The government has come forward to help home loan borrowers by making some norms so that home loan borrowers can easily prepay the loan. These norms will also make possible to shift to another scheme without having to pay a penalty.
The government is planning to make changes in the prepayment rules so that home loan borrower can easily shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan.
After receiving suggestions from loan borrowers, the Competition Commission of India (CCI) has asked the banks that why prepayment penalty should not be held as anti-competitive practice.
However one can prepay home loan when his financial condition improves but the timing of prepayment of loan should be chosen carefully. Before making prepayment borrower must check how much amount of loan he can prepay with out paying penalty. Although, most banks allow loan prepayment up to a certain point without any penalty, but borrower must check that the part-prepayments do not exceed this limit to avoid a prepayment penalty.
Banks have fixed their own prepayment limit. Generally, the prepayment charge levied is two percent of the principal outstanding at the time of foreclosure and amount paid in excess of the monthly installment in the last one year. In some cases, banks do not levy any charges if the prepayment is made after three years of availing the loan and if it is from own savings.
But the penalty clause is significantly included in the contract. In fact the charges are meant for those who want to pay off a loan or move to one offering better terms. Most banks waive the penalty if the repayment is made with the borrower’s own money. In case the borrower takes a loan from other bank to prepay the existing loan then banks levy charges. It acts as a restriction for borrowers who wish to switch the lender by way of refinancing the loan when the other bank offers a lower rate of interest.
Banks say, the penalty interest is mainly to cover the bank’s notional losses incurred in finding a new borrower, and to prevent a borrower from increasing the bank’s load by returning the money. The banks say that if they allow easy foreclosure without any penal charges it may lead to asset-liability mismatch.
The Reserve Bank of India will be discussing the issue with the Indian Banking Association (IBA), a body of all commercial banks, after which it will formulate new prepayment norms including fixing the maximum and the minimum amounts that a bank may charge.
However government requires that banks should give two-month window to new borrowers to shift to some other bank without a prepayment penalty if they have raised interest rates too quickly after disbursement. The finance ministry will be discussing this matter with the Reserve Bank of India to make these changes
Wednesday, May 26, 2010
Tuesday, May 18, 2010
Prepare checklist before finalizing bank for home loan
Generally,in order to buy a house we take home loan from banks and 70-80 percent we get from banks and rest is financed out of our own resources. Here we will discuss some factors which should be taken into consideration before taking a final decision from whom to borrow and how much to borrow.
First you should prepare a checklist covering specific areas which can be prepared while discussing with a prospective lender. This helps in making a comparison and take a final decision.
The points to be covered in checklist:
Purposes for taking the loan – to purchase plot, for construction or for both. Then how and when will the bank give the loan amount. Documents required for getting loan, Eligibility to be a co-applicant. How much time bank will take to disburse the loan amount?
Usually bank takes 7-10 working days to disburse loan amount. Then you must know when EMIs start, method of implementing interest rate change - reduction/increase in tenure or EMI Method of calculating interest rate. Guarantor requirement, phases of the loan disbursement, legal and verification fees payable by the borrower, rate of interest and effective rate of interest. The effective interest rate will help in making comparison.
Then there are commitment charges payables, if any processing charges payable by the borrower, procedure for switching over from floating to fixed rate or vice versa. The terms and conditions related to charges payable.
In case of purchase of land and construction loan, you must check whether bank will sanction separate loans or a composite loan. Also monthly EMI amount, mode of payment of EMIs direct transfer from bank account, postdated cheques or debit from salary, offer of a free or concessional insurance policy for the loan, house or against personal accident Impact of part prepayment on EMI - reduction of EMI amount or reduced number of EMIs.
These factors will help in preparing preliminary checklist only there are many more factors. Thus, this will help you in comparing and negotiating with banks for a good deal.
First you should prepare a checklist covering specific areas which can be prepared while discussing with a prospective lender. This helps in making a comparison and take a final decision.
The points to be covered in checklist:
Purposes for taking the loan – to purchase plot, for construction or for both. Then how and when will the bank give the loan amount. Documents required for getting loan, Eligibility to be a co-applicant. How much time bank will take to disburse the loan amount?
Usually bank takes 7-10 working days to disburse loan amount. Then you must know when EMIs start, method of implementing interest rate change - reduction/increase in tenure or EMI Method of calculating interest rate. Guarantor requirement, phases of the loan disbursement, legal and verification fees payable by the borrower, rate of interest and effective rate of interest. The effective interest rate will help in making comparison.
Then there are commitment charges payables, if any processing charges payable by the borrower, procedure for switching over from floating to fixed rate or vice versa. The terms and conditions related to charges payable.
In case of purchase of land and construction loan, you must check whether bank will sanction separate loans or a composite loan. Also monthly EMI amount, mode of payment of EMIs direct transfer from bank account, postdated cheques or debit from salary, offer of a free or concessional insurance policy for the loan, house or against personal accident Impact of part prepayment on EMI - reduction of EMI amount or reduced number of EMIs.
These factors will help in preparing preliminary checklist only there are many more factors. Thus, this will help you in comparing and negotiating with banks for a good deal.
Tuesday, May 11, 2010
Options to increase home loan eligibility
Normally 70 per cent and 80 per cent of the loan-to-value ratio is sanctioned to home loan borrower. This can be increased by providing collaterals in the form of life insurance policies, national saving certificates (NSC) and other investments.
Usually people avoid home insurance policy due to added costs but it is useful if unfortunately borrower expires. Here we will discuss about the investment options which can be used as collaterals with bank to increase the loan eligibility.
Life insurance: As many people do not buy home insurance policy therefore a life cover can be used as collateral. In case you do not have a life cover, then banks insist you have a term policy at least. S Govindan, general manager, Union Bank of India, said, “We encourage borrowers to take up a separate life cover for a home loan, as the life insurance policy is meant for dependents in an unforeseen situation.”
Bank uses this collateral to recover their loan amount unfortunately the borrower expire during the repayment period. In such case lender then either request the insurance company to remit the entire amount due to them. The lender, on its part, will adjust the loan outstanding and pay the balance to the borrower’s family or legal heir.
If all the debt has been cleared the policy papers are returned by the bank. The bank will write to the life insurance company to reassign or transfer the ownership back in the name of the borrower.
Shares: If shares are kept as collateral, the borrower has to transfer the ownership to the bank. K V S Manian, head (retail banking), Kotak Mahindra Bank, said, “Shares are in the demat form and therefore, need to be transferred in the name of the lender.”
In case during the repayment period borrow expires then the lender can recover the outstanding loan amount by selling the shares. The leftover amount is paid to the family.
The shares have additional benefit that is their value increases and makes it easier for the banks to recover the loan. A banker said, “In many cases, the borrower’s dependents also get some amount.”
Other investments: The long term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra and Mutual Funds can also be kept as security. According to experts it is discouraged, “These are meant for dependents of the borrower in an unfortunate circumstance. By using it as a security, the purpose is defeated,” said Govindan.
Like shares these documents are also needed to be endorsed in the name of the bank, if taken as security for a loan. “Mutual funds are liened to the bank. But investments are considered only for high net worth clients who will not need to liquidate the investments,’ said Manian.
If, unfortunately borrower dies, a similar formula is used as before.
Property: In case you own more than one property then you can used it as collateral. In this case transactions are done in two ways:
1. The property documents are to be kept with the lender.
2. The property is registered in the name of the lender till the financial obligations are over.
“In most cases, the property is equitable,” said Manian. In case the borrower dies before the settlement of the loan, the lender can sell the property and recover the loan amount.
Fixed deposits (FDs): You can keep FD as collateral with the lender but the FD should be of the same bank from which you have taken home loan. In this case also if the borrower dies before the settlement of the loan the outstanding is recovered from this.
Public Provident Fund: The banks have stopped accepting PF. “PF is not an instrument, it is an account,” said Manian. Reason being, as per law, no authority is allowed to freeze your PPF account except if it is to set-off your income tax.
Usually people avoid home insurance policy due to added costs but it is useful if unfortunately borrower expires. Here we will discuss about the investment options which can be used as collaterals with bank to increase the loan eligibility.
Life insurance: As many people do not buy home insurance policy therefore a life cover can be used as collateral. In case you do not have a life cover, then banks insist you have a term policy at least. S Govindan, general manager, Union Bank of India, said, “We encourage borrowers to take up a separate life cover for a home loan, as the life insurance policy is meant for dependents in an unforeseen situation.”
Bank uses this collateral to recover their loan amount unfortunately the borrower expire during the repayment period. In such case lender then either request the insurance company to remit the entire amount due to them. The lender, on its part, will adjust the loan outstanding and pay the balance to the borrower’s family or legal heir.
If all the debt has been cleared the policy papers are returned by the bank. The bank will write to the life insurance company to reassign or transfer the ownership back in the name of the borrower.
Shares: If shares are kept as collateral, the borrower has to transfer the ownership to the bank. K V S Manian, head (retail banking), Kotak Mahindra Bank, said, “Shares are in the demat form and therefore, need to be transferred in the name of the lender.”
In case during the repayment period borrow expires then the lender can recover the outstanding loan amount by selling the shares. The leftover amount is paid to the family.
The shares have additional benefit that is their value increases and makes it easier for the banks to recover the loan. A banker said, “In many cases, the borrower’s dependents also get some amount.”
Other investments: The long term investment instruments such as NSC, Indira Vikas Patra, Kisan Vikas Patra and Mutual Funds can also be kept as security. According to experts it is discouraged, “These are meant for dependents of the borrower in an unfortunate circumstance. By using it as a security, the purpose is defeated,” said Govindan.
Like shares these documents are also needed to be endorsed in the name of the bank, if taken as security for a loan. “Mutual funds are liened to the bank. But investments are considered only for high net worth clients who will not need to liquidate the investments,’ said Manian.
If, unfortunately borrower dies, a similar formula is used as before.
Property: In case you own more than one property then you can used it as collateral. In this case transactions are done in two ways:
1. The property documents are to be kept with the lender.
2. The property is registered in the name of the lender till the financial obligations are over.
“In most cases, the property is equitable,” said Manian. In case the borrower dies before the settlement of the loan, the lender can sell the property and recover the loan amount.
Fixed deposits (FDs): You can keep FD as collateral with the lender but the FD should be of the same bank from which you have taken home loan. In this case also if the borrower dies before the settlement of the loan the outstanding is recovered from this.
Public Provident Fund: The banks have stopped accepting PF. “PF is not an instrument, it is an account,” said Manian. Reason being, as per law, no authority is allowed to freeze your PPF account except if it is to set-off your income tax.
Wednesday, May 5, 2010
SBI further extended home loan teaser rates till June 30
The State Bank of India (SBI), country’s largest lender has further extended its home loan teaser rates by two months till June 30.
Earlier bank had extended the scheme till April 30, as the scheme is popular with the customers and also bank has surplus liquidity therefore it has decided to extend its special concessional home loan rate scheme, an anonymous SBI official told the press.
The official said, "This scheme is very popular with customers. As far as liquidity is good, we can continue with this scheme".
No changes have done in the rates for the first three years but the rate for fourth year onwards has been slightly reduced.
For the first year, the home loan interest rate is 8 % and for the second and third years the interest rate will be 9%.
Then from fourth year onwards, on home loans up to Rs 50 lakh bank will charge 9.25% interest rate while higher loans will carry 9.75 per cent interest rate.
At present, from the fourth year onwards the scheme is offering 10 per cent interest rate.
Under the teaser rate schemes banks offer concessional home loans to borrowers in the initial years, thereafter the interest rates increases to align with prevailing market rates.
The government and the RBI has shown concern over these schemes and said these may impact financial stability of lenders.
However the two other banks ICICI bank and HDFC Bank had also re-introduced their teaser rate schemes but on Friday the schemes of both the banks had expired and they have no plans of extending it.
Earlier bank had extended the scheme till April 30, as the scheme is popular with the customers and also bank has surplus liquidity therefore it has decided to extend its special concessional home loan rate scheme, an anonymous SBI official told the press.
The official said, "This scheme is very popular with customers. As far as liquidity is good, we can continue with this scheme".
No changes have done in the rates for the first three years but the rate for fourth year onwards has been slightly reduced.
For the first year, the home loan interest rate is 8 % and for the second and third years the interest rate will be 9%.
Then from fourth year onwards, on home loans up to Rs 50 lakh bank will charge 9.25% interest rate while higher loans will carry 9.75 per cent interest rate.
At present, from the fourth year onwards the scheme is offering 10 per cent interest rate.
Under the teaser rate schemes banks offer concessional home loans to borrowers in the initial years, thereafter the interest rates increases to align with prevailing market rates.
The government and the RBI has shown concern over these schemes and said these may impact financial stability of lenders.
However the two other banks ICICI bank and HDFC Bank had also re-introduced their teaser rate schemes but on Friday the schemes of both the banks had expired and they have no plans of extending it.
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