General advice on home loan
As the financial year ending is approaching fast, let’s take a look at the different investment / exemption options to save tax under section 80C. One can use options like Fixed Deposit, PPF, National Savings certificates (NSC), Tuition Fees, Home Loan Principle Component, Life insurance/ULIP, ELSS to save tax under section 80C.
Here is a comprehensive list of common documents required by banking & financial institutions like SBI (State Bank of India), ICICI, HDFC , Axis etc. for home loan processing.
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.
| 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.
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.
| 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.
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.)
| 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.
For most of the people, buying a first home is a very challenging task. One of the challenge they face is that an affordable house is not available in the locality they prefer. People often do mistake by choosing locality/specific project before working on finance aspect. It is always beneficial and time saving tactic to decide on your budget first. Based on the budget, look for the locality/project. There is no point in searching the property if you do not know your financial appetite.
Home buying is a long term commitment. So ask a few questions to yourself
Have I saved enough to pay for down payment?
This is the initial amount which needs to be paid from your pocket. Generally down payment is 20% of agreement cost. In addition to the down payment, you need to pay for stamp duty, registration charges, sales tax and VAT. Most of the banks do not include these charges in loan amount. It is not advisable to go for another loan for making down payment.
How much EMI I can afford?
Equated monthly Installment (EMI) is the payment made every month towards home loan. EMI of all your loans should not exceed more than 40-50% of your in-hand salary. Loan adviser might suggest you to consider your future salary hikes/promotions for increasing loan amount, thus EMI. But do not buy with this option. Even though you might get a salary hike or promotion, it is associated with inflation. Your home expenses will keep increasing too. Consider the worst case scenario, if you have over-committed on the EMI and home-loan interest rate also rises, you might default on your loan and calling for more trouble.
Do I have enough fund balance after making down payment?
For emergencies, you need to keep aside some amount. You should not spend all your savings towards the down payment on the house.
Can I afford both EMI and rent for initial period?
If you have booked under construction property and currently staying in rented house, you might have to make payment for both EMI and rent till the time you get possession. Even though this is a temporary situation, keep aside some money for this scenario.
Most of us want to buy home as early as possible, but buying home come with long term loan liability. If you do not have enough funds for down payment, wait for some time. Plan short term goal and create a corpus for down payment.
