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When to switch your home loan lender

June 1, 2009 16:24 IST

Have a query regarding your home loan? Maybe we can help.

Drop us a line and our expert, Anil Rego, will answer it.

Got a question for Anil Rego? Please write to us at getahead@rediff.co.in with the subject line as Home loan query for Anil Rego.

I have taken home loan for 20 years from HDFC Bank amounting to Rs 16 lakh. Currently the floating interest rate is 11.25 per cent. Will I benefit if I switch my home loan to public sector bank, say SBI which charges 8 per cent interest rate, provided HDFC charges 3 per cent penalty on switching the home loan?

Sudhir Joshi

You would have to evaluate this after taking into consideration all the charges incurred on such switch including the pre-closure charges. One should also keep in mind that from the 2nd year onwards, the rate applicable on the SBI loan would be a floating rate one.

In your case the difference may be too marginal keeping in mind the pre-closure penalty of SBI. One could therefore continue with the existing loan.

I got a loan from ING Vysya Bank for Rs 44 lakh in September 2008. Currently my interest rate is 11 per cent where from Bank of Baroda or SBI having 9.75 to 10.25. How can I transfer my loan and is it viable to transfer?

Dharmander Gupta

Given that your current interest rate is 11 per cent, you benefit from a switch if the processing fees is 2 per cent. If the pre-closure charge is 3 per cent, transferring your loan may not work out. You can evaluate the special scheme of SBI, which has first year interest rate of 8 per cent. You also mention that the interest rate of ING Vysya is higher than that of SBI. If this difference exists in subsequent years, one may benefit from the switch in subsequent years as well.

We have taken a loan of about Rs 31,00,000 from HDFC Bank in July 2008. Now as the market conditions have gone bad most of the banks have reduced the interest rates.

We started with interest rate of 10.25 and now it is 10.50 per cent. The question is how we can avail the benefits of low interest rate? Should we transfer our loan to some PSU bank or pay off extra to reduce and make it in limit of Rs 30,00,000. Can you please advice?

Ritu Arora

Your interest rate is around 10.5 per cent, switching it into a lower interest rate would call for pre-closure and processing charges. Hence, you may not benefit substantially due to such switch activity.

If the increase has created a stress on your household budget, you can either make a partial prepayment (as you have already suggested) to reduce your principal and thereby the EMI (make payment only till the extent which will not call for pre-closure penalty).

Alternatively, if the bank does allow, you can switch and increase the tenure, provided that you would still be in a position to payoff your EMI completely prior to retirement -- the idea is to not have any liabilities post retirement.

I have a HOME LOAN from HDFC taken in 2002 at a floating rate of 11.5 per cent. Currently, the applicable rate is 12.5 per cent.

I have 3 questions:
a. Is it advisable to go for a shift to other banks such as SBI where the interest rate seems to be less?
b. What would be the net difference for a principal amount of Rs 10 lakh for a balance of period 10 years? Is it beneficial for changing over to new bank or maintaining with the existing one keeping in mind the opportunity cost.
c. Even though the RBI is reducing the CRR, is there any possibility of reducing the interest rate, which is a judicious move?

Narahari Aachi

Evaluate these options after thoroughly examining the costs attached to such transfer.

You could consider switching to other banks especially if the interest rates in subsequent years are lower. (Normally the rates are at PLR +/- a certain interest rate. You can compare the same for the other loan you are considering).

If the interest rate is about 2 per cent lower than your interest rate, the EMI differential is Rs 1,144 for Rs 10 lakh loan.

The CRR & Repo cuts by the RBI are with a perspective that they should be necessarily passed on to the end investor / borrower. Hence, the interest rates would eventually move southwards.

Banks have already lowered their interest rates.

I have taken loan from IDBI bank in last April, 2008 of Rs15,00,000. EMI was Rs 14,976 in 20 years. After increasing interest rate I have received letter that payable period is now 28 years.
But now interest rates have decreased but I have not received any letter from bank. I personally visited in bank but they informed me that rates are only for new customers. What is the use of floating scheme?

Rahul Khade

Banks unfortunately follow the practice of keeping the PLR constant but lower the differential vs PLR for home loans for new customers. Example if the bank was providing loans at PLR minus 1 per cent, for new customers they would provide at PLR minus 1.5 per cent.

A person, who has taken the loan earlier at PLR minus 1 per cent, will not see a reduction in interest rates till the PLR is reduced. This is definitely unfavorable to the customer and one hopes that RBI puts a stop to such measures by banks. Eventually though the banks would need to lower interest rates lest customers switch loans to other banks.

Banks do these revisions on a periodic basis. If the same is quarterly then if the PLR is changed in April, the same would be effective from the next quarter only.

Anil Rego is the founder and CEO of Right Horizons (http://www.righthorizons.com/), an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.

When to switch your home loan lender

June 1, 2009 16:24 IST

I have just switched my home loan for 10 year of Rs 6,03,000 from HDFC BANK to SBI @ 8 per cent FOR FIRST YEAR and rest as applicable the rate of interest. But initially my EMI is Rs 7,969 @ 10 per cent p.a. instead of Rs 7,317 @ 8 per cent, they are saying (mean SBI) that deposit of excess amount has been adjusted in principal amount directly. Will you please suggest what to do?

M K Gupta

The lower interest rate of 8 per cent is only applicable in the first year for SBI. For the remaining period it would be at a floating rate. Since the normal floating rate at this time for SBI is 10 per cent (without this scheme) they are charging EMI at 10 per cent interest rate so that the EMI is constant.

You need not worry even though the EMI is calculated assumed at 10 per cent; the interest rate that will be charged to you will only be 8 per cent. This can be beneficial to you since the higher EMI will result in prepayment of the loan much faster.

I want to take a loan up to Rs 20 lakh from bank and after 3-4 years I want to convert that bank loan to company housing loan. Can you suggest which type of Loan and from which Bank is best suitable for me?

Rajendra Patwal

You can look at any loan, which has lower prepayment charges since you would like to transfer it to your company loan.

My elder brother took a loan before 5 years with joint name of my mother. Now he brought new house (with new loan) and now I am paying EMI of old loan but as my name is not there I cannot claim the income tax benefit.

Is there any way I can claim the tax benefit? My name can be added to the house name or loan name? Kindly answer asap.

Rushi Seth

You can claim interest benefit only if the house is in your name. You can execute a gift deed and re-register the property to claim the benefit -- this would come with a cost thereof.

Eventually since you are paying the EMI, you would want to have the house in your name I would expect.

I have a housing loan with State Bank of Hyderabad of Rs 4 lakh, floating rate of interest. When the interest rate went up, they promptly increased the EMI, but now with the decrease in interest rate there is no change in the EMI, the Manager does not even bother to clarify or sort out this matter. Is floating rate not applicable when the interest decreases? (Only increase is immediately applicable) Please clarify this issue and advice on what I need to do?

Malathi

A person, who has taken the loan earlier at PLR minus 1 per cent, will not see a reduction in interest rates till the PLR is reduced. This is definitely unfavorable to the customer and one hope that RBI puts a stop to such measures by banks. Eventually though the banks would need to lower interest rates lest customers switch loans to other banks.

Banks do these revisions on a periodic basis. If the same is quarterly then if the PLR is changed in April, the same would be effective from the next quarter only.

I'm looking to buy a house in the next couple of months. The expected value of the house should be about Rs 2.5 crore. I need to know how much out of this amount could be taken on loan? We are 3 working members in the family. Our occupation is business.

Karan

Ideally banks offer 80 per cent to 85 per cent. The bank would also look at the repayment capacity while determining the value of the loan. If it is a joint loan, they would include the repayment capacity of the joint holders while calculating the eligibility.

Have a query regarding your home loan? Maybe we can help.

Drop us a line and our expert, Anil Rego, will answer it.

Got a question for Anil Rego? Please write to us at getahead@rediff.co.in with the subject line as Home loan query for Anil Rego.

When to switch your home loan lender

June 1, 2009 16:24 IST

I have gross salary of Rs 18,000 per month. For how much loan I can get for purchase of flat?

Ahmed Sadiq

It entirely depends on your expense / savings pattern. Normally banks would lend such that EMI commitment would be about 40 to 60 per cent of the net monthly salary.

I have a couple of questions. I am just about to take a home loan but have few difficulties. Please help me sort them out.

Can you help me understand one thing? If the rate if fixed for first five years (9.25 per cent) and the remaining are floating for the next five. Will that floating rate be applicable for the principle left after five years?

Is it not true that in such cases, the EMI deducted for the first five years will mostly cover the interest and not the principal, so that the banks can gain maximum after five years when the floating rate will be applicable?

When the Prime Lending Rates (PLR) of banks change, how much time does it take for them to change the EMI? Is it mandatory for the banks to inform us when they change the EMI?

Do banks have the authority to change the term period without our approval?

Looking forward for your suggestions.

Rashesh Dedhia

After the five-year period the bank will have the interest rates linked to their prime lending rate. It will become equivalent to a floating rate loan.

The interest component will be higher during the first few years, whether the loan is a fixed or floating rate one. This is the principle of the Equated Monthly Installment. A part of the EMI is toward interest payment and a part towards principal repayment. In initial years the principal is high. As the years pass by, the principal keeps reducing and hence more and more of the EMI keeps going towards principal repayment as the interest is lower on a lower principal.

You will receive a notification on any rate changes that would happen. Different banks have different policies norms when they increase the EMI. Some of them keep the EMI constant and increase or decrease the term of the loan when the interest rate is different from the initial rate.

In the case of a floating rate loan, if EMI is not changed, the term will automatically differ. The banks will not take prior approval in this case.

I am planning to buy a flat. My monthly income (including my wife's salary) is being Rs 43,000. I am looking loan for Rs 20 lakh loan. Kindly suggest which bank can provide the loan with lowest interest rate.

Subhash

Banks keep changing interest rates at different times and also have special schemes like the one from SBI which had the first year interest pegged at 8 per cent and with floating rate loan subsequently. The interest rates also differ for different tenures.

I have a plan to purchase one flat in multistoried apartment for Rs 30 lakh by home loan for 20 years. I want to know is any Lifetime (like 50 yrs, 75 yrs) is there for apartment by government laws? After the lifetime what will be the situation of flat owners?

Which is wise decision, either go for a flat or independent house? Please answer.

Samaya Balan

There is no lifetime fixed for the age of a building. There have been cases where apartment owners of very old buildings have got together and got the same reconstructed by a contractor/developer. One would have to face the inconvenience of living elsewhere in that period.

Both apartments and independent houses have their own benefits. Apartments can be cheaper, provide security and also sometimes socially preferred. Independent houses can be costlier though the resale value is likely to keep appreciating. Gated communities could be much costlier. Land value will keep appreciating. The building value would keep depreciating as time goes by. You can choose from the two options by considering both financial, social and convenience factors.

I am a salaried person. I am constructing a house for self-occupancy. I am planning to take a home loan of Rs 10 lakh.
Can you please tell me how much of tax benefits can I get?

Abhilash D

Interest part paid towards home loan can be availed as 'Interest on Home loan' u/s 24 allowed to a maximum of Rs 1.5 lakh.

Principal part can be claimed as deduction u/s 80C with a maximum limit of Rs 1 lakh. For a home loan of Rs 10 lakh, if the interest is 9.5 per cent, then your interest for the year would be approximately Rs 95,000. (Interest would keep reducing as the outstanding keeps reducing as time goes by).

Have a query regarding your home loan? Maybe we can help.

Drop us a line and our expert, Anil Rego, will answer it.

Got a question for Anil Rego? Please write to us at getahead@rediff.co.in with the subject line as Home loan query for Anil Rego.

When to switch your home loan lender

June 1, 2009 16:24 IST

I have bought a flat 4 years back & enjoyed tax benefit on EMIs. Loan is cleared. Now I want to buy a second home for whom my wife will be owner & I will be co owner.

My wife is housewife so i will be one who is paying EMI. I want to know can I enjoy tax benefit for this property without showing income from first home since for my wife this is the first home.

Santosh More

Since the house and loan will be jointly held, and given that you will be paying the EMI and your wife will be unable to claim any tax benefit, you can claim the entire tax benefit. (However interest is restricted to 150,000 as per tax laws)

There are two possibilities:

You stay in the new house: Note that you can have only one self-occupied house. The earlier house will be treated as a let out property. Ie rent needs to include as income (after a 30 per cent deduction available for maintenance). Even if the house is not let out you will have to show a notional rent that the house would have got if it was let out (deemed to be let out).

If you stay in the old house then you will not get an interest benefit since you have repaid the loan on this house. The new house will then be treated as a let out house as explained above and if there is no rental income it will be deemed to be let out as explained above.

I have land in Lonavala. Want to take a home loan of about Rs 70 lakh and construct apartments. Wanted to know the following:

1) Which are the banks that give home loan at Lonavala?

2) What are the documents required to get the loan?

3) How does the disbursement take place?

4) How does the bank decide on the amount that can be given as loan for a property that I want to construct on my own?

5) Any other important information that I need to know?

Rakesh Kumar

1. All banks would provide for a home loan, you will have to evaluate it from the perspective of cost / interest rate. If you are planning to build an apartment complex then some banks may not be willing to consider it as a home loan, but could treat it akin to lending to a developer.

2. A host of documents would be required:

ID Proof
Address Proof
Proof of earnings
Past year IT returns
Any other document as required by the bank

As per the stages of completion of home, you can request disbursement, it is suggested that you take full disbursement only when your home is ready for occupation, thereby starting your EMI when you occupy the home. This will optimise your tax benefit

Evaluate your financial feasibility before adding the EMI burden, often one fails to do this, the bank would conduct a due diligence on the property and hence, nuances such as title etc., will already be taken care of.

I have booked a flat in Naigoan area (Thane district) in March 2008. It is still under construction. During that time the property price was at its peak. We booked the flat for Rs 2,200 per sq feet. People who have booked prior to us have got same flat Between Rs 1,400-1,700 per sq feet also.

Now since the market is bad the builder to selling flats in the same building for Rs 1800? I am very depressed due to this as I am facing loss of more than Rs 2 lakh.

I want to know the way out. Can I negotiate with my builder to reduce my flat price? My loan has also started from HDFC bank since last month. I am really in a fix as I can't even sell it as it is still under construction and nobody will takeover it at higher price. What should I do? Please advice.

Veronica Fonseca

There does not seem much that can be done at this point considering that an agreement has been made and also loan disbursal has started, however, no harm in trying to negotiate with the builder.

It is very unlikely that the builder will reduce price considering that most of them are in difficulty due to the downturn and also since the price was agreed earlier.

We need to be careful regarding any investment made at market peaks.

I have a flat in Pune for which about Rs 40,000 needs to be paid back to HSBC to close the loan, which I plan to do soon. I have a monthly salary of Rs 1,00,000 & net take home of Rs 65,000.

What is the approx loan I can get on my above salary & can I buy a new property without selling the first one & still take benefit on income tax? I plan to take a loan with 15 years of repayment, as I am 40 years now.

Milind Waglele

About 80 per cent to 85 per cent of the property would be allowed as loan by most banks; though some banks have increased the margin amount. You will have to check with the bank, how much would be allowed for your salary stack. This would also look at the repayment capacity while determining the value of the loan.

You can take tax benefit on multiple houses -- the first one being self-occupied and the rest let out properties. However you would need to include the income you get from the let out properties. (There is a 30 per cent deduction on rent received towards maintenance).

15 years is ideal, however, keep in mind that the EMI commitment should close out prior to retirement. The idea is to not have any liability post-retirement.

There is plot with my father. We are thinking of doing ground+3 floor construction on it.
The cost is coming to Rs 17 lakh. I want to go for home loan for it.

Questions:

1) Can I get home loan if father owns land?
2) Can I get home loan if we are going to sell off remaining flats?
3) Is there benefit to me from tax point of view to have it (I can pay back Rs 40K per month) and on selling of first flat. Entire amount can be given back to bank. I fall into top tax bracket of 30 per cent.

Ashish Shah

The property and loan should be in your/joint names to avail any tax benefit. The bank could give you a loan though with some extra documentation.

The bank is unlikely to allow you to sell the flats unless a repayment is made. Example: you would need to use the proceeds of the flat sale to clear the loan. Otherwise the buyer would not be in a position to register the property.

Interest can be claimed as a deduction. This is likely to be treated as business income by the IT department and charged to normal tax rate.

I have been going pillar to post to get answer to query but every time I see an article I get a different version, hence I am reaching out to you and I am confident of getting the right answers to my query. I would like to thank you in advance for your expert advice.

Brief:

I had taken a housing loan of Rs 37 lakh from ICICI Bank on 25th July 2006 for a house getting built in Indirapuram- Ghaziabad (apartment house). The construction is now complete and I am planning to take possession during June 2009.

I am paying monthly EMI of Rs 52,000 (Principal Rs 12,000 and interest of Rs 40,000) per month since inception of the loan.

Here goes my query:

As per rules I can take possession of flat within three financial year from the start of the loan, I had taken loan on 25th July 2006 so I can take possession until March 2010, FY1 2006 -2007, FY2 2007-2008, FY3 2008-2009. Please conform if my understanding is correct.

Once I take the possession of this flat, I am not planning to occupy for couple of years and neither I would like to rent this, in this scenario would I get full exemption on interest i.e. 4,80,000 (40,000 X 12 months) under section 24 (b). The way I understand section 24 (b) is applicable if the property is not self occupied.

Also please advise me on the PRE EMI i.e. exemption of Interest on Housing loan for the period July 06 May 09 (pre possession time).

I work in NOIDA and I have taken a rented house in Delhi (Saket) and paying a rent of 25K every month and even post possession of the new property I would like to continue in Delhi due to the schooling of my kids. Please advice if I can take HRA benefit as well. As the property on which Housing loan is taken is in Ghaziabad, working place in NOIDA and rented house in Delhi. Would this be treated as three different places or would this be considered as a one area i.e. NCR. I know some of my friends who get this benefit on the above scenario so hence wanted to confirm this with you.

Looking forward to an early reply.

Nagarajan Balaji

Within 3 Yrs, you will have to purchase the house and hence your understanding is appropriate. It goes by date and not by financial year.

You can claim it as self occupied property(tax benefit limited to 150,000 on interest, additional benefit of Rs 100,000 towards principal repayment in a year under section 80C). You cannot claim HRA benefit simultaneously within the same city; but this is possible to claim if it is in different cities.

Add up the pre-EMI and start claiming the same from the year in which you occupy the house in 5 equal installments alongside your EMI tax benefit claim. However, it appears that you will not get a benefit since your interest will exceed the limit of Rs 1.5 lakh.

HRA and self-occupied can be claimed simultaneously if in different cities. The definition is for a city. If Ghaziabad is considered as a separate city then you can claim.

Have a query regarding your home loan? Maybe we can help.

Drop us a line and our expert, Anil Rego, will answer it.

Got a question for Anil Rego? Please write to us at getahead@rediff.co.in with the subject line as Home loan query for Anil Rego.