‘The interest burden won’t be high, as only three EMIs are deferred’ As the example illustrates (see table), for a 20-year loan taken three months ago, the increase in interest due to a moratorium will be as high as Rs 5.05 lakh. “The balance tenure will increase from 237 months to 253 months. “This means you will have to pay 16 more EMIs compared to your original schedule,” explains Vipul Patel, Founder, Mortgageworld.inRead More
All retail floating rate loans sanctioned by banks after October 1, 2019 have to be linked to an external benchmark – it’s the repo rate for most banks. These borrowers will benefit from a 75-bps rate reduction, when their bank resets the rates, which is once a quarter. “Banks tend to extend the loan tenure where possible and reduce the EMI. However, if you can afford to, it’s best to keep the EMI intact, so your overall interest payable goes down and your loan can be paid off faster,” advises Vipul Patel, Co-founder, Mortgageworld.in, a loan consultancy firm.Read More
Loan rates linked to benchmarks Since October 1, 2019, all banks have had to mandatorily link their new floating-rate retail loans to an external benchmark – RBI’s repo rate, three/six month treasury bill yields or any other benchmark prescribed by Financial Benchmark India Private Ltd (FBIL). The objective was to ensure effective RBI policy transmission and greater transparency. A long-standing grievance of home loan borrowers has been their banks’ unwillingness to pass on benefits of a policy rate cut, while being prompt in raising rates in line with hike in policy rate. Step-motherly treatment meted out to existing borrowers is another grouse – newer borrowers are often offered comparatively lower rates. The new system was seen as antidote to such complaints. “However, if banks can revise RLLR only for new customers, without passing on the benefit to existing customers, it somewhat defeats the purpose of the external benchmarking regime,” says Vipul Patel, Founder, Mortgageword, a loan consultancy firm.Read More
A buyer has to incur down-payment, interest cost, goods and services Tax (GST), registration and stamp duty charges while opting for under-construction property. This amount, however, will not be refunded if there is a delay in giving possession. “Ascertain the loss you could incur if the project goes bust. The bank will, most probably, just refund the principal amount repaid until then and write off the loan if the project cannot be revived. There is no protection available to the consumer under the current legal framework on own contribution, stamp duty, registration, GST and brokerage,” says Vipul Patel, Founder, MortgageWorld, a loan consultancy firm.Read More
In the fourth quarter of FY20, lenders expect a pick-up in credit growth. Small value loans, which are helping fund affordable homes, might see reduced rates. “Housing finance companies are likely to cut about 25 basis points in the next few weeks following the SBINSE 1.38 % move,” said Vipul Patel, founder MortgageWorld, a Mumbai -based advisory firm . “But expected rate reductions would be subject to ceilings where low-value loans would be prioritized.”Read More
While real estate has not been a sought after investment avenue of late, it has traditionally been amongst the most favoured asset classes for Indians. However, if you own two or more houses and are applying for a loan to buy another house, you will be charged higher interest rates — 25-50 bps more — even if your credit score is high. “This is because lending to individuals with two or more houses is considered commercial real estate lending as per RBI norms. Hence, such borrowings attract higher rates,” says Vipul Patel, Founder, Mortgageworld.in, a mortgage advisory firm. This would be applicable even if you are a joint owner of some properties.Read More
While real estate has not been a sought after investment avenue of late, it has traditionally been amongst the most favoured asset classes for Indians. However, if you own two or more houses and are applying for a loan to buy another house, you will be charged higher interest rates—25-50 bps more—even if your credit score is high. “This is because lending to individuals with two or more houses is considered commercial real estate lending as per RBI norms. Hence, such borrowings attract higher rates,” says Vipul Patel, Founder, Mortgageworld.in , a mortgage advisory firm. This would be applicable even if you are a joint owner of some properties.Read More
Industry-watchers say that internal grading models for loan pricing might not pass the transparency test.
“Ideally, banks should use a verifiable scoring model or adopt external credit score mechanisms, such as Cibil, to ensure there is complete transparency in their offerings,” said Vipul Patel, founder and CEO, Mortgageworld.in, a mortgage advisory firm.Read More
The T-Bill-linked rates could be more volatile (see graphic), say experts. “Moreover, they will be market-driven, while repo rate will be driven by the regulator. Repo rate also scores over T-bill rate in terms of awareness amongst lay individuals. This is a plus from the transparency standpoint,” says Vipul Patel, Founder, MortgageWorldRead More
“Considering that the RLLR home loans are 25-45 bps cheaper than MCLR-linked loans, existing borrowers will gain substantially,” adds Vipul Patel, Founder, MortgageWorld. The change in RLLR will be effective from the first day of the following month in which the repo rate is changed. So, for SBI customers, the new lowered rates will reflect from 1 September.
Patel agrees. “RLLR is being adopted by banks gradually. Hold on for a month or two and then evaluate the options. ”Your existing bank may soon launch a product, saving you the hassle and cost of switching to another bank.Read More
The National Housing Bank (NHB) in July asked housing finances companies to stop offering interest subvention schemes through developers. Now, some developers have come up with their own offers. Typically these involve the buyer making a small upfront payment and rest at possession. There are also builders who are offering to pay you ‘rent’ for booking flats in their under-construction projects. “Some banks continue to finance such schemes as they are not bound by the NHB circular,” says Vipul Patel, Founder, MortgageWorld. in, a mortgage advisory company.
As a new customer, if you opt for a builder’s scheme that involves paying 9-20% up front, with the balance being funded by your independent loan at the time of possession, you don’t risk any violation. If a lender is involved at inception, you need to be cautious. “After the NHB ban, some builders are offering to reimburse the interest to the customers instead of the lender,” says a senior official of a large HFC.Read More
"RBI may, at its sole discretion, recommend and/or advice the HFCs and banks to follow a singular external benchmark for lending towards home acquisition. This will bring in the much needed transparency in the transmission of the policy initiatives by the regulator," said Vipul Patel, Founder, MortgageWorld.
Industry-watchers believe the move will benefit home loan customers and the sector. "RBI may, at its sole discretion, recommend and/or advice the HFCs and banks to follow a singular external benchmark for lending towards home acquisition. This will bring in the much needed transparency in the transmission of the policy initiatives by the regulator," said Vipul Patel, Founder, MortgageWorld.Read More
Vipul Patel, Managing Director & Founder, of loan advisory firm Mortgage World, recommends, “The Section 80 C deduction limit of Rs 1.5 lakh is generally exhausted by tax-planning investments. There is a need to remove the home loan principal repayment deduction from the basket of Section 80C and introduce a new section or sub section allowing a higher principal repayment. This limit can be further enhanced to Rs 2.5 lakh.”Read More
State Bank of India (SBI) has announced a home loan scheme that can alter the way floating-rate housing loans are priced. It can also usher in transparency. It will be available to borrowers from 1 July. “Principal to be repaid every year will be at least 3% of the outstanding loan amount, in addition to interest applicable. The EMIs could fluctuate during the year, depending on changes in repo rate,” says P.K. Gupta, MD, retail and digital banking, SBI. The new scheme’s lending rate, starting at 8.4%, will be pegged to the Reserve Bank of India’s repo rate. The current practice links it to the banks’ marginal cost of funds. “With external benchmarks, there would be no ambiguity on whether banks will pass on RBI rate revisions. Customer grievances could come down,” says Vipul Patel, Founder and MD, Mortgageworld.comRead More
"In a repo rate-linked home loan, the differential (with MCLR) can be higher, lower or even negative depending on the rate cycle," explained Gupta.
But experts differ. Says Vipul Patel, Managing Director and Ffounder, MortgageWorld, a mortgage advisory firm, "MCLR is derived by a formula where repo plays a pivotal role. So, effectively any change in repo will be captured in MCLR movement too. The difference between the two benchmark rates, being MCLR, will impact consumer on an annual basis while the repo rate home loan will impact consumer on immediate basis."
He added: "Over a period of time most banks will have just one benchmark, i.e external benchmark, repo is just one of the benchmarks and this move will usher in a new era of transparency in effective home loan pricing for the consumers. Banks will create some mechanism for consumer to move from one benchmark to other and from bank to bank."Read More
while the final guidelines will be out by end December, it is expected that rates will become transparent and more responsive to the regulator’s policy action. “The new mechanism will plug the loopholes of the previous systems. As it is dependent on an external factor, which the lenders have no control over, customers are likely to have more faith in the pricing,” says Vipul Patel, Founder, MortgageWorld, a loan consultancy firm.Read More
While the final guidelines will be out by end December, it is expected that rates will become transparent and more responsive to the regulator’s policy action. “The new mechanism will plug the loopholes of the previous systems. As it is dependent on an external factor, which the lenders have no control over, customers are likely to have more faith in the pricing,” says Vipul Patel, Founder, MortgageWorld, a loan consultancy firm.
The benefits of home loan refinancing
one should switch early to save big. Benefits of balance transfer are most pronounced in the initial years due to high interest component in EMIs
New rate after switching - Source: Mortgage WorldRead More
The couple’s approach is not unique. While prepaying large home loans may seem a mammoth task, with a little bit of planning and a lot of discipline, it is not a difficult target to meet. “Around 65-70% of home loans are repaid in seven to nine years,” says Vipul Patel, Founder, Mortgageworld, a loan consultancy firm.
Scenario 1 Start with a small amount as part payment and increase it gradually
Assumptions The first prepayment is made in the seventh month after taking the loan; subsequently, prepayments go up at the rate of 10% on the back of bonus and monthly savings and are paid every six months.
Scenario 2 Prepay a fixed amount every year without reducing the Emi
Assumptions For a Rs 50-lakh loan carrying a 9% interest rate and original tenure of 20 years; EMI is Rs 44,986 (Rs 5.40 lakh per annum), which is maintained despite continued reduction in principal; a fixed sum of Rs 3 lakh is paid every year till the loan is repaid
Source: Mortgage World
Patel, however, recommends starting small and increasing the prepayment amount by 10% every six months. “A huge pre-payment—constant over several years —is not realistic,” he says. According to him, people tend to use their savings to first repay family members who might have extended financial support. Also, savings are unlikely to be high given that they have to spend on furnishing the house. They can gradually increase the prepayment amount in subsequent.Read More
Home loan Rates: In a rising interest rate scenario, such as the current one, it is better to wait before moving to MCLR-linked home loan rates, say experts. Vipul Patel, founder, Mortgage World, said, “It’s not mandatory to move to MCLR. However, we recommend borrowers to move to MCLR as this pricing is in their favour. Ensure that the MCLR reset frequency is 12 months or lowRead More
Vipul Patel, founder of an independent loan advisory firm, Mortgage World, said, “It’s not mandatory to move to MCLR. However, we recommend borrowers to move to MCLR as this pricing is in their favour. Ensure that the MCLR reset frequency is 12 months or lower.”Read More
Impact of an interest rate rise
Typically, when lenders increase interest rates, they prefer to increase the loan tenure of the borrower instead of the equated monthly instalment. Though the borrower is relieved that he doesn't have to alter his monthly budget to meet the increase in EMI, lengthening the tenure actually hurts his finances because of the increase in overall interest payment. If the interest on a Rs 50 lakh home loan for 300 months increases from 8.5% to 8.75% in the 12th month, your balance loan tenure gets extended by 10 months. You end up effectively paying an additional interest of Rs 8.73 lakh (Rs 79.51 lakh instead of the original Rs 70.78 lakh), says Vipul Patel, managing director & founder of independent loan advisory, Mortgage World.Read More
“If home loans from housing finance companies get cheaper, the home credit market will turn competitive,” said Vipul Patel, founder, Mortgageworld, a Mumbai-based loan consultant company. “But, the regulator needs to ensure transparent transmission of policy benefits. NBFCs are often known for charging risk premium (higher rates) for creating convenient structures.” “The NHB board has approved such a proposal. The regulator is busy setting the operational modalities before it notifies it officially to all housing finance companies,” said one of the persons cited above. There are 96 housing finance companies, of which 8-9 are top-rated. Many smaller companies are unable to access the bond market given their limited wherewithal. In some cases, small entities are not even rated, an impediment that shuts the bond market door for them. An NHB backing will make them eligible for rating upgrades, ensuring their entry into the debt market.Read More
“We are flooded with queries from home loan customers on how they could pay their dues to respective builders in advance along with service taxes, particularly on under-construction buildings,” said Vipul Patel, founder of Mortgage World, a Mumbai-based home loan advisory firm. Technically lenders should disburse loan only once the asset is constructed and certified by the architect.Read More
To switch or not to switch MCLR is also expected to usher in transparency in loan pricing and revision. “Existing borrowers should move to the available MCLR with their respective banks. The new system of benchmarking is more dynamic and better regulated with the end objective of transmitting the monetary policy in essence without manipulation or leakages and ensuring compliance by banks,” says Vipul Patel, Founder, Mortgageworld, a loan consultancy firm. While pros and cons of the new system will come to light over the course of time, he does not foresee any adverse impact on home loan borrowers for noRead More
Mumbai-based Vipul Patel, a home loan advisor by profession, recently checked out his credit scores with different agencies and the results left him perplexed. Largest credit information bureau Cibil had assessed his credit score at 516 while Equifax gave him a rating of only 337. In stark contrast, his score stood at 781 with Experian.Read More
Moreover, MCLR is also expected to usher in transparency in loan pricing and revision. “Existing borrowers should move to the available MCLR with their respective banks. The new system of benchmarking is more dynamic and better regulated with the end objective of transmitting the monetary policy in essence without manipulation or leakages and ensuring compliance by banks,” says Vipul Patel, founder, Mortgageworld, a loan consultancy firm. While pros and cons of the new system will come to light over the course of time, he does not foresee any adverse impact on home loan borrowers for now under the MCLR regime.Read More
A few months ago, before the latest round of rate cuts, if a person qualified. 1 crore home loan, today he can avfor a ` ail a 20-30% higher loan, say home loan consultants. HDFC Bank charges `. 1,044 EMI for `. 1 lakh loan for a 15-year loan as against `. 874 and `. 841 for loans for 25 years and 30 years maturity, respectively . “Large value loans in the wide range of `. 80 lakh to. 1.60 crore are picking up,“ said Vipul Patel, founder, ` Mortgage World, a real estate advisory firm. “With realistic price expectations, home demand is coming back. Banks are now pushing for long tenor loans in the 25-30 year category, which in turn increases borrowers' eligibility.“ Lenders have significantly slashed rates after the Reserve Bank of India reduced the benchmark borrowing cost by 50 basis points in September. SBI and HDFC sell home loans at about 9.50-9.55% or a little less than that. “Higher tenure loans give the edge and comfort to buyers and allow them to go for high-value properties,“ said Dhaval Ajmera, director at Ajmera Realty & Infra.“If I am eligible to get a 20-year loan for a 2BHK, with a longer tenure loan, I can go for a higher-value property. “ The median base rate, below which banks cannot lend, has declined by 60 bps even as the RBI lowered repo rate by 125 basis points since January.Read More
For example, HDFC Bank which sells home loans on behalf of its parent HDFC, charges Rs 1,044 EMI for Rs 1 lakh loan with 15-year maturity versus Rs 874 and Rs 841 with 25-30 year tenors. “Large value loans in the wide range of Rs 80 lakh and 1.60 crore are picking up,” said Vipul Patel, founder at Mortgage World, a real estate advisory firm. “With realistic price expectations home demand is coming back. Banks are now pushing for long tenor loans in 25-30 year categories, which in turn increase borrowers’ eligibilityRead More
Vipul Patel, founder of Mortgage World, an advisory on loans, says, "Each bank is has a different method of calculating the base rate – some adopt the average cost method, while other use the marginal cost method. There is hardly any impact when the central bank announces a rate cut as a result of this anomaly."
The scene is set to change with the RBI notifying the draft regulations on the new base rate proposing a shift to marginal cost of funds by April 2016. The motive said the central bank was, "Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates. In order to improve the efficiency of monetary policy transmission, the Reserve Bank will encourage banks to move in a time-bound manner to marginal-cost-of-funds-based determination of their Base Rate'."
The final guidelines are likely to be issued by end November 2015. As a result, bank base rates could fall further, say experts. "Things should change with the new policy coming into force. The RBI called all bank chiefs and has mandated banks to pass on the benefit of the rate cut. I see a big discount coming into effect. Overall, the rates should be in the range of 9%." says Patel.Read More
Sure, your EMIs have been high for sometime now, and your budget may not be able to afford the higher EMI. But, don't be in a hurry to switch that loan. Says, Vipul Patel, director, Home Loan Advisors (HLA), an independent mortgage advisory firm, "Just one bank (SBI) has cut their lending rates on home loan. But, it's the largest bank in the country. Also, the competition is so steep, that other banks will have to follow them." So, if you can wait a little while, it's possible that your own lender might cut rates as well, that too for existing borrowers.Read More