Homing in on loans

Finance

Homing in on loans

Home loans have become a necessary financial tool to enable the end-customer to purchase real estate. “More than 90 per cent of buyers in the market avail of home loans as this provides the end-customer with the required liquidity to purchase their homes.

The recent trend has been towards lower interest rates spearheaded by none other than SBI with their tiered home loan rates starting at eight per cent for the first year, which has proved to be very popular.

Additionally, the service rendered by banks to both homebuyers and promoters has improved tremendously in recent years with less paperwork and a more streamlined and simplified approval process,” says Haresh Kishor, Director, KG Developers & Promoters. “We offer personalised service as our key differentiator. Since a home loan is a high involvement and multiple touch-point process for a buyer, the bank aligns a dedicated manager who takes handholds the homebuyer through the entire process.

“From keeping the customer informed of which stage of processing his loan is in, to following up for any pending documents, it gives a face to an organisation and humanises bank processes for a customer unfamiliar with them.

“We believe that in order to succeed, we need to offer not only competitive products and service, but also value-added features. “In a market where the basic product is largely similar, the differentiator is our ability to structure the value-adds in the form of top up loans and home improvement loans for salaried segment, OD against property for self employed businessmen etc appropriately,” says Kamlesh Rao, Executive Vice President & Business Head, Retail Assets, Kotak Mahindra Bank.

Cost benefit trade-off

A home loan is one liability that offers attractive tax breaks. “Given that the interest rates have tanked over the past few months, one may find it to be an attractive preposition to avail a home loan at this point when the interest rates are starkly lower than what they were about 1-1.5 years back. With lower interest rates, one could even look at fixed rate home loans while planning for your loan,” says Anil Rego, CEO & Founder, Right Horizons.

Most customers face a dilemma when deciding whether to choose a fixed rate home loan that is easy to budget and has an element of certainty to it, or to choose a floating rate of interest that is most beneficial during a phase of declining interest rates. “While it may be wise to avail of fixed rate in an increasing interest rates market, the biggest benefit with floating rate home loans is that they are about two - four per cent lower than fixed interest rates. So if you are getting a floating interest rate of 8.5 per cent while the fixed interest loan is being offered at 11 per cent (for the full tenure), you still save money if the floating interest rate rises by even up to 2.5 per cent,” opines Rao.

‘Don’t rely on popularity’

Even if the floating rate increases over the fixed rate, it will likely be limited to some period of time and not for the entire tenure of the loan. Choosing fixed or floating rates should not be based on popularity, it should be based on one’s outlook towards interest rates. At this point, the interest rates have fallen sharply.

“Hence it makes sense to lock-in the lower interest rates with a fixed rate loan. However, even fixed rates offered by banks have a clause that they can be revised at an interval ranging between three and five years. One should look at banks that offer fixed loans for the entire tenure of the loan. When one is of the view that interest rates will move southwards, a floating rate would work better,” opines Rego.  
As per Sec 24(B) of the Income Tax Act, 1961 a deduction up to Rs 1,50,000 towards the total interest payable on the home loan towards purchase/construction of house property can be claimed while computing the income from house property for self - occupied property.

Also, the principal repayment up to Rs 100,000 on your home loan for purchase or construction of a residential property will be allowed as a deduction from the gross total income subject to conditions. The tax rebate can be availed only by the person under whose name the home loan has been borrowed.

The interest on any loan, taken for repairs, renewals or renovation of the house also qualifies for a tax deduction. Also, it is possible to get a joint tax deduction on a home loan for spouses who are both taxpayers with independent income sources. In such cases, there is a proportional distribution of the tax benefits that are shared to the extent of the amount of loan borrowed in their individual names.

New products

Barclays Global Retail Bank (GRB) India recently launched ‘Semi – Fixed’ loans against property (LAP), a first-of-its-kind in this category. Customers availing of LAP will be given a fixed interest rate for the first two years after which the rate of interest will become variable. This offering would help customers limit their interest rate risk. Currently, most LAP offerings come with a variable rate of interest for the tenure of the loan.

However, the offering is unique because customers will be offered a fixed rate of interest for the first two years of the tenure, after which the rate of interest will become variable. Additionally, customers who are regular in the repayment of their EMIs will benefit from a drop down of interest rates too, similar to the offering of ‘Drop Down Facility’ launched previously for business instalment loans. “This will also encourage customers to make payments in a timely fashion by way of the differentiated repayment structure they will enjoy,” opines Ram Gopal, Interim Managing Director and COO, Barclays GRB India.  

Development Credit Bank (DCB), the listed new generation private bank, recently launched home loans at 7.95 per cent per annum in Mumbai and Thane.
This is the fixed interest rate for the first year and thereafter from the second year, a floating rate will be applicable for loans up to Rs five crore.  

Speaking on the launch of the new home loan, Murali M Natrajan, Managing Director & CEO, DCB said, “the onset of the festive season is an auspicious time for customers who will be looking to close out property purchase transactions.”

The ministry of finance has offered some decent breaks on loans below Rs 20 lakh by insisting that banks cut tax rates, these being identified as the priority sector within home loans.

“Home loans have now caught the fancy of retail investors, what with new projects being launched by developers catering to the mid–tier segment. “Prior to the realty crash there were housing options available only in the range of Rs 30 – 35 lakh upwards. Now you have decent options even within the Rs 20 lakh bracket. Low cost housing options coupled with low interest rates have increased traction for home loans,” says Rego.

Mortgage cover

For anyone availing a home loan, it is advisable that they also adequately cover their loan liability by means of a mortgage cover/life cover.  This will hedge the risk of family having to fund the EMIs in case of any eventuality.

Further, it is a good idea to consider a detailed financial planning exercise before going in for a house, to assess the value of the loan one can opt for, the life cover required and also how to take maximum advantage of the tax benefits being offered both for oneself and for one’s spouse. With realty majors launching affordable housing projects and discounts on existing ones, coupled with homes loans with lower interest rates, the realty market is once again looking up.

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