We
have seen two repo rate cuts of 25 bps in last 3 months. We have seen immediate
reduction in borrowing rates by both banks and housing finance companies but
nobody was ready to reduce the lending rate. The benefit of rate cut must be
passed to the borrowers but unless there is some action from regulators nothing
happens of its own. The strong message by RBI in its last review meeting forced
the banks and housing finance companies to reduce the home loan interest. In
past we have seen whenever there was a increase in repo rate immediately in 1-2
days the burden is passed to the borrowers but in case of rate cut benefit is
not passed to borrowers. This is serious issue and RBI has to see that this
does not happen in future.
Loan
and insurance planning are most important part of financial planning. Before
jumping to investment, as a financial planner, I always first check the loan
and insurance portfolio. The review of both existing loans and insurance according
to clients needs is on top priority. Suggesting a suitable option improves the client’s
monthly surplus for future investment. Buying own home is the top most priority
of every Indian. People also upgrade their existing home and also buy second
home for investment once cash flow improves. The trend is very natural as the
home loans are available easily. The rate of interest is also competitive
compared to other loans available in the market. There are tax benefits
available for the payment of principal amount as well as for interest payment
which reduces the cost of borrowing. Home loan is a good loan which allows you
create asset and also helps you in paying it in instalments. Even it is good
you need to be careful and do some home work before opting for it and review
the same. The following points will help you to take informed decision.
Home
loan is available from both PSU and private banks and also from housing finance
companies like HDFC and LIC housing finance. Banks are governed by RBI whereas
housing finance companies are governed by National Housing Bank. Banks follow
base rate system whereas NHB follow Prime Lending Rate system. Interest rate
calculation in Bank is base rate plus spread and in case of NHB it is prime
lending rate minus spread. The base rate has direct relation to repo rate and
hence it is advisable to take loan from banks and not from housing finance
companies.
Housing
loan is also a DEBT and you should be very careful before taking this. Most of
the borrowers do not understand the impact of interest payment and apply for the
loan. There are different types of home loan available such as fixed rate,
floating rate and dual rate of interest. You should be careful while opting for
it in the beginning. As per guidelines by both the governing bodies there are
no pre payment charges in case of floating rate of interest. There is
prepayment charges in both fixed and dual rate (till the initial period of
fixed rate) home loans. Therefore it is advisable to take floating rate loan as
you can prepay your home loan or you can also shift the existing home loan to
other lender who offers competitive deal.
The
recent experience of rate cut tells us that it is advisable to shift the
existing home loan if your lender has not reduced the base rate. It is also
advisable to shift the home loan even if you have bought it under fixed rate by
paying penalty for that. Lenders also pass the benefit by lowering your balance
tenure for repayment instead of EMI. Here you should also be careful and check
the EMI and balance tenure when there is change in repo rate. RBI has also to
relook it and stop duration increase and decrease so that borrowers understand
what exactly happens when there is some action from RBI.
There
is also practise to charge the transfer fee to borrower by same lender for lowering
the interest rate which highly objectionable. They are happy to lend to new
customers at lower rate and for lowering existing borrower’s rate they ask for
onetime fee. You should know that instead of paying fees to the same lender
sometimes it makes sense to shift the loan to other lender. You might have to
pay nominal processing fees for transfer which is much lower than transfer fees
payable to same lender.
Transferring
or shifting of existing outstanding home loan to from one lender to other
lender is known as balance transfer. So if your lender is charging higher rate
of interest compared to competitive rate of interest available in the market,
you can opt for balance transfer option and reduce your EMI for the balance
tenure. It is important to check Cibil score before applying for shifting any
loan because higher score will give you ability to negotiate for the better
deal in respect to interest rate and other charges. Don’t allow lenders to
charge you more and review your loan portfolio at earliest.
This article first appeared at myiris.com on 16th April'2015
http://www.myiris.com/financial/storyShow.php?fileR=20150416131613043&secID=finan&secTitle=Financial&dir=2015/04/16
