Advantages of switching Home Loans after Interest Rate Cut

The New Year brought in a reason to rejoice for house loan borrowers. The home loan interest rate saw a further dip and here’s what’s important to note.

How do the old borrowers benefit?

The old borrowers who have been servicing their EMIs based on the erstwhile base rate system of lending are the main beneficiaries of this interest rate cut. They now have a stronger reason to switch to the MCLR – based lending, even though the base rate hasn’t come down as much but the difference between base rate at which old borrowers are servicing their loan and the current MCLR is widening.

Why should you switch?

The benefits of RBI rate cuts have been given rather sluggishly to borrowers, which is the main reason to switch from base rate to MCLR.

What to watch out for?

The home loans interest rate at present seems to be in place for a certain period of time. The only disadvantage could be the interest rate cycle turning. There is always a risk of an upward movement of interest rates before reaching the reset period.

What are the options for base rate borrowers?

The tenure is automatically reduced when the interest on your loan goes down, thereby, transferring the benefit of lower rate to the customers.

The base rate borrowers now have two options – switch to MCLR based lending with the lender or else, transfer. One may also continue the loan on base rate, especially if the loan term is nearing the end.

The switch to MCLR by base rate borrowers is allowed by RBI. The existing loans can run till maturity or borrowers can switch to MCLR on mutually agreed terms.

Switching in the lending institution

In case the difference between what you are paying and what is being offered now as MCLR is significant, it makes sense to switch. Also, in cases where the home loan tenure is still away from closure, it’s sensible to make a home loans balance transfer.

Switching to another lender

If you are being offered a high housing loan interest rate (MCLR plus spread) then look for refinancing. In such a case, get the loans refinanced from a lender offering a lower interest rate and make a home loan transfer. Also Read: Your Checklist for Home Loan Transfer

Switching to MCLR in itself should help you save a substantial amount. In addition to switching the loan from base rate-linked to MCLR and thereby saving interest, prepare a systematic partial prepayment plan to further reduce the interest burden. Therefore, it is advisable to analyse and switch your existing home loans provider whenever there is a home loan interest rate cut.

{Source: www.indiabullshomeloans.com/blog/advantages-of-switching-home-loans-after-interest-rate-cut/}

Types of Home Loans

Being a home owner is everyone dreams. With the increasing demand for a room of one’s own, the popularity of home loans has gone up. Banks, financial institutes and NBFCs offer a variety of home loans. With low rates of interest, affordable EMIs, manageable tenure and tax benefits, home loans are high in demand. Home loans are not limited to buying a house or a property; it can be used for home improvement, buying land to build a house of their own design, renovating, expanding, etc.

The types of home loans available to customers these days are as follows:

1. Land purchase loans: Land purchase loans are to be taken when you are buying a plot of land, on which you wish to construct a house. Banks offer land purchase loans which are up to 85% of the cost of the plot, irrespective of whether it is for residential or investment purpose. Based on your age, the maximum tenure for this type of loan is 15 years. Anyone, who is above 21 years of age and has a regular income, is eligible to apply for this loan. Usually, the amount of loan sanctioned for land purchase tends to be lesser than the loan for purchasing a house.
2. Home purchase loans: Home purchase loan is the most common and the most popular type of loan sanctioned by, almost, all the lending institutes. It is used to purchase a new residential property or an old one from previous owners. Lending institutes grant up to 85% of the market value of the house. The rate of interest on this loan varies from fixed, floating and hybrid.
3. Home construction loans: A home construction loan can be availed when you wish to construct a house rather than buying a pre-constructed one. The loan application process for this type of loan is slightly different from other, related home loans. The approval also depends on different parameters. The points to remember while applying for this loan.
4. Home expansion/extension loans: Home expansion or extension loan is perfect when you wish to expand any house owned by you. It includes changes in structure, adding extra space, dividing a big room into two smaller ones, adding a low attic, enclosing balcony, making a bigger bathroom and many such alterations that utilise the existing house area. This loan can also be sanctioned as a part of home improvement loan. It depends on how the lending institute categorises it.
5. The home expansion loan amount constitutes 70% to 85% of the total cost of expansion. The parameters considered while granting this loan are same as those for other types of loans, credit history, annual income, tenure, etc. The rate of interest for this type of loan can be floating or fixed, as agreed with the institute.
6. Home improvement loans: Home improvement loans are quite different from home expansion loans. Home improvement loans are sanctioned for internal and external painting, repair work, electrical repairs, plumbing, water-proofing, adding underground and overhead tank, flooring, tilling, etc. With a maximum tenure of 15 years and rates of interest ranging from 9% to 11%, these loans cover up to 80% the cost of renovation and repair work; perfect when you want to tweak the house for upcoming festivals, weddings and special events.
7. Home conversion loans: If you have already purchased a house by taking a home loan, but have changed your mind and wish to buy another house, you can choose home conversion loan. It simply means that you can transfer the current home loan over to the new home, without the need for repaying the loan on the previous home. While extremely beneficial in a rare case, this loan is very expensive and can cost you a lot.
8. NRI home loans: This is a specialized home loan variant, developed to help Non-Residential Indians to buy residential property in India. Even though the formalities and process for NRI home loan application is similar to regular home loan application, the paperwork involved is quite extensive.
9. Balance transfer loans: When you wish to transfer your home loan from one bank to another, you can choose for the balance transfer option. The balance transfer can be an option for various personal, professional and financial reasons. For instance, when you want a lower rate of interest than what you are getting at your current or you are displeased with the customer service you are receiving at your current bank.
10. Stamp duty loans: A stamp duty loan is rarely opted for, with majority of customers remaining unaware about it. It is sanctioned solely for the purpose of paying off the stamp duty charges on the purchase of a property. The loan amount is much lower for this type of loan as the stamp duty is, usually, in the rage of 4-5% of the cost of the property. Experts advice to pay the stamp duty and registration fee upfront instead of taking a loan to pay them.
11. Bridged loans: A bridge loan is a short term loan granted when you wish to buy a new house, while already owning a residential property. Typically, it is used to fund the purchase of your new home till you find a buyer for the old home. The tenure for this type of loan is less than two years and requires you to mortgage the new home.
12. Refinance Loan: Refinance loan is similar to the practice of debt consolidation, but specifically, for home loans. Herein, you take this loan to repay your friends, relatives and private lenders, from whom you have borrowed for the purpose of buying your current home.

{Source: blog.loanbaba.com/types-of-home-loans/}

Suit yourself: How to choose which home loans suit you best?

While home loans are easily available, it is essential to avail of the one with the lowest interest rate, thereby saving money. Important criteria such as loan percentage, lowest fixed and floating interest rates, availability of prepayment option, special concession for women and senior citizen etc, will help people to choose the home loan best suited for them.

Taking a home loan in present day has become very simple due to more banks and private lenders offering flexible interest rates and various budget options. In this wide market, it is important for one to do their research and choose the one which allows them to save the most money. Every year, banks launch new home loan schemes and introduce loan options which suit the economic trend of the country. Public sector banks will not raise the home loan interest rate as they are pressurized by the finance ministry to protect the home loans borrowers.

Four ways in which you can identify a good home loan scheme are:

1. Check the percentage of loan offered: One can decide which is the best home loan based on the percentage of the home loans offered. If one bank is offering 80% of the amount required to buy the house and another is offering 85%, it makes sense to choose the latter. This is helpful only if you are unable to afford large sums for down payment but subsequently, your EMI will increase in the percentage amount offered.
2. Analyze the interest rates and prepayment charges: The smartest way to save on home loans is to choose one based on the rate of interest and free processing offered. Checking for the EMI, prepayment charges and processing fee and looking at comparative rates are good ways to sift through to the best home loan offers. According to the RBI, banks are not allowed to collect a prepayment charge from home loans borrowers for floating interest rates. It is also easy to change the loan from one bank to another along with the transfer of balance.
3. Consider loan process and time involved: The process of applying for a loan is a lengthy procedure and requires the submission of many property and income related documents. The time taken for the application to be considered and the loan to be disbursed differs from bank to bank, but this time should also be taken into account when considering a loan. Apply to a bank which has a simple process and saves time with better schemes. While there are agents who can guide you through this process, it is not possible to gauge their credibility. Researching can help you find the best home loan schemes which take the least amount of time. Applying for a loan online would also reduce the amount of time it takes for the loan to be approved.
4. Special concession schemes: Some banks would offer special concessions to senior citizens and women which would save them a considerable amount on the interest rate. LIC housing finance offers a 10% special interest rate for female borrowers in comparison to the normal 12.25% offered for others. People could also look into different kinds of loans such as hybrid loans, joint loans, etc.

Choosing the best home loans scheme would mean that you would save money in the long run. When the plan is suitable to your financial conditions, it also reduces the stress induced by taking a home loan.

{Source: https://www.indiabullshomeloans.com/blog/suit-yourself-how-to-choose-which-home-loans-suit-you-best/}

Joint home loans: To do or not to do?

We have all heard of home loans haven’t we? The banks take into consideration the eligibility criteria before sanctioning a loan. A borrower must be at least 21 years of age and at most 60 years of age to avail a loan. However the age criteria vary from bank to bank.

Also the borrower must have a high CIBIL score, usually above 750 to be within the eligible bracket to receive a loan. Once the borrower is proved eligible, he/she is entitled to a maximum loan amount of 60 times his/her monthly net income. For example if Mr. A who is 30 years old earning a monthly income of Rs. 80,000/- applies for a loan, he will be entitled to an amount of Rs. 48,00,000/-.

What if Mr. A is looking to buy a flat worth 1.5 crore? So where does he acquire the balance from, to pay for his house? This is where joint home loans come in. He can take joint home loans with his spouse, sibling, parent or son. The one who jointly takes a loan with him is called the co-applicant.

The banks then take the joint monthly income of the co-applicant and the borrower and club it as one, increasing the loan amount the borrower and the co-applicant are entitled too. This means that the co-applicant also has the responsibility for the repayment of the loan. This indeed will make it far easier for Mr. A to buy the flat that was always on his mind. The borrowers can claim the interest paid on the loan as a deduction under section 80c in the ratio of the interest paid. However if the co-applicant has a poor CIBIL score, the banks will not consider his/her score and the amount the borrower is entitled to,won’t increase.

Usually there is a lot of ambiguity between the definition of a co-applicant and a co-owner. A co-owner includes the owners of the concerned property to be purchased. A Co-applicant is the person who jointly takes a loan along with the borrower. Banks insist all the co-owners be co-applicants mandatorily. On the other hand, co-applicants don’t necessarily have to be co-owners.

It is always better to go in for a joint loan, if the loan required is exorbitant. One should keep in mind that a higher loan is accompanied with a greater interest over a period of time. On the other hand, if the borrower has the capacity to make a huge down payment, he shouldn’t go for a joint loan and must opt for single home loans, thus saving on the total cumulative interest and the risk to pay the bank more.

{Source: https://www.indiabullshomeloans.com/blog/joint-home-loans-to-do-or-not-to-do/}

The problem with home loans.

The latest in Reserve Bank of India’s measures to protect customers with home loans is a proposal to change the way banks determine their `base rate’ – the benchmark for all floating rate loans. The need for a re-look arose because customers have been complaining of a raw deal in pricing.

In recent years RBI has taken a number of measures to provide a better deal for home loan borrowers. The introduction of base rate ensured that banks do not reduce rates only for new customers by playing with the interest spread. In the past banks could play with the spread as they would lend below the prime lending rate (their earlier benchmark) for new customers while old customers continued to pay over the PLR.  This was not possible with the `base rate’ which was also the floor rate for pricing. In June 2012 RBI forbade banks from imposing a penalty on pre-payment of home loans irrespective of whether the loans were being refinanced or repaid. This made it possible for disgruntled borrowers to move away to rivals if their loans were not re-priced when interest rates were falling.

But there are a number of areas RBI could look into as part of its consumer protection initiative. Here are a few.

Compulsory Insurance: Banks have an interest in the property mortgaged with them and they need to ensure that it is protected against any eventuality. At the same time banks also gain by selling insurance policies.  But what need to be insured is the cost of construction and not the cost of land. A 1000 square foot house may cost Rs 2 crore in Mumbai but the cost of construction would be around Rs 20 lakh. So there is no need of buying property insurance for the whole loan amount. Yet many banks insist that the buyer pay 15-year insurance premium upfront based on the market value of the property rather than the construction cost. Also in cities like Mumbai, the property is owned by the cooperative society which is required to insure the property. It is therefore not clear whether the bank’s insurance policy will pay a claim when the housing society is also making a claim for the property damage.

Non-intimation of interest rate changes:  Most home loan borrowers focus on the interest rate at the time of availing home loans. But floating rates are dynamic and vary from time to time. The borrower is not aware of this because while rates vary, the equated monthly installment or EMI does not. Banks merely change the tenure of the loan. So in a rising interest rate regime it is not unusual for borrowers to find that their principal loan amount is unchanged even after years of repayment.  Very rarely does a bank communicate to the borrower changes in interest rates.

Notice of intimation of mortgage: In Maharashtra the government has made it compulsory for all mortgage interests to be registered. This is aimed at preventing fraudulent sale of the property even as a loan is outstanding.  While the objective is laudable, the trouble is with the process. Although the law actually protects the bank’s interest lenders have shifted the onus on the borrower.  Rather than use their institutional clout to facilitate smooth registration, borrowers are forced to approach agents and spend a few thousands to complete this process.

No refinancing of existing loans:  Lenders often poach from home loan borrowers of other institutions. But when it comes to their existing customer they do not offer them the benefit of new rates.  If there is a special scheme running in the bank, existing borrowers are not informed of it. Also banks charge customers a processing fee even when their loan is refinanced within by their own bank but under a different scheme.

Complex pricing: Some banks have resorted to complicating the pricing of home loans introducing interest free years in middle of the tenure of the loan. Innovation in financial products is good only as long as they do not obscure pricing. Borrowers need to have the opportunity to compare the cost of one home loan against another.  One way to make the pricing transparent is to disclose the cost in the form of annualised yield to the lender based on prevailing rates.

{Source: http://blogs.timesofindia.indiatimes.com/small-change/the-problem-with-home-loans/}