Teaser Home Loans

Teaser home loans are today the rage with first-time home buyers. Here's what you need to know about them.

How they work

Teaser home loans carry attractive interest rates and discount offers in the initial years of the loan's term. A novice loan applicant may be drawn to teaser loans because they start off with lower EMIs . However, the EMIs can rise sharply if interest rates rise during the tenure of the loan.

EMI Nightmare ?

This is a fairly unrealistic scenario because interest rates are cyclical - however, will give you a idea why you should pre-pay if you have got the bucks

If the current interest rates stay, you might end up shelling out more than Rs1 crore to pay off a Rs25 lakh home loan. How? Read on.

Six months is a long time, especially if you happened to take a home loan back then.
Banks were charging a floating interest rate of 11% on their home loans. The equated monthly instalment (EMI) on a 20-year loan (or 240 months) of Rs25 lakh would have worked out to Rs25,805 a month.

Around one-month back, banks raised the interest rate on floating rate home loans to 11.5% and have now raised it by another 0.75% to 12.25%.

Last time, hike in interest rates were not accompanied by an increase in EMI. Banks did the smarter thing and increased the tenure of the loan. The remaining tenure of the loan went up from 240 to 269 months.

If banks were to follow the same strategy now and increase the tenure of the loan, instead of increasing the EMI, the remaining tenure of the loan would go up to 394 months. Add to this the six months of EMI you have already paid, and you are looking at a total tenure of 400 months. If you keep paying an EMI of Rs25,805 for a period of 400 months, you would have paid Rs1.03 crore (Rs25,805 x 400 months) by the end of it.

However, the bigger question is will banks allow tenures to shoot up to 400 months? crore

How it will hurt you
Principal Rs 25 lakh
Initial rate 11%
Tenure 240 months
Initial EMI Rs 25,804
Principal repaid Rs 14,707
in first 5 months
Principal left Rs 24.85 lakh
Rate after 5 months 11.5%
Remaining tenure if 269 months
EMI remains same
Increase in tenure 35 months
at the same EMI
Principal repaid in Rs 4,027
the 6th month
Principal repaid in Rs 1,8734
first six months
Principal left Rs 24.81 lakh
Rate after 6 months 12.25%
Remaining tenure if 393.5 months
EMI remains same
Increase in tenure 159 months
Extra money paid to Rs41 lakh
service the loan (Rs 25,804 x 159)
Total EMI to Rs1.01 crore
be paid

via DNA Money

SBI increases home loan rates

Home loans and auto financing from public sector State Bank of India would be dearer as the lender has decided to hike interest rates by 50 basis points on all credit linked to Prime Lending Rates.

Speaking at a function here on Monday, State Bank Chairman-cum-Managing Director O P Bhatt said the bank has decided to raise the interest rate by 0.5 percent on all loans such as home loans and auto loans which are linked to PLR.

The revision in PLR came after SBI raised its PLR from 12.25 percent to 12.75 percent last week following Reserve Bank's increasing its key short-term lending rate to banks and the mandatory cash deposits that banks need to keep with the apex bank (CRR) by 0.5 percent each.

Referring to the impact on bank's profit margins, Bhatt he hoped to maintain the net interest margin at 3 percent this fiscal.

SBI had earlier announced to hike interest rate on fixed deposit rates by up to 75 basis points effective from June 30.

State Bank of India in which government has about 60 percent stake is targeting 40 percent growth in non-interest income in 2008-09, compared to 28 percent last fiscal.

The bank had lowered its PLR twice in February to 12.25 percent but decided to raise by 50 basis points last week.

"The net profit of the bank is likely to be affected next quarter though there is not much on first quarter profits ending today," he said.

He also indicated the bank is expected to set aside at least USD 10 billion to provide for depreciation in its treasury portfolio as interest rate rise.

Home loan strategy

Buying a house, by itself, is a big decision. And after that deciding on the bank, whether to take a fixed or floating rate and all the documentation is definitely going to exhaust you completely. But this is just the beginning.

Now comes the painful part of constantly monitoring the rates, whether they are rising or falling. This is because there could be opportunities where the rate of interest that you are paying to the bank could be higher than the rate that is being offered to the new borrowers.

A typical case of wives versus girlfriends where a girlfriend (read a new borrower) is treated with extra caution and wife (read an old borrower) is taken for granted. So, when the rates go up, a new borrower is subsidised by hiking the spread for the old borrower. And when they go down, banks are often reluctant to cut it for the existing customers. The advantage always goes to the new ones.

Confused? Here is how it works. Most banks have a mortgage specific rate. Popularly known as the rack rate, banks use this as the benchmark, based on which, your home loan rate is calculated. They charge you something known as a "spread" which is 3 per cent to 4 per cent below the rack rate.

While for the new customer, this "spread" is 4 per cent, the old customers have to pay a lower spread, say 3 per cent. But a lower spread means a higher rate of interest. How this works is as follows. If the rack rate is 15 per cent, new loan seekers pay an interest of say, 11 per cent (4 per cent below the rack rate) and old customers continue to pay at 12 per cent (3 per cent below the rack rate).

Obviously, this can put the existing customer at a disadvantage because his interest payout is higher. And despite being a customer on floating rate, you do not get the benefit of lower rates.

However, the existing customer has an option. He can always ask for adjustment of his rate to a new level if the interest rates have come down. This is called re-adjustment of rate or spread that he is currently paying. For example, you were offered a spread of 3 per cent when you took the loan, and later, the rate falls, you can go ahead and negotiate a better spread of 3.5 per cent or 4 per cent depending on the market reality at that time.

For example, if you have taken a home loan of Rs 50 lakh for 20 years at 12 per cent interest rate, the numbers work out something like this. If in the first year, the rate gets reduced for the new customer at 11 per cent, then it makes sense to align it. And you get a benefit of Rs 2,81,270 (See Benefits of realignment). The same goes for changing it after five years as well.

However, if the rate difference is below 1 per cent in any case, it does not make sense to align. The table shows that aligning it after five years to 11.75 per cent that is, a 25 basis point fall makes you lose money because of the 2 per cent charge. Similar exercises for changing after five years when there is a 50 basis point drop gives you a small benefit of Rs 9,067. In other words, realignment is important but is not always beneficial.

Financial experts are of the view that the rate difference should be at least 1 to 2 per cent for you to get some advantage of readjustment. Says Harsh Roongta, CEO, www.apnaloan.com, “It is important to review the rates every six months.”

Accordingly, one can take a call whether to adjust the rates or not. However, it is important that in the initial years, you keep a careful watch on the rates. This is because a rate differential of one per cent does make a big difference in your interest pay out. Of course, it is also dependent on the fee that the bank is charging to shift your existing rate. A lower fee would encourage home loan seekers to adjust it more often.

It is important to remember that buying a home is one of the largest expenses that you will ever make. And, to reduce the interest payout, it is important to constantly monitor where the rates are heading.

Via Business Standard

Home loan interest rates cut

Here’s some good news for all those people who dream of buying their own house but have been deterred from doing so by soaring interest rates. Home loan rates are finally showing a downward trend after nearly three years, thanks to banks suddenly finding themselves flush with funds.

Three lenders have already kicked off rate cuts. HDFC Ltd had cut its floating rate by a quarter of a percentage point (0.25%) to 11% under its special monsoon offer, in addition to lowering the processing fee. Last week, Bank of Baroda pruned rates by 50 basis points to 11% for loans up to Rs 20 lakh and 11.25% on loans above Rs 20 lakh.

Allahabad Bank too joined the party, cutting its rate by 1 percentage point to 12% for 25-year loans. But there’s a catch: the offers have so far been confined to new borrowers. Existing home loan customers will have to wait for a while to enjoy a reduction.

Several other lenders, including the likes of SBI, are expected to follow in the coming weeks. Initially, it will be pitched as a festival bonanza, but bankers say the reduction will continue even later as they plan to pass on the decline in the cost of funds — with deposit rates having already been slashed — to borrowers.

Interestingly, several lenders have already cut rates without making any announcements . The reduction — for new borrowers — is in the form of a discount on the benchmark rate by 50 basis points.

The interest on floating rate is pegged to a benchmark reference rate, known as prime lending rate or floating reference rate. None of the banks have decreased their benchmark reference rate. But many have increased the discount they offer on the reference rate, effectively lowering the home loan rate for fresh borrowers.

Existing borrowers will only benefit once the reference rate is lowered. But bankers suggest that people who have already borrowed should not lose hope as continued high liquidity in the system will lead to lowering of benchmark rates over the next couple of months.

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Bankers said there was abundant liquidity , forcing them to scout for good customers . With bad loans accounting for less than 1% of the home loan portfolio, the segment is once again emerging as a lucrative option for bankers and prompting them to offer lower rates.

The current round of rate reduction will be the first since November 2004. Between then and March 2007, home loan rates were revised eight times, with interest rates rising from 7% to 12% during the period. As a result, EMIs have increased nearly 40% since 2004-end.

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Banks queue up to sell rising bad home loans

Defaults due to rising rates resulted in the move.

For the first time since the housing loan boom, the country’s top three home loan providers, State Bank of India (SBI), ICICI Bank and HDFC, are approaching the Asset Reconstruction Company Ltd (Arcil) to sell bad loans from their home loan portfolios.

The move has been prompted by a sharp rise in defaults from retail customers, squeezed by rising interest rates, in the last two quarters.

Arcil is a company that buys bad loans at a discount and sells the assets for a profit. All three institutions are selling home loan portfolios worth Rs 250-300 crore each, sources close to the developments said.

While Arcil will take these loans on its own balance sheet, a subsidiary will be set up to service the loans — in terms of valuing property, collecting cheques and so on.

The retail loans, scattered across the country, will be taken over by Arcil for Rs 100 crore to Rs 150 crore each. “We are in negotiations. These deals are expected to close by the second quarter,” the sources added.

Interest rates on home loans have risen from 8-8.5 per cent to 10-12 per cent in a year’s time, a result of the Reserve Bank raising the cost and reducing the availability of money to achieve monetary policy objectives. As a result, borrowers have seen their equated monthly instalments rise significantly.

“In many places, builders have failed to give possession of the apartment and the customer was unable to pay EMIs as well as rent for his present accommodation. The double blow for retail customers has increased the incidence of bad loans,” sources in ARCIL said.

Several banks have reported a 3.5 to 4 per cent default in home loan repayments, against less than 2 per cent a year ago. State Bank of India Chairman O P Bhatt recently commented that rising interest rates would result in higher defaults for India’s largest commercial bank.

ICICI Bank, HDFC and SBI have grown their portfolio at an average annual rate of 28 per cent in the past three years. Though HDFC says it has not seen a deceleration, SBI has seen growth slow to 18-19 per cent in its home loan portfolio.

Once the loans are in Arcil’s portfolio, the Mumbai-based firm will either offer a package to existing customers to pay off the loans or sell their property to the highest bidders.

Take a joint home loan with your spouse

Do you plan to take a joint home loan along with your spouse? It can be a good decision as the joint effort could get you greater resources to buy a bigger house. But, the big question is who will get the tax benefits on a joint home loan. The good news is that all the co-borrowers can get tax benefits. But, this can happen only if your paperwork is in order. Here are a few points co-borrowers can keep in mind:

Both should be co-owners in the property

Ownership of property makes one eligible to claim tax benefits. A joint home loan involves an applicant and a co-applicant. Housing finance companies insist that the co-owners of the house have to be co-borrowers as well.

However, they do not insist on the reverse. But, it is essential for co-borrowers to be co-owners to seek tax rebate. You cannot get tax benefits if you are just a co-borrower but not a co-owner. Co-borrowers, who are also co-owners, are eligible for tax rebate in the proportion of their share in the loan.

Thus, repayment capacity of each spouse should be taken into account while deciding the share of the loan. So, a couple can be equal owners but if their share of the loan is in the ratio of 60:40, the tax benefits would be shared in that proportion. Tax experts suggest that you have to get a break-up of the share of the loan on a stamp paper at the beginning itself to avoid tax complications.

Each co-borrower can claim tax benefits

The overall tax deduction for a single borrower is Rs 1,50,000. This deduction would apply to each borrower taking the total possible deduction to Rs 3 lakh. Consider a couple which jointly owns property worth Rs 25 lakh with a loan share of 50:50.

If this couple pays Rs 1,50,000 as the interest and Rs 50,000 as principal, each can claim Rs 75,000 and Rs 25,000 as interest and principal deduction. It is advisable for you to lay down the share of the property and other loan details on a stamp paper for tax purpose, say tax experts.

Each needs a copy of the borrower certificate

Every borrower has to provide a copy of the borrower certificate to claim their respective tax relief. At the outset, the co-borrowers should enter into a simple agreement with the spouse on a Rs 100 stamp paper. This agreement should basically contain the share of the ownership along with that of the home loan availed by the couple. You need two copies of the certificate from the HFC and each of you can submit copies of the certificates along with a copy of the agreement signed between the two of you, say our tax experts. They, however, point out that there are no clear guidelines to this effect. Hence, it is possible for either of the borrower to miss out on the tax rebate. In such cases, they can claim it as a refund while filing tax returns.

Better to share payment of installments

A couple cannot pay two cheques for servicing the same EMI, i.e., EMI of the same month. An HFC cannot accept two cheques, as the internal systems do not support this. One viable option is to service the EMI from a joint account of the co-borrowers. The second option is to share the number of instalments. So, for example, eight cheques in a year could be issued from the husband’s account while the wife could issue the balance.

Another option is that one spouse pays off the instalments and seeks reimbursement from the partner. However, tax experts say that this process could get highly cumbersome both for the borrowers and the HFC.

Can one claim all benefits if spouse is not earning?

This is a relevant question, especially if one of the co-owners does not have any income. In such a case, the other co-owner should enter into an agreement with the spouse. The agreement should state that the entire repayment is met only by one borrower’s income. This would ensure you have 100% beneficial home ownership and consequently you can enjoy all tax benefits applicable to a single borrower.

It’s never too late for paperwork

What if the loan has already been taken without the above mentioned groundwork or if you want to change the loan share further down the line. You can still figure out the ownership share and the share of the loan between the two of you. But, this can have stamp duty implications. This also applies to those couples where the wife starts working after a year or later from the date of repayment. However, our tax experts recommend that co-borrowers should not keep changing the share of the loan every now and then. This can be viewed as a tax avoidance device