Santosh had been quite regular with home loan EMI payments for the last three years. However, paying for his father’s sudden medical requirements drained off his balance leading to a couple of EMIs being defaulted upon. Once his initial worries about his father’s health were over, Santosh asked the bank what his options were with regard to his skipped EMI payment. He was relieved to receive an extension.
If you have missed your EMI for any reason then do not panic as it is not the end, you still have an option, even if it costs you a little more. Of course, the real challenge will be to adjust your funds.
Options for Loan Adjustment
If you have a good track record, then the bank will be willing to make some adjustments to help you manage your default payment easily by either extending your loan term or reducing your EMI. There are numerous solutions available:
* Reschedule your loan term: If after analysing your situation, the bank feels that your EMI amount is high, they might consider rescheduling your loan tenure by extending it. Your monthly EMI commitment would be reduced, which of course means more interest paid. However, it also means some immediate relief and you can always renegotiate with the bank to raise your EMI when your financial position is better. This is more feasible than paying the pre-payment penalty at the end of the loan tenure.
* Deferring payment: You may ask the bank to defer your EMI for a certain amount of time if you are expecting some rise in the cash flow from a job change or maturity of some funds. The bank may permit this, but it will charge you a penalty if you do not make the payment within the stipulated time period.
* Restructuring the loan: Banks have the provision for restructuring housing loans by extending the loan tenure under genuine default circumstances under RBI’s policy guidelines.
Even before you go to the bank for negotiations, it would be better to reconsider your sources of funds so that you can discuss your options accordingly. Once you have agreed upon the alternatives with the bank, start working out your cash flow to meet the EMI requirements. If you will be making a one-time payment for settlement, then the adjustment of funds must be made accordingly.
Repossession & Auction
If you are unable to cope with your EMIs and there is no other alternative left, the loan will be classified as a Non performing Asset (NPA) by the bank as per the RBI guidelines and a notice will be sent to you under Section 13(2) of the SARFAESI Act.
The guidelines state that:
The customer will be allowed 60 days to regularise the account or to settle the account post-issuance of the notice.
* On the refusal of the borrower to pay, then the authorised officer can hand over the demand possession notice and ask for physical possession of the property.
* The bank can proceed to auction the property 30 days after taking possession of the property if the customer does not come forward to repay the loan. The bank shall send a letter to the customer informing them about the auction date and time.
* The bank will consider handing over the property back to the customer after possession at any time before concluding the sale transaction of the property if they clear all bank dues.
* Any proceeds over and above the bank dues from the auction will be returned to the borrower.
A Word of Caution
The SARFAESI Act gives the customer the right to appeal against repossession taken by the bank under the Debt Recovery Tribunal within 45 days from the date the action is taken.
Loan default can result in seizure and auction of your assets, affecting your credit history. Even late payment, rescheduling your loan can affect your chances of obtaining a loan in the future. So, it is better to plan for such eventualities when you take the loan in the first place. However, if you are a victim of unforeseeable circumstances, the best you can do is to have a backup plan.
Ramesh has just received his annual bonus of Rs 3 lakh. He has a home loan for Rs 35 lakh with a private bank, and pays interest at 11 per cent per annum. The equated monthly instalment (EMI) paid by Ramesh is Rs. 34,500. He wishes to reduce this huge burden progressively.
The long tenure of a home loan results in a substantial interest outflow, in addition to the huge principal repayment. In most cases, the total interest repaid is more than the original loan amount. A considerable portion of the EMI goes towards the interest component, and only a minuscule portion is allocated towards principal. As in the case of several borrowers, Ramesh also faced this problem. How can he reduce this burden?
Ramesh has two choices: Either increase the EMI amount to reduce loan tenure, and the interest outflow, or part-prepay the loan with the bonus he received. Ramesh found the latter option more feasible. But he had another dilemma of whether to repay the loan or to invest this amount in good investments. Let us look at both the cases:
When to Prepay?
A major portion of the EMI is allocated towards interest, especially during the initial 5-8 years of your loan. This is the best time to part-prepay the loan. When you prepay, the full amount goes towards reducing the principal. This in turn reduces the total loan period and total interest outflow.
If you are placed in a situation, which does not assure a regular income, you should prepay your loan whenever you receive any windfalls.
Another factor to be taken into account is the interest rate scenario in the economy. If there is an expectation that interest rates may harden, you should prepay as an increase in rates will result in an increase the interest burden on your floating rate home loan as well. In this scenario, you may end up paying a higher EMI, or there will be an increase in the loan tenure. Remember, it is always better to reduce the tenure and pay off the entire loan before retirement.
The most common deliberation is whether to use the cash to reduce the home loan amount or to invest this amount. You can prepay when the interest rate on your home loan is higher than the post-tax interest rate you earn from your investments. Do remember that interest rate cycles move up and down and so returns from equity-related instruments can be volatile.
When not to Prepay?
Compare the returns from your investment and the interest on your home loan. Invest the lump sum cash received if the post-tax return from your investment works out to be higher than the home loan rate. You must also consider the tax benefits of a home loan for both principal and interest components. So when the rates are compared, the reduction in tax outflow due to these deductions must be factored. Investing in fruitful investment avenues makes sense if you are below 35, as you can repay the loan before retirement.
The third option
Yet another option is to port your home loan to another bank, which charges a lower interest rate. As RBI has waived prepayment charges on floating rate home loans, even if you do a balance transfer to another bank, you can now easily shift banks without incurring high costs. While the interest rate is the most important factor to be considered when you shift banks for home loans, remember to consider a few other things. An important expense you will incur is the processing fee charged by the new bank. In addition to this, you may also have to incur expenses on stamp duty and related charges and insurance premium (some banks require you to compulsorily take a fire insurance for your house).
Your existing lender may offer you a lower interest rate if you pay conversion fee, which is more or less equal to the processing fee in the new bank. If this reduced interest rate is the same as the new lender’s rate, it is better to stay with the existing lender.
Your decision to part-pay the loan or not depends on several factors. Remember you must always try to maximise your earnings, either by reducing your interest outflow or by maximising your investment returns.
— The author is CEO, BankBazaar.com
Source: Times Of India Publish: 24-April-2013
With the zooming real estate prices showing no sign of hitting a speed bump, many prospective buyers have begun to tap another avenue to buy cheap houses—auction properties. Though it’s not a common practice, banks auction the houses that they foreclose. What makes them attractive is that their selling price is usually advertised as being 15-20% less than the prevailing market price in that particular locality. However, before you jump at the prospect of buying one, consider the ramifications.
A bank auctions the properties for which the owner is unable to repay the home loan taken from the bank. This means that there could be various incidental expenses that you too could have to pay. When a borrower misses a couple of EMIs on his home loan, the lender sends him notices. If he continues to default for a few months, the bank takes over the house under the SARFAESI Act. The property is then put up for auction and this is advertised in the local dailies.
As the bank is only interested in getting its outstanding principal and some interest component, this amount is listed as the reserve price for the auction. This is usually much lower than the price that the property would fetch in the market. If the final auction price is higher than the reserve price, the extra amount is handed over to the original owner.
What to check
The low reserve price may seem tempting, but you need to ascertain whether the amount mentioned by the bank is the gross price or if there will be additional costs that you may have to pay later. Here are some questions you need to ask before you bid.
Are there unpaid dues?
When a bank auctions a property, it is sold on an ‘as is where is’ basis, so you should read the bid document carefully to find out if there are any unpaid dues. “The bid document is like the prospectus of an IPO, where all the facts covering the legal title and responsibility for pending dues are stated,” says Om Ahuja, chief executive officer, residential services, Jones Lang LaSalle India.
In most cases, the owner is not in a position to pay the dues to the bank and knows that the property will be seized. So he doesn’t bother to pay the associated fees, such as the society maintenance charge or property tax. From the time he receives the first notice till the property is taken over, there is a minimum period of six months. This means that if you buy the house, you will probably have to pay at least six months’ worth of outstanding dues.
Obviously, the utility bills are also unlikely to have been paid. It’s possible that some utilities have been disconnected or discontinued, such as the removal of the electricity meter. So, you will have to pay for renewing the connections, along with the late fee, if any.
How much repair work is needed?
Most banks do little to keep the property in good condition after taking possession. So, you may have to undertake some renovation or maintenance work to make it more habitable. It would be a good idea to visit the property and calculate how extensive the repair work is likely to be and how much it will cost.
Also, as the property is being sold on an ‘as is basis’, you will be responsible for any damages that may have been caused directly or indirectly to other properties around it. For instance, if there is water seepage while the house is in the bank’s possession and this damages an adjoining property or the one below it, you, as the new owner, will have to pay for it.
It’s also possible that the previous owner has left some stuff in the house. You will have to check with the bank about the person who will assume responsibility for it. Will you have to pay extra for any furnishings, furniture or appliances that have been installed by the previous owner? Will the previous owner collect these or will you need to dispose of these? Who will be entitled to the money received on the sale of these items?
Source: deccanherald.com By: Ajith Athrady Publish: 8-April-2013
Imagine a person who has taken a home loan for Rs 30 lakh, but suddenly meets with an accident resulting in a temporary disablement? He is unable to continue working and so there is a break in his income. He has not taken a personal accident insurance, and as a result is not compensated for this accident. He is not sure when he will start working normally again, which will give him the same income as his previous job to enable him to continue his monthly loan payment. What can be done in this case? Lets first look at what should be done before such a situation happens and how to stay prepared for it.
Building an Emergency Fund: As the popular saying goes ‘It is better to be safe than sorry’, it is important to build a safety fund for emergencies. The purpose of such a corpus is to help you deal with life’s uncertainties, of which a fall or stop in income is one of them.
You must consider all your expenses in a month to calculate the amount required for this fund. Experts generally recommend at least six months of expenses as the amount to be built as an emergency fund. This can even go up to 2-2.5 years of expenses, depending on your risk tolerance.
The corpus in this fund should only be used to meet the contingencies and not for regular expenses or on luxuries. It is better to keep a majority of this fund as liquid, to help you access the money without much problem. Remember, this can entail lower returns. Hence the amount to be invested in an emergency fund depends on what you perceive to be your risk level and the returns you expect on your investments. However, it must be kept in mind that the sole purpose of an emergency fund is to help you in emergencies and not to enhance your returns.
The higher the emergency fund, the better is your ability to deal with a crisis. The amount from this emergency fund can be used to pay your EMIs till you become fit to earn again.
Now what can be done after you realise you have uncertain cash flows?
Stay Calm: This situation cited earlier sounds scary, but anyone can be a victim of this. The first thing to do in such a case is to stay calm and think straight. Although it is difficult to manage your monthly cash flows, it is very important not to panic.
Talk to your bank: The next important thing to do is to talk to your bank or lender and discuss the issue. Get your loan papers in order and meet the bank officials. Banks generally understand such uncertainties and can re-work a loan repayment schedule, which takes into account your situation. You can either opt for lower EMIs or for a delayed repayment with some penalties or for re-financing the loan. These options will work out to be costlier for you over the long term; but they can provide you with the much needed breathing space which will ease your cash flows. The bank looks at your past repayment history, and will definitely entertain requests from genuine borrowers who have the intention to repay.
Cut out unnecessary expenses: Analyse your monthly expenses and cut out on all unnecessary expenses. In the normal course of life, when there is a regular income, we often spend on things which are not so critical or essential. Only when a crisis strikes, you can recognise these unimportant expenses and reduce or cut back on these. This will help you in paying off your EMIs more easily, as cash is freed up.
Avoid borrowing: Generally, when a crisis strikes, people resort to borrowing. Borrowing from banks may not be possible, as banks require payslips while granting a personal loan. If they know you are not working, they will not grant a personal loan. However, it is possible to borrow from other sources where higher interest rates are charged. This has to be avoided to the maximum possible extent, as this can be very harmful over the long term.
Talk to credit counsellors: You can also talk to credit counsellors who will help you deal with this situation in a better manner.
Events such as job loss, fall in income from a business venture, sudden illness, accidents etc. can happen to anyone, crippling your ability to meet your expenses and pay your debt. The situation calls for careful planning and methodically working out all possible options to manage cash flows efficiently.
— The author is CEO, BankBazaar.com
A home will always have a deep connection with every individual and buying one’s own home is fondest dream of almost every Indian. The housing industry in India has been growing at a robust 14-15 per cent and is projected to continue to grow for the next few years.
There is an estimated shortage of around 22 million houses by 2014, and the government and apex bodies like the National Housing Bank (NHB) are playing a vital role in trying to fill this gap. The growth in this sector as well as the changing profile and consumption behaviour of the upwardly mobile population have also brought about a sea change in many aspects of the industry, and most notably the profile of today’s home loan buyer.
One of the most evident changes is the decreasing age of the home loan buyer. There has been a trend of reduction in the average age of the home loan buyer from the mid-40s to the mid-30s over the last two decades. There is also a growing segment of under-30 year olds who are buying homes and taking loans for the same.
The rising income levels of this segment coupled with growing aspirations have been major causes of this change in profile. Another major contributor to this phenomenon is the easier access to credit fuelled by banks and housing finance companies (HFCs). Most loan providers view home loans as a high growth product and have been diverting focus to it in the last few years.
Another aspect that has changed is the purpose of a home purchase. While purchasing a house for the purpose of living in it still remains the major reason, there is a growing segment of home buyers who buy a second home for investment purposes.
They also could take a larger home loan for the same as they are aware of the taxation benefits that they can avail of as a result of it. Financially savvy investors are now making use of these multiple benefits of a home loan. As long as there is a significant growth in the housing sector and appreciation of prices, this segment will continue to grow. It is estimated that the Indian mortgage market accounts for 7 per cent of GDP and about two-thirds of the savings of customers availing home loans are deployed in payment of EMIs. Attractive interest rates and ease of credit access here too contribute to the growth of this profile among home loan buyers.
A large chunk of growth in home loans is now coming from tier I and II cities, with the metros approaching a saturation point. The new segment of home loan buyers now come from high growth areas like Pune, Bangalore, Ahmedabad and other non-metro locations. As a product segment, the growth has been seen in ‘affordable housing’, with a loan ticket size in the range of Rs 25-40 lakh. Banks and HFCs offer their most attractive rates for this range, and this has fuelled its growth.
Developers have begun shifting their projects to newer non-metro locations or on the outskirts of large metros. This has helped in de-congestion of many cities and banks and HFCs also provide a pre-approval for home loans for most of these projects.
Today’s home loan buyer is an empowered individual. Not only is he spoilt for choice, both in terms of properties to buy, but also in terms of home loan providers willing to fund his purchase. He has access to information, is more financially aware and will have multiple banking or financial service relationships.
To cater to this new profile, banks and HFCs will have to value-add and provide high levels of personalised and dedicated service, both at the time of sale as well as through the duration of the loan.
— The author is MD, Tata Capital Housing Finance
Source: Financial Express Publish: 20-March-2013
Home buyers had been facing a scenario of high interest rates which was in existence for a very long period of time. However, during the current year the scenario looks different with the Reserve Bank of India lowering key policy rates. It is widely expected that the central bank would continue to lower rates in its forthcoming announcement. Many banks, in response to the rate cuts, went ahead and announced lower interest rates on home loans, with State Bank of India taking the lead. Moreover prepayment charges on loans have also been abolished in line with RBI guidelines. With these changes happening, how can anyone not be tempted to switch to a bank with lower rate of interest?
Before you decide to take the plunge, halt, and evaluate. One should take into account key considerations before switching loans.
Interest rate variation
Check the existing rate of interest and the interest that you have been offered now. If the new lender’s rate is at least 1-1.5 per cent cheaper then it makes sense to switch.
For example, on an existing loan of Rs 75 lakh charged at 12 per cent for 20 years, your current EMI is Rs 82,582. If there is a reduction by 0.5 per cent, your EMI will change to Rs 79,982, a difference of Rs 2,600. However, if the interest rate comes down to 10.5 per cent, the savings would be substantial with your new EMI at Rs 74,879, which means savings of Rs 7,703.
It is a known fact that during the initial years of a home loan, major component of the EMI outgo is towards repayment of the interest component and a small part goes towards repayment of the principal amount, however this changes as the years increase.
For the loan of Rs 75 lakh at 12 per cent cited in the previous example, out of the EMI of Rs 82,582, the interest portion stands at Rs 75,000 and only Rs 7,581 goes towards principal reduction for the first month. So to get a better deal, it pays to switch during the initial years of the loan.
If you are servicing your loan at a very high rate of interest like 14-15 per cent (with interest rates continually being hiked), a switch towards the latter half of the tenure may still be beneficial, but you need to figure out how much interest remains to be paid to arrive at an accurate picture.
A good online loan calculator would show that the savings from switching is lowest when the remainder of the tenure is five years or less. If a switch is carried out towards the later part of the tenure, a significant proportion of the interest component would already have been repaid and the benefit from switching the loan is lost.
Processing fees for new loans
A new lender would typically charge a processing fee ranging from 0.25-1 per cent of the outstanding amount. The country’s largest lender, SBI, has currently capped the processing fee to maximum of Rs 10,000. Depending on the amount of loan outstanding, the processing fee will be a determining factor for deciding whether to switch loans or not. The processing fee should be lower than the cost saving that you would make on the interest differential.
However, here you have a catch-22 situation, as the amount of loan will be higher during the initial years of the loan and that is when the switch is more beneficial. But on a higher amount, the processing fee would also be higher. Further, some banks also charge a legal fee for property verification and such added extra costs. This also needs to be figured in the net savings available.
It is not possible to decide whether to switch or not based on a single cost. We will have to work a combination of all costs and decide prudently.
One can also try renegotiating the loan with the existing lender at lower rates to avoid processing fee. No lender would like to lose a borrower with good credit history. Hence this option could be explored before actually opting for loan switch from a different lender with its accompanying hassles.
— The author is CEO, BankBazaar.com
Navin Raheja, President, Naredco
What is the reaction of the real estate industry to the Budget? Of the key demands, post Budget, what needs to be done on a priority basis?
The National Real Estate Development Council (Naredco) is extremely disappointed with the Budget proposals. The Council in its memorandum to the finance and housing ministries had suggested conferring infrastructure status to integrated township and group housing and giving income tax relief to developers and buyers to stimulate demand and supply. Besides, there is a need for monetary interventions to lower interest rates, to bring down costs both for developers and home buyers. We hope that the RBI will address them to give the much needed boost to the sector.
The Budget offered an additional deduction of Rs 1 lakh for a first home loan up to Rs 25 lakh for FY14. How do you evaluate this proposal?
Naredco is happy that the proposal would benefit first time home buyers. The net deduction now available will be up to Rs 2.5 lakh and would definitely boost demand and supply in tier II and III cities. In metros, where average cost of house is above Rs 50 lakh, it would be of no help.
What are your views on the proposal to set up an urban housing fund?
It is a welcome step. Naredco had been advocating the ‘shelter fund’ to mitigate the problems of low income groups and economically weaker sections who are deprived of decent living conditions and are forced to live in unauthorised colonies and slums or be a squatter. This will help in eradicating slums, where nearly 25 per cent of urban population live. Housing finance institutions will get encouragement and their risk will be appropriately covered.
Are the Budget proposals to boost affordable housing different from the earlier pronouncements on ECBs for low cost housing?
External commercial borrowings (ECBs) permitted in Budget 2012-2013 for affordable housing has been operationalised. This will help in creating capital, at low cost, for the development of affordable housing projects. The urban housing fund will primarily help low income buyers in accessing home loans. This, and the interest subsidy scheme will help the poor in buying a house.
Corporate governance is a major issue in the sector, as the RBI pointed out. Does Naredco have a time-bound agenda in this regard?
Naredco is continuously working on it. Enacting the real estate regulation Bill, simplified project approvals and the new accounting procedure will help a lot in achieving this objective.