A roof over your head and ground beneath your feet count as the bare necessities of life. There’s nothing quite like owning a home, however humble, to give you that warm and glowing feeling. But when you buy a home, you have much more than a feel-good purchase in mind: it’s also a crucial investment decision, perhaps the biggest spending decision of your life.
There are ample opportunities today for young salaried investors to plan their moves early and buy a house at the right time — and at the right price. In the process, not only do they fulfill that cherished dream of owning a house, but also put themselves on the path to acquiring property that would meet the needs and aspirations of their growing family, even as it leads to wealth creation.
Meet 32-year-old Delhi-based lawyer, Rahul Sharma and his 30-year-old wife Anvita Sharma, who works with a garment export company. Together they earn Rs 38,000 a month, and are living in a rented accommodation that costs them Rs 12,000 a month. Starting October this year, their landlord proposes to hike the rent to Rs 15,500 a month. Instead of paying him that much, they have decided to buy a house of their own in Delhi suburb Gurgaon at a total cost (including brokerage and registration) of Rs 15 lakhs. Since the Sharmas have a combined income of Rs 38,000, they can afford an EMI of Rs 15,200 a month, which is less than the rent they’d have to pay their landlord.
Every individual aspires to own a home. But many either spend a lifetime saving to purchase a house or exhaust money on monthly house rents. It’s time you got smart with your money! Take a house loan and let your monthly rent (easily converted into affordable EMIs) build you your dream home. This would stop you from worrying about monthly house rents and shifting base at the makkan malik’s (landowner’s) fancy.
Profitable Proposition
“The overall demand in the residential sector has grown by about 7-8 per cent in the past few months as compared to the same period last year,” says a prominent New Delhi builder. The growth is on account of two main factors: One, income-tax exemption; Two, with no similar rebates available for individuals in the high-income group, they are creating a second asset. Add to this the stable property prices over the last year and plunging interest rates, planning for your dream home could not have been better timed.
Rock-bottom interest rates, standardisation of the periodicity of interest calculation across lenders (which makes it easier to compare loans), lower interest charges, waiver of loan application processing fees and, a customer-friendly attitude is reason enough to celebrate the ascension of the home loan consumer as the king.
But if you require more reasons to apply for a home loan, read on.
Convenient Loans.
Redefining the way home loans are provided, a pilot project for “auctioning” home loans has been organised by apnaloan.com, a financial service intermediary, in alliance with baazee.com, an online auctioneer. Under the project, if you’re shopping for a home loan, you log onto the baazee website and send a proposal determining how much you are willing to pay as EMI (equated monthly installment). Your proposal is then auctioned among participating lenders, each of whom presents a counter-proposal before the “bid” closes. You can then select and choose with a home loan deal that comes closest to matching your precise needs.
With home loans available on auction and housing finance companies slugging it out (by reducing interest rates) to convert you into their esteemed customer, buying a house is not a distant dream any more. What’s more, even those who have taken home loans in the past can benefit from the subsequent fall in interest rates by refinancing their loans.
Intensification of the interest rate war among lenders has facilitated these benefits. Public sector banks, State Bank of India and Corporation Bank, triggered the most recent battle when they lowered their rate on five-year loans to 9.5 per cent and 10.75 per cent, respectively.
In response, private players like ICICI Bank, IDBI Bank, Standard Chartered Bank and a few others too lowered their rates. Market leader HDFC also brought down its interest rates to 9.75%, very recently, to participate in the interest rate war.
Among the spate of recent rate cuts are those by ICICI Housing Finance (0.25 percentage points), Housing and Urban Development Corporation (rates down 0.25 per cent), LIC Housing Finance (0.25 percentage points) and Corporation Bank (0.25 per cent) Dewan Housing (0.25 percentage points) and PNB Housing Finance by (0.25-0.50 percentage points). GIC Housing Finance has also reduced rates on loans by 0.25 percentage points for loan tenures of 6-15 years. The latest to join the list is Punjab National Bank (PNB), which has reduced interest rates 10% per cent on loans for up to 5 years. The bank has cut the rate on loans for tenures between 5 and 10 years to 10.5%. PNB has even increased the maximum housing loan tenure from 20 years to 25 years. If you are still not satisfied with the lowered loan rates, there’s more. Industry representatives think home loan rates could tumble further. Some industry watchers believe the floating home loan rate will slip to 8 per cent for long-term loans in another two to three years.
Rest easy
Most banks have changed the way interest is calculated from annual rests to monthly rests. Under the annual rests method, the EMIs (equated monthly installments) you pay through a year are factored in as part-repayment of the principal component only at the end of each year. In other words, you have to pay interest even on the installments you’ve paid until they’re reduced from the principal at the end of each year. Under monthly rests, the principal is lowered by the appropriate amount each month. The thumb rule being that the more frequently interest is calculated, the better for you. Recently, HDFC Bank added monthly rests on its fixed-interest loans apart from annual rests. As a result, the fall in EMIs on fixed-interest loans (where the interest rate is constant for the entire tenure of the loan, irrespective of changes in the lending rates) is more pronounced than on floating-rate loans (where the loan interest rate varies with changes in the interest rates). For example, the EMI on a 15-year, fixed-interest loan for Rs 15 lakhs has come down by Rs 840; the corresponding fall in the EMI on a floating-rate loan is only Rs 465. Apart from lowering the cost of your loan, the switchover to monthly rests has another advantage: it makes it easier to compare loans.
At your service
With increasing competition, lenders are also lowering and in some cases, even waiving-service charges (processing fee, administrative fee and so on). SBI has completely waived off the processing fees on all housing loans taken from August 16, 2002 to January 31, 2003. Even a one percent point reduction in the processing fee translates into a saving of Rs 15,000 on Rs 15 lakhs loan for borrowers. No lender has announced a permanent lowering of service charges, but they’re offering these at special events or for specific periods.
Fixed or floating?
A decision on whether you should go in for a fixed-rate or a floating-rate loan is a function of two factors: Your perception of where interest rates in the economy are headed, and your capacity to ride the interest rate changes.
A floating-rate loan lets you take advantage of further falls in interest rates, but you stand to lose if interest rates rise again. In other words, floating-rate loans make sense only when the interest rates are high and are expected to fall. On the other hand, a fixed-interest loan immunises you to interest rate jumps. If, however, interest rates fall, you can foreclose your loan and refinance at a lower rate-either with another lender or, increasingly, with the same one.
Recently, Sanjay Jain, his wife and five-year-old daughter moved into their new one-bedroom home in Dwarka, their acquisition part-funded with a Rs 3.25 lakh fixed-rate loan at 13 per cent. Since Jain had opted for a fixed-rate home loan with a monthly repayment of Rs 4,191 for 15 years, he could not gain from the steady fall in interest rates. That’s what prompted him to switch from his fixed-rate loan to one with an adjustable (“floating”) rate. The move to an 10.5 per cent floating rate loan at a 0.1 per cent fee has saved the Jains over Rs 1 lakh in equated monthly installments (EMIs) over the reduced loan tenure. “I brought down the tenure of the loan from 15 years to 13 years by switching over,” said a delighted Jain. The Jains are among the thousands of homeowners switching to adjustable rate loans in order to take advantage of the general fall in interest rates.
Locking in
Choosing a housing loan is not a straightforward decision. There are several ways in which interest can be calculated. Some lenders charge interest on monthly outstanding balances (or rests), others on yearly rests and still others on daily rests. So, your EMIs on the same loan and tenure may differ greatly, depending on whom you borrow from. Here’s a tip: your monthly payment is the lowest when interest is charged on a daily reducing balance. Processing and other fees too add to the cost. Also, remember, that lenders allow you to switch from a fixed rate loan to a floating rate loan, but not the other way.
| COMPARING RATES ACROSS VARIOUS HOUSING FINANCE COMPANIES | ||||
| LOAN TENURE FOR 5 YEARS | ||||
| Name of the institution | Loan slab | Rate of interest | EMI per lakh (Rs) | Annual or monthly rent |
| Birla Home | 25,000 to | 10.50% | 2,227 | Annual |
| HDFC | 10,000 to | 9.75% | 2185 | Annual |
| IDBI Bank | 2 lakhs to | 9.5% | 2100 | Monthly |
| LIC Housing | 1 lakhs to | 9.50% | 2100 | Monthly |
| PNB Housing | 6 lakhs to | 12.25% | 2327 | Monthly |
| State Bank | 1 lakh to | 9.50% | 2100 | Monthly |
| Standard 2.1 | lakhs to | 11.50% | 2199 | Monthly |
| CanFin Homes Ltd. | 1 lakhs to | 10.5% | 2184 | Annual |
| Maharishi | Up to 50 lakhs | 12.50% | 2340 | Annual |
| Corporation Bank | 1 lakhs to 1 crore | 10.50% | 2149 | Monthly |
| ICICI Home Finance | 1 lakh to 1 crore | 9.50% | 2100 | Monthly |
VALUE-ADDITIONS OF VARIOUS HOUSING FINANCE COMPANIES
With the number of players increasing at a fast rate in the housing finance sector, every company is adding new features to their home loan product in order to lure customers. Take for instance IDBI has decided to offer free legal services on property documents to customers.
They already have the concept of reducing your home loan burden through your savings. Let us venture into some of the value-additions provided by various well-known players in the housing finance market.
Housing Development Finance Corporation:
HDFC has recently reduced its Retail Prime Lending Rate (RPLR) from 11% to 9.75% with effect from 4th September 2002. It also provides free counselling on how and where to buy a house in India or what are the prices and trends in the real estate market or what precautions one should take before buying a house. Being a market leader HDFC can provide you with the knowledge they have gained in the last 25 years on property markets, property titles, builder background and in addition to their customer friendly service.
Standard Chartered Grindlays:
It’s Smart Saver option is extremely beneficial. The bank offers you the flexibility to use your excess cash to reduce the EMI burden. All you need to do is to have a deposit for your excess cash in the Smart Saver account. They adjust the interest applicable on this account against the EMI due by you. This reduces the EMI burden in the long term. It also reduces the loan tenure period.
ICICI Housing Finance:
An aggressive player in this segment. They provide the option for balance transfer to replace an existing loan policy. Under this scheme, customers can replace their existing old high interest loan by a cheaper (equal to applicable current rates) loan. ICICI will not only finance the balance amount of outstanding loan but also your prepayment charges to the old housing finance company. They also offer an accidental death cover at absolutely no extra cost. ICICI is also good at buying and selling property through their home search division.
PNB Housing Finance:
They have extended repayment of loan period to a maximum of 25 years. Refinancing is also easier with PNB. The company claims to have the lowest EMI of Rs 9,99 for a 20-year loan.
Birla Home Finance: The company has reduced its interest rates to 10.5% for loan amount upto Rs 50 lakhs taken for repayment period upto 20 years. It also offers you the easiest way to your own home, with loans for buying, constructing, extending or improving your own home. The loans are available both on fixed and variable rates of interest. Their main USP being that the company believes in direct selling without any middle-man operations.
SBI Home Finance: This has seven personal banking branches in Delhi specialising in housing loans. Home loans are also available at most of SBI branches spread all over the city. They offer you a loan amount, which is up to 48 times the net monthly income. If all your documents are ready then the loan is sanctioned within a day’s time. They have slashed the interest rates to 0.5%. They are also offering SBI’s International Credit card free of cost with every home loan sanctioned.
LIC Housing Finance:
For Rs 10 lakhs loan, LIC Home Finance offers at 9.5 per cent floating rate the best EMI in town at Rs 2,100 to be repaid in 5 years. They have also decided to give loans to power of attorney transactions. Customers also have the option of linking their home loan with a variety of insurance products provided by the company.
This ensures that the loan taker leaves no burden for his family in case of his unfortunate and untimely death. The insurance benefits automatically get adjusted to the outstanding dues.
Now that you are aware of the market scenario choose the loan that suits you best. Like they say, it’s all about perfect planning when it comes to buying a house.
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