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Bid a happy farewell to prepayment penalty

http://www.thehindubusinessline.com/features/investment-world/personal-finance/article1761416.ece

The country's largest bank SBI announced last week that it will be dropping the ‘prepayment charge' on its loans.

This announcement came the next day after it hiked its base rate for lending by 0.25 per cent. It also withdrew its teaser loan schemes along with this announcement. So what are the implications of this move?

As home loans typically run their course for 15-20 years, the borrower may find that a lot can change over the term of the loan - interest rates, the size of the monthly instalment and even capacity to repay the loan.

A borrower may choose to “pre-pay” a loan or close it out before its term. Most banks impose a penalty on such prepayment. Prepayment can be charged in two cases. One, when you prepay with your own sources. In this case, you issue a cheque from your own account. Second, you refinance the loan by transferring it to another bank.

Impact of prepayment

The prepayment penalty usually stipulated by public sector banks is about 1 per cent or less of the loan outstanding, while it can be anywhere between 1-3 per cent in private banks. In many cases, banks do not charge any prepayment penalty if you prepay using your own sources.

The penalty is calculated on principal. Hence, if you have Rs 20 lakhs of loan outstanding, the penalty could range from nothing to Rs 60,000 depending on the bank.

Now, when it comes to figuring out your outstanding loan amount do not assume that if you have taken aRs 40 lakh loan for a 20-year tenure and you are halfway through it, you would have paid Rs 20 lakh.

Here is why. During the initial years of repayment the interest component makes up a larger portion of your EMI (equated monthly instalment) and during the latter years the principal component is higher.

So if you are indeed halfway through the term of your loan, you would have repaid the interest component for the most part.

Banks do this to retrieve their interest cost or fee for the loan upfront before obtaining the actual loan amount (principal) borrowed.

To determine how exactly the repayment happens throughout the tenure of your loan, use can use the EMI calculators and amortisation tables available on websites such as www.bankbazaar.com.

However, do note that when you prepay a loan, unlike EMIs, it directly reduces the principal amount borrowed.

So if you were to prepay in small amounts throughout the loan tenure, chances are you will close your loan much earlier.

Most banks allow you to partially prepay up to a certain limit without any penalty but when you prepay in full you are likely to incur the highest prepayment charge.

However, pre-payment maybe worth it if you actually save a significant amount of interest by re-financing the loan.

Points to note

From the banks' point of view, they charge prepayment penalty as it impacts the future income of the bank.

To ensure you get clarity on prepayment, you must discuss the clauses at the time of borrowing.

Insist on getting a written note on all the clauses.

At the same time, discuss with the bank the specific prepayment penalty levied at different stages of the tenure of the loan as banks have different charges for prepayment at different timelines.

For example, banks may charge 2 per cent if you prepay before 5 years, 1 per cent between 5 to 10 years and none beyond 10 years.

You should also discuss with the banks the difference in charges on prepayment from your own sources and on refinancing from other banks.

Last and most importantly, you should also see if you can prepay partially.

Most of the banks do allow partial prepayment up to a certain limit. For example, you can pay 3-5 extra EMIs in a year.

The RBI has shown its displeasure in the past about the practice of banks levying prepayment charges and has been advising the banks against it.

However, in the recent turn of events where SBI has actually dropped prepayment penalty charges there is hope that other banks might follow suit.

Also, it may be worth mentioning that another body, owned by the RBI, the National Housing Bank (NHB) directed the banks in October 2010, with immediate effect, not to charge prepayment penalty when the borrowers pay off loans with their own sources.

Violation will lead to action under the National Housing Bank Act, 1987, it said. The one page directive is available at http://nhb.org.in/Regulation/scan0019.pdf.

This directive, however, doesn't say anything about refinancing. It remains to be seen if State Bank of India's recent move has a ripple effect, which can usher good news for borrowers.

(The author is CEO of www.bankbazaar.com, an online marketplace for loans)

Pre-sanctioned home loans look attractive, but they don’t suit everybody

25 Apr, 2011, 12.43AM IST, PreetiKulkarni,ET Bureau

http://economictimes.indiatimes.com/articleshow/8063741.cms?prtpage=1

For a house-hunter, the second biggest hurdle after zeroing in on the dream home is obtaining a home loan. How would you like it if you have the loan in your pocket even before you approach the developer to negotiate? Banks and housing finance companies offer pre-approved home loans even before the borrower decides on the property. While this sounds inviting, there may be some not-so-exciting features that you should be aware of.

The working: The procedure for a preapproved loan is not very different from a regular home loan application-you need to submit the documents along with the processing

These will include (depending on whether the applicant is a salaried individual, self-employed professional or an 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 borrower's income-toobligation ratio. Hypothetically, if the applicant's income is `1 lakh, his total repayment 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 loan seeker 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, the 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. In case of Kotak Bank, the validity could range from 1-3 months. "We generally prefer a period of one month," says Rao.

However, if there is a change in the interest rate, you will be charged the one prevailing at the time of taking the loan. While the interest rate may change, the spread over the bank's base rate will not be altered, 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 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 advise home-seekers on properties that meet their criteria. Besides, lenders have tie-ups with builders for various projects. "In the event of the borrower (with a pre approved home loan) finding it difficult to take a decision, the bank may direct him to the right kind of project. Thus, if both the loan as well as the project is pre-approved, the processing 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 negotiate," reasons the HDFC spokesperson. Such schemes also merit consideration in case 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 not always a win-win situation. You would lose the processing fee if you defer your purchase or decide to shift to another lender. "The processing fee is not refundable. In case of HDFC, it is 0.5% of the loan amount or `10,000, whichever is lower," says the HDFC spokesperson. "We retain 0.25% of the loan amount or `5,000," says Rao.

Therefore, you need to factor in the uncertainty of the actual disbursement while signing up for such loans. Even if you do take the decision within the prescribed cut-off date, the disbursal may be stalled if the bank does not find the property 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 it." 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 down your search 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.

Seven rules to improve your Cibil Credit Information Report

31 Mar, 2011, 06.18AM IST, HARSHALA CHANDORKAR,

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/seven-rules-to-improve-your-cibil-credit-information-report/articleshow/7831029.cms

Your Credit Information Bureau (Cibil) credit information report (CIR), other than your income , is the single most important tool used by a lender to evaluate your application for any loan or credit card application. Naturally, it's important that you understand your Cibil CIR and what it takes to maintain a credit history, so that it is viewed favourably by lenders . A good credit history can be maintained by following these seven simple rules:

RULE 1

Always pay your bills on time. Late payments are viewed negatively by lenders and may affect the chances of your loan getting approved. In addition, if you do not make payments on loans for more than 180 days, the lender may "Write Off " the amount in question. The lender then proceeds to report this on your Cibil CIR. Moreover, in the event that you make a payment which is less than the amount the lender believes it is owed, the lender will report this as 'settled' to Cibil. For example, if the lender tells you that you owe it Rs 100 but you pay only Rs 80 to the lender, it will then report your account as 'settled' to Cibil. Both 'write off ' and 'settled' accounts may be viewed negatively by lenders while evaluating your loan application because this status implies that you haven't been able to adequately repay your lender.

RULE 2

Keep your balances low. Most lenders review the total outstanding debt of a potential borrower (across all types of accounts ) and the amount of debt used in proportion to the amount of debt sanctioned to the borrower by the lender. While the balances on your loans will only reduce over time as payments are made, you must be diligent about controlling your credit card utilisation. For example, if your "Current Balance" is Rs 90,000 with a "High Credit" of Rs 1,00,000, this may be viewed negatively by a lender. While it is always prudent to not use too much credit, if you are already approaching the boundaries of your existing sanctioned amounts and credit limits the lender may be reluctant to provide additional loans to you.

RULE 3

Maintain a healthy mix of credit. Your Cibil CIR should contain a mix of a home loan, auto loan and a couple of credit cards. A high number of just credit cards may affect the chances of a loan approval. You may wonder why. Although a credit card offers easy access to finance, it's also by far the most expensive form of credit. The more the number of credit cards with high utilisation, the larger are the payments resulting from the high interest rate charged on credit cards. This may affect your ability to service additional debt obligations.

RULE 4

Apply for new credit in moderation. If you have made many applications for loans, or have recently been sanctioned new credit facilities, a lender is likely to view your application with caution. This 'credit hungry' behaviour indicates your debt burden is likely to, or has, increased and you are less capable of honouring any additional debt.

RULE 5

Think twice before closing credit card accounts. While using credit cards may negatively impact your Cibil CIR, unused credit cards actually imply that you are financially secure. This makes lenders view your application more favourably.

RULE 6

Monitor your co-signed and joint accounts monthly. In cosigned or jointly held accounts, you are held equally liable for missed payments. This is extremely important because your joint holder's negligence could affect your ability to access credit when you need it.

RULE 7

Review your Cibil CIR frequently throughout the year. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your Cibil CIR accurately reflects your current financial status. So reviewing your Cibil CIR 3-4 times each year is important in order to keep you financial health in good stead. Though these general rules are important to keep in mind, each lender has its own policies to sanction a loan to an applicant.

(The author is Senior Vice President Cibil)

Pre- EMI interest has tax sop

Source: Times Property, Pg no. 8 dated 30-04-2011.

A home loan has to be repaid within a specified number of months through equated monthly instalments (EMIs). EMI is the monthly payment you make on your home loan. It is a arrived at with interest and principal components. The total monthly amount is calculated in such a way that it remains constant all through the repayment tenure.

EMI begins when the loan is fully disbursed. Once your bank makes the entire loan payment, you begin repayment through EMIs. The amount of EMI to be paid depends on the amount of loan, tenure, rate of interest, and mode of calculations of interest. Longer the tenure, lower is the EMI. Shorter the tenure, higher is the EMI. At the same time, it is to be noted that in case of longer tenures, during the initial period, the interest component is more and the principal component is less. Over the years, -it gets reversed and the principal component becomes more while the interest element becomes less. This is because in the initial phase the loan amount outstanding is more as compared to the later years.

Pre-EMI is relevant when the building's construction is not yet completed. When the building is under construction, the builder may be paid depending on the stages of construction. The entire sum for the house is not disbursed to the builder. A partial disbursement happens linked to stages of construction. The actual loan repayment will start only when the entire loan amount is disbursed to the builder.

During the period of partial disbursements you will have to pay pre-EMIs. Only the interest accrued on the disbursed money is paid.

Tax deduction for the preconstruction period - on the pre EMIs- can be availed only after the construction of the building has been completed. Once the construction is completed, the total pre-EMI interest paid is deductible in five equal instalments in the subsequent years.

For example, if you have paid Rs. 5 lakh as the pre-EMIs, then 1 lakh will be shown in the next five years as tax deduction. Pre-EMI is only the interest paid during the period. If you have paid any principal amount, it is not eligible for tax deduction.

All interest payable in respect of the year during which the construction is completed, (including interest payable for the period during which the construction was still to be completed in that year) is deductible under Section 24. The entire interest payable is deductible under this Section. All interest payable in respect of periods up to the year of construction is required to be aggregated and is allowed as a deduction in five equal instalments beginning from the year in which the construction is completed.

Capital repayments on the loan, if any, made in the years during which the property remained under construction are not eligible for any deduction. However, capital repayments on a loan made in the years after the construction of the property has been completed are eligible for deduction up to a limit of Rs. 1 lakh per annum.

Rebate on loan EMI tied to share in house

T. Banusekar

Recently I read in The Hindu that both husband and wife can claim income-tax benefits in respect of interest payment and principal repayment on a housing loan. We have taken a housing loan with me as the applicant and my husband as co-applicant. We are individually income-tax assessees and we wish to claim 50 per cent of the housing loan benefits in each of our hands. Under what section can I make such a claim? – R. Rukmani

If the house is self-occupied and if the property is co-owned by you in equal proportions, each of you can claim a deduction of the interest in the proportion of your ownership but restricted to Rs 1,50,000 each. This limit will individually apply to each of you.

Section 24 allows a deduction in respect of borrowed capital where the borrowing is for purchase, construction, repairs, renewal or reconstruction of a house property. This section restricts the deduction in case of self-occupied properties to the limit stated above.

Ownership of part of a house is also recognised as ownership of house and the deduction can be claimed by each of you subject to the limit of Rs 1,50,000. This deduction is not a restriction in relation to each house but in relation to an assessee and, therefore, this limit will apply for each of you individually.

Section 26, which refers to a co-owned property, refers to a case where the shares of the co-owners is definite and ascertainable and provides that in such a case the income from the property as computed in accordance with sections 22 to 25 shall be included in the co-owners income.

Even in respect of principal repayment, the deduction under Section 80C can be claimed subject to the limit of Rs 1 lakh by each of you. Section 80C allows a deduction in respect of certain investments and payments and places a limit of Rs 1 lakh on all investments and payment of which principal repayment of housing loan is one, provided the loan is taken from certain specified institutions. You may also note that if the property is let out there is no limit on the amount of interest that can be claimed as a deduction u/s 24.

This article was published in Hindu-Business line edition dated Date: 07/02/2010 URL: http://www.thehindubusinessline.com/bline/iw/2010/02/07/stories/
2010020751191300.htm