Get Your Own House

When buying a house, a buyer’s first and foremost concern is the price of the property. Fortunately, for the buyer, there has been no sharp movement in price lately due to a languishing property market. In other words, the time to buy a home is now. To encourage home buyers, RBI has cut repo rate and also reduced the risk weightage of bank’s home loan portfolio, which means banks can now borrow cheap from RBI and lend to home buyers, keeping aside much less capital.
The new risk weightage norm gives flexibility to bankers. The biggest beneficiary has been the home loans takers between Rs 20 and Rs 30 lakh as the loan-to-value (LTV) is now 90 percent for them, up from 80 percent. Another interesting feature of RBI’s latest move in reducing risk weightage is creating more room for banks to cut rate within the loan categories. This wasn’t there in the past. In loans up to Rs 30 lakh, Rs30-75 lakh and Rs 75 lakh and above category, if LTV is up to 80 percent, banks have to keep lower risk weightage of 35 percent, than compared to someone taking loan with LTV 90 per cent. Banks therefore can offer much lower rate to those bringing more of own funds. In a way, banks are transferring risk to buyers and thus are able to offer lower rates. It remains to be seen, how aggrieve are banks in their pricing now.

Brijesh Parnami, CEO, Destimoney Advisors says, “We realise that banks are passing only 50 per cent of what the rate cut is.” (See table Bank Base Rates and Home Loan Rates)

Market watchers say with the festive season round the corner and RBI’s reduced risk weightage, the rush to offer low rates to attract customers will begin soon. Harshil Mehta, CEO, DHFL, says, “We are giving special festive season promotional rate of 9.55 per cent (further 10 bps reduction from our new rate of 9.65 per cent) to new customers for loans up to Rs 25 lakhs.” CRISIL Research expects interest rate on home loans to come down by another 25-30 basis points over the next few months.

Whether or not that happens, a home loan taker should try to negotiate the best possible rate and keep the loan-to-value ratio below 80 per cent. There are various ways to bring the overall interest burden down. Let’s visit each of the options.

Conversion
If the interest rate on home loan is floating, the rate for existing customers should come down when the bank reduces its base rate. This is how floating rate should work. However, some banks do not pass the benefit to customers unless one asks for it. All customers basically have the option to convert their existing loan into a new lower rate. Converting an existing loan to current rate, however, comes at a cost. To get the new rate, banks typically charge around 0.50 per cent plus applicable taxes of the principal outstanding up to a maximum of Rs 50,000 plus applicable taxes. You can always negotiate the fee.

When To Convert
Paying conversion charges means adding on to the cost. Conversion would make no sense if the difference between the interest saved and the conversion fee is low, which typically happens when the loan is nearing completion. But, if the loan is around three years old, do convert it. Anil Sachidanand, managing director and CEO of Aspire Home Finance Corporation, says, “Interest rate reset (conversion) would be advantageous for borrowers who are already more than half way into the home loan cycle.”

Refinancing
If the interest rate charged by your existing banker is high even after conversion, you could either foreclose and transfer or refinance from another lender. The home loan rates in banks and non-banking financial corporation’s vary widely; the range could be anywhere between 9.3-10 per cent. Unlike in the past, there is no foreclosure fee on floating home loans. However, there could be a processing fee of 0.5 to 1 per cent of the loan amount. Most banks waive off the processing fee during festive seasons.

When To Refinance
Refinancing is usually costlier than converting, so consider it only when the existing rate is considerably higher. Sachidanand says, “The balance transfer makes sense only for loans that have residual tenure of more than 7-10 years.” After refinancing, ask the new lender to keep the EMI unchanged and instead reduce the tenure.

Refinance involves running around as one has to deal with a new lender. The documentation process and legal requirements need to be met. Sachidanand says, “In balance transfer, the customer will have to apply to the new lender by filling out an application form, submitting income, KYC and property-related documents (getting a copy of property documents from the existing lender, post balance transfer, and the original property documents to be deposited with the new lender might involve considerable follow up in some cases) and other required documentation from the existing lender.”

The net savings after accounting for such things and processing fee need to be considered before a decision to refinance is taken. “Switch only when there is a significant difference of 50 bps,” says Parnami. There may be a special case too. “If you want a top-up loan on existing property, and the bank is not giving it at a competitive rate, then it makes business sense to consider the switch option.” adds Parnami. Mehta informs, “To keep this process simple, one must write down the cost to close the existing loan and the cost to open a new loan.” (See table Lower is Better, on switching to a lower interest rate when possible).

Why Keeping EMI Unchanged Helps
When the rate is cut, a home loan holder has two options — reduce the EMI or the tenure. Banks, typically, reduce the tenure and transfer the benefit of lower base rate to customers. Whether its conversion or refinancing, keep the EMI unchanged while reducing the tenure. Even when the lender reduces the rate without demanding conversion fee, get the tenure reduced. Do not lower your EMI just because the interest rate has gone down. There are two reasons for doing so. One, the EMI that you are already paying is well within your budget and is not pinching your pocket. Two, earning more by investing elsewhere what you are paying as interest on your loan is unlikely in the current falling interest rate scenario.

Part Prepayment
Use the opportunity to build a partial repayment plan. Arrange for extra cash from your savings account or gains from shares or mutual funds. By repaying, the principal outstanding goes down, thus lowering the overall interest burden. Remember, do not increase EMI, always pre-pay. Save amount equal to three month’s EMI and then pre-pay every quarter.

Prepay When Converting
If there is a conversion fee to be paid, do not pay up upfront. First, get the pre-payment cash ready, set-aside the conversion fee and then pay up the balance towards the principal. In doing so, the outstanding reduces. Pay the conversion fee thereafter. Prepayment would reduce your loan outstanding, while the penalty for conversion would also be lower. Do speak with your banker to chart out the best way as every case would have its own nuances.

New Buyers
For those contemplating to buy a property, the rate cut has increased their loan eligibility. Parnami explains, “When rate falls, EMI is reduced. Banks prefer fixing EMI such that it is not more than 50 per cent of customer monthly income. So, with reduced EMI and no changes in income, the eligibility improves.” Try negotiating with lenders on processing fees as the festive season is nearing.

Conclusion
The current spate of rate cuts by banks doesn’t look adequate to even tempt those sitting on the fence. Unless property prices fall and home buyers see value for money in buying property, the stalemate situation in the home buying market would continue.Home loan interest rate by itself may not trigger home sales ,but several recent changes in the home loan market can be used to one’s advantage.

HOME WORK
Truth be told, easy monthly instalments, as banks claim, are often not so easy on the pockets of home buyers. Here’s what new buyers can do to reduce the home loan rate:

1 ASK BANKER to re-sanction the loan even if you have already received your sanction letter. Eligibility of loan amount would increase after banks cut home loan rates
2 MAXIMISE your down payment and negotiate for lower rate with banker. Risk weightage norms allow bank to price differently depending on down payment
3 OPT FOR banks with rates in the lower range and that which do not ask for processing fee
4 FIND OUT about the documentation process before applying. There could be a lot of running around involved in completing paper-work related to affidavits and agreements

Pointers for existing home loan takers:
5 CHECK IF banker has reduced rate. Else, negotiate on conversion fees
6 KEEP THE EMI same, rather reduce the tenure. This reduces overall interest burden of loan
7 THE PRINCIPAL paid through EMI towards home loan qualifies for deduction under section 80C of the Income Tax Act up to a maximum of Rs 1.5 lakh per annum
8 GO FOR refinancing or switch lender only if differential is enough to not only cover switch-over cost but also save a decent amount overall. A 50 basis point differential could be the starting point
9 PRE PAY as much as possible to bring interest burden down even while you convert or re-finance.

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@dhawansunil

(This story was published in BW | Businessworld Issue Dated 30-11-2015)