Income Tax Rate (%) – (depends on your tax slabs)	30.9	10.3
Total Taxes Paid	17,479.512	5,826.504
Post Tax Returns	39,088.488	50,741.496
Interest Earned Post Tax Return (%)	6.6	8.2

In addition to better return, you can get advantage of postponing your tax liabilities i.e. in fixed deposit, you need to pay tax every year on interest earned however in debt fund you will have to pay tax only at the time of withdrawal.

For short term FD, interest rates are very low, sometimes not even beating the inflation however, if someone invests in short term or ultra short term debt fund, he can expect better returns without compromising the liquidity.

Petrol Car vs Diesel Car

As petrol prices keep on increasing, many new car buyers are seriously looking at an option to buy a diesel car. In fact, some of the petrol car owners started selling their old petrol car and are going for a diesel car. Most of the buyers take a decision based only on the difference in the fuel price. But I feel that this decision actually depends on multiple factors.

Factors to be considered while choosing between a petrol and a diesel car

Petrol Car vs Diesel Car
Factor	Petrol Car	Diesel Car
Initial Cost	Economical	Costlier
Fuel price	Costlier	Economical
Daily Running	Economical for short runs	Economical for long runs
Mileage	Low	High
Waiting Period	Less waiting period	More waiting period
Available Options	In small segment, many options are available	In small segment, very few options are available
Maintenance Cost	Usually less	Usually more (depends on model too)
Pickup	More	Less

Few days ago, Vaibhav (a friend for mine) wanted to buy a new car but he was unable to decide whether to go for petrol or a diesel one. He was looking for a small car for which a petrol version would cost around 5 lacs and diesel version would cost 6 lacs. He also noted that his daily run would be around 20 km.

I tried to make some sense out of these numbers and quickly built a Vehicle Compare Calculator. This calculator will help you decide between any two comparable vehicles.

Looking at the usage, break even point will reach only after 4 years. That means, a diesel vehicle will be more affordable only after 4 years.

Are you going through similar confusion? Try our Vehicle Compare Calculator to make a more informed decision.

Think before you invest in a second home

Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…

1. Your appetite and eligibility for a second home-loan

The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.

2. The appreciation in property cost

Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.

3. Do your financial math

If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession. Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.

* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.)

Home Loan Calculation
	Disbursement Month	Payable Amount	Disbursement Amount	Actual payment including interest (@ 10%) as on Jan’2014
Month 24	Jan’2012	25%	1000000	1220391
Month 22	Mar’2012	10%	400000	480121
Month 19	Jun’2012	10%	400000	468315
Month 16	Sep’2012	10%	400000	456800
Month 13	Dec’2012	10%	400000	445568
Month 10	Mar’2013	10%	400000	434612
Month 7	Jun’2012	10%	400000	423925
Month 4	Sep’2013	10%	400000	413501
Month 1	Dec’2013	5%	200000	201667
		Total Payable	4000000	4544899

In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.

4. Long-term horizon

If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.