Home loan players in India offering festival discounts

By Vipin Agnihotri

In my opinion, there is a lull in the home loan interest rate market in India with plenty of banks and housing finance companies announcing festive offers with lower interest rates for new borrowers.

It has come into the notice of The India Street that lots of other lenders are also going to follow suit in the coming days. The pivotal factor here is that even as there is some amount of easing, it is too early to predict a soft interest rate regime ahead, as large chunk of lending institutions will wait and watch for signals from the RBI’s credit policy in October before minimizing their prime lending rates.

It is worth mentioning in this regard that HDFC has cut its floating rate by a quarter percentage point (0.25 %) to 11 per cent, in addition to lowering the processing fee. On the other hand, Bank of Baroda has pruned interest rates by 50 basis points to 11 per cent for loans up to Rs 20 lakh and 11.25 per cent on loans above Rs 20 lakh. According to sources, Allahabad Bank too has made a one percentage cut to 12 per cent for 25-year loans.

If experts are to be believed, increasing home loan rates have severely impacted the housing sector, as their growth have dip to 26.6 per cent in 2006-07 from 29.1 per cent in 2005-06. In my opinion, home loan companies are looking to increase their business and have adopted this strategy for growth.

Point to be noted here is that the current round of rate reduction will be the first since November 2004. Interestingly, between then and March 2007, interest rates rose from 7 to 12 percent. Most of the experts feel that till property rates ease substantially any marginal reduction in interest rates will not have much impact.

I completely agree with the fact that lowering interest rates for the festive season is business promotion, hoping to bring in some spurt in activity but that may not happen. All in all, one can safely say that correction in property prices is the critical factor that will create enthusiasm to go in for home loans.

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Home Loan Borrowers Cheer as NHB Introduces Independent Mortgage Counselors

By Dr Suvrokamal Dutta

It was long overdue, but can set the trend for borrowers to get educated. Prospective home loan borrowers can now take the services of independent mortgage counselors to be introduced by the National Housing Bank (NHB).

The best part about these counselors is that they are going to guide borrowers through the maze of financial terms and the implications of various loan terms on offer by banks and housing companies. In addition, they will help borrower prepare a budget, which they can afford.

Point to be noted here is that in an increasingly complex market, home loan borrowers are floundering, unable to comprehend the nuances of various products and are looking for a authentic source of information to assist them negotiate a proper deal.

It has come into the notice of The India Street that the National Housing Bank has sought to introduce a system of mortgage counselling and the first batch of Certified Independent Mortgage Counsellors (CIMC) should hopefully come in towards the end of this year.

In my opinion, a CIMC will help bring in fairness and transparency and would be of value to both the borrowers and mortgage originators. Lots of industry observers feel that plenty of housing finance companies are not transparent in the way they word their agreements or the loan conditions and complaints galore from borrowers who have felt cheated and let down.

Keeping all these things into perspective, home loan activists and participants in the industry have welcomed the move by NHB. “Customers should not shy away from having to pay the mortgage counsellor’s fees as taking their advice would help them save much more over a period of time,” pointed out Bhumi Veerani, investment and property advisor.

No one will argue with the fact that there are plenty of financially illiterate people in India, who need the services of a professional. On the downside, it is of paramount importance that counsellors should not act as agents of home loan players. That is where, professional counsellors found to be acting as agents should be blacklisted and disqualified.

For ensuring the success of the concept, NHB has laid down the criteria for eligibility of CIMC, the procedure for accreditation, renewal of accreditation and suspension of accreditation. The grievance redressal cell would be the key to the success of the scheme. Over a period of time, the NHB expects the counsellors to become a self-regulatory body, which would conduct itself with fair practices.

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Indians Should Carefully Examine the Benefits Paying Off Their Home Loans

Indians Should Carefully Examine the Benefits Paying Off Their Home Loans

By Vipin Agnihotri

There is quite a rush among Indians to repay the home loans in view of the increasing interest rates. But the question now arises: Is it the right move? The India Street decided to analyze the whole situation.

In the last one-year, interest rates on home loan have increase substantially. In terms of statistic, the rates have gone up from around 7.5 percent in 2005 to 9 percent in 2006 and further to around 12 percent at present. In my opinion, this has led to rise in the equated monthly installment in the last one-year by around 23 percent and by 37 percent since 2005.

It has come into the notice of The India Street that as the interest rates on home loan has increased; plenty of borrowers are considering pre-paying the loan from their savings. But if experts are to be believed, one should just not rush to withdraw for his savings like provident fund to pre-pay a part of the home loan.

In my opinion, first and foremost you should try to find out the net cost of your home loan after adjusting for tax advantage. Once you are through this step, you should ascertain the return your savings are generating. Theoretically speaking, if the net rate of return of your saving is higher than the net cost of your home loan, you need not retire the loan by dipping in such saving.

On the other side of the coin, if the return from a particular investment of yours is lower than the net cost of home loan, it is recommended that you pre-pay the home loan from such savings. It is worth mentioning in this regard that there is no penalty for pre-paying of your home loan from your savings.

In terms of tax benefit, first you should ascertain the tax benefit that you get because of repayment of the home loan. If you take into account Section 24 of the Income Tax Act, you will realize that you are subjected to a deduction of up to Rs 1,50,000 from your taxable income against the interest payment for your home loan. Similarly, according to Section 80C, your taxable income will get minimized by the principal up to Rs 1 lakh repaid during a year.

All in all, if you have money lying idle in the savings account, where you are earning a return of 3.5 percent you should prepay the home loan from your such savings.

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Waiting for Interest Rates to fall not a Good Strategy

By Vipin Agnihotri

The people of India wait with bated breath for home loan interest rates to fall. There is no doubt that the average Indian dream of owning his own home is stronger then compared to other impulses.

It is correct that interest rates have never been higher. It is equally correct that there is little likelihood of them falling significantly in the near future. Moreover, the magnitude of property prices in cities such as Mumbai and Delhi compound the difficulty of the situation.

The present wait and watch game large chunk of buyers are playing is mainly based on two factors. First and foremost, home loan interest rates will soon fall and secondly there will be a correction in the property market and property rates will come down.

All in all, the average Indian has put his dream for a home on indefinite hold, assuming that lower property prices and minimized interest rates are just around the corner. In my opinion, this is not a reasonable stance to take because there is no likelihood of property rates in Mumbai, Pune and saturated cities such as Delhi and Bangalore coming down. If experts are to be believed, the demand is huge and the supply nowhere matches it. “It is a seller’s market and will remain one- at least for the short to mid term,” pointed out Kadam Khan,” real estate expert.

Another important factor is that people tend to misunderstand the dynamics involved in lending rates. Point to be noted here is that government cannot arbitrarily lower rates, since they are attached to the global value of benchmark commodities such as oil. The pressures that the Reserve bank of India is subject to are inflexible.

That is where it makes little sense to wait for home loan interest rates to ease before investing in something as important as a home for genuine self-occupancy. In my opinion, it is highly unlikely that interest rates will ease in the foreseeable future. Consider along with the fact that property rates will not drop either, it is crystal clear that the best time to buy one’s first home is now.

Furthermore, it is worthwhile to note that despite the soaring interest rates on home loans, buying a property is still among the safest investments available at the moment.

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Indian Banks Not Playing Fair with Home Loans?

By Dr Suvrokamal Dutta

Amidst hardening interest rates and rising defaults, it has come into the notice of the India Street that Indian banks are inserting new clauses in their home loan agreements to protect balance sheets.

If experts are to be believed, while few have stopped giving fixed rate loans beyond a few years, a number of them have set an early reset clause while others are putting in a lock-in period within which fixed to floating and floating to fixed switch cannot take place. In my opinion, all these changes will make life difficult for borrowers, who are already coughing up higher EMIs.

“Borrowers who have taken home loans on floating rates of interest have seen them increase by three to four percentage points in the last 18 months to around 10-12 percent,” pointed out Saddia Abid, home loan expert. There is no doubt that with rising rates, new borrowers are looking at taking fixed-rate loans while existing borrowers are thinking of a switch from floating to fixed rate loans despite the higher rate. Though, point to be noted here is that banks are designing the loan documents to discourage this.

It is worth mentioning in this regard that a fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a reset clause will enable banks to charge a higher rate at the time of the reset in the event interest rates move up.

Theoretically speaking, state owned IDBI Bank and Union Bank of India do not offer fixed rate loans above five years. Some of the bank officials feel that the fixed and floating rate concept is slowly losing its relevance. “In the last two occasions, we have not raised interest rates for existing floating rate customers, which means their loans have been at a fixed rate of interest even as interest rates have moved up in the system,” pointed out MV Nair, Chairman of Union Bank of India.

Plenty of other banks are giving a long-term fixed rate option with a reset clause. Not so long ago, Bank of India minimized its reset option on fixed-rate home loans from ten years to five years.

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