TIMES NEWS NETWORK[ SUNDAY, FEBRUARY 11, 2007 03:28:32 AM]
Chintamani is more worried these days. And not without reasons. Ever since he has taken a home loan, he’s seen interest rates going northwards, with no respite in sight. So much so that during the last two-and-a-half years alone, home loan rates (floating) have increased from 7.5% to 11.75%, forcing the EMI for a 20-year loan go up by around 35%.
Moreover, despite government assurances, bankers and experts see no softening of rates at least till the next one year or two, implying more worries and hardships for the people like Chintamani.
Says Deepabh Jain, business leader - mortgages, GE Money, “Interest rate follows a cyclic trend. 2002 to 2005 saw a downward trend in the interest rates and from the beginning of 2006, rates have gone up by approximately 2.5% to 3%. The rising trend is likely to continue for some more time and with current market conditions, rates are not expected to stabilise for the rest of the year.”
This means more trouble for home buyers, particularly for home loan seekers. “Home loan seekers today have to contend with the double whammy of rising interest rates coupled with sky-rocketing asset prices. While the home loan rates have gone up sharply over the last one year, the asset prices have moved by an average of 18-22%. As a result, homes have started moving in the range of unaffordability for the average home buyer,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Thus, besides the houses becoming unaffordable, the current trend of rising interest rates is a matter of concern for consumers as even small upward changes in the monthly EMIs can play havoc with their personal finances. What, however, is the way out? The home loan seekers may postpone their plan to buy a new house for some more time, but what about the old customers? Should they switch from a floating rate to a fixed one or start prepaying the loan?
Says J S Grewal, president-operations, Religare Finvest Ltd, “Consumers who have already taken home loans do not have too many options at this juncture. It would, therefore, not be advisable for people with floating rate loans to shift to fixed rates, since most banks charge a premium of 1 to 1.5% for fixed rates over floating rates. In my view, however, home loan rates are not expected to go beyond this band in the coming year or two. Hence, paying this premium upfront today would not be advisable. Banks also charge a fee for permitting such a switch. This would also add to the overall cost.”
Rakesh Singh, business manager - mortgages, Standard Chartered Bank, is of the same opinion. “Floating rate loans are cheaper by 100-150 bps compared to fixed rate loans. Also, switching from floating to fixed attracts an additional fee of around 1-1.5%. We feel interest rates in the short-term are not expected to increase by more than 50-100 bps. Hence, our advice would be not to shift from a floating rate loan,” he says.
The case of home loan seekers, however, is different. “Going by the trend, one cannot completely rule out the possibility of home loan rates inching up further. This being the case, home loan seekers should consider opting for a fixed rate loan (i.e. fixed for 3-5 years).
This will protect them from a potential interest rate hike in the near term. At the end of the said 3-5-year term, they have the option of considering either to continue with the ‘fixed’ rate (if interest rates continue to rise) or migrate to a floating rate loan,” informs Kapur, adding that “however, in case interest rates were to decline going forward, the truly fixed rate loan will not reflect the fall in interest rates and the consumer will forfeit any chance of benefiting from a decline in interest rates.”
Jain agrees. “Interest rates are not looking to stabilise for some time and with property prices going up, decision to wait may not be the right approach. It is suggested that consumers opt for a fixed rate for the initial years and subsequently be on the floating one,” he says.
Put simply, your home loan will be a lot more expensive, but still it is better to go for it rather than wait for interest and property rates to come down.So far as prepayment is concerned, this option looks ideal, but should be handled with care.
Jain is of the opinion that prepayment is not a good option considering returns on the investment with any other instrument is much higher. For instance, take the example of a Rs 25-lakh loan for 15-year tenor at 9.5% IRR. On making part-payment of Rs 5 lakh, the tenor is reduced to 119 months, with the total savings in interest amount being Rs 11.11 lakh. “If the same 5 lakh is invested in fixed deposits with at least 9% returns, earning for 119 months will be Rs 12.17 lakh, which is over Rs 1 lakh higher than the savings made in the interest. Similar investment in stock markets or other market instruments can fetch even better returns,” advises Jain
Moreover, prepayment is an option that comes mostly with a prepayment penalty clause which is generally based on outstanding principal. “This prepayment penalty ranges from 3 to 4% of the principal outstanding. So, the amount of penalty would vary from consumer to consumer, depending on principal outstanding,” says Kapur.
Thus, if a consumer has the money to prepay the outstanding home loan, he must calculate the total Net Present Value (NPV) of both the options, i.e. regular instalment vs prepayment. The option with the lesser NPV is preferable.
Of course, however, if you are making the part payment from your own fund, this generally doesn’t attract any penalty. But make sure that there isn’t a prepayment penalty associated with your loan.
Says Singh, “Prepayment decisions should also be taken by customers depending upon their cash flow situation -- availability of surplus funds. Customers with surplus funds should look at the option of maximizing their investment returns based on their risk appetite.”
Besides, other considerations like tax savings on account of principal repayment and interest should also be taken into account. The principal repaid in a home loan instalment is currently allowed for a deduction up to Rs 1 lakh under section 80C. You can also claim up to Rs 1.5 lakh in interest payments as a deduction from your income, the combined deduction being up to Rs 2.5 lakh. Not a small amount to be ignored! Also, you should clear your non-constructive debts such as credit card, personal and car loans first before focusing on your home loan.
Experts are also of the view that the current trend of rising interest rates is likely to put a lot of pressure on financial institutions offering housing loans and will force them to review their portfolio.
“They will now have to be more careful about while assessing individual’s ability to service the loan being offered. This is good as the tightening of norms will result in lower NPAs for the banks and help them earn better profitability. This in turn will ensure that genuine buyers/investors with adequate finance capabilities remain in the market providing an overall sustained growth for the real estate sector,” says Varun Pawha, director, Pawa Builders. Thus, actual users are also likely to benefit as it will deter speculators from over leveraging themselves and cornering/hoarding housing flats for speculative gains.
In the final analysis, prepayment makes lots of sense. After all, it’s a great feeling owning one’s own house, and residing in a debt-free world. But if wishes were horses, wouldn’t everyone have been riding them?
Chintamani is more worried these days. And not without reasons. Ever since he has taken a home loan, he’s seen interest rates going northwards, with no respite in sight. So much so that during the last two-and-a-half years alone, home loan rates (floating) have increased from 7.5% to 11.75%, forcing the EMI for a 20-year loan go up by around 35%.
Moreover, despite government assurances, bankers and experts see no softening of rates at least till the next one year or two, implying more worries and hardships for the people like Chintamani.
Says Deepabh Jain, business leader - mortgages, GE Money, “Interest rate follows a cyclic trend. 2002 to 2005 saw a downward trend in the interest rates and from the beginning of 2006, rates have gone up by approximately 2.5% to 3%. The rising trend is likely to continue for some more time and with current market conditions, rates are not expected to stabilise for the rest of the year.”
This means more trouble for home buyers, particularly for home loan seekers. “Home loan seekers today have to contend with the double whammy of rising interest rates coupled with sky-rocketing asset prices. While the home loan rates have gone up sharply over the last one year, the asset prices have moved by an average of 18-22%. As a result, homes have started moving in the range of unaffordability for the average home buyer,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Thus, besides the houses becoming unaffordable, the current trend of rising interest rates is a matter of concern for consumers as even small upward changes in the monthly EMIs can play havoc with their personal finances. What, however, is the way out? The home loan seekers may postpone their plan to buy a new house for some more time, but what about the old customers? Should they switch from a floating rate to a fixed one or start prepaying the loan?
Says J S Grewal, president-operations, Religare Finvest Ltd, “Consumers who have already taken home loans do not have too many options at this juncture. It would, therefore, not be advisable for people with floating rate loans to shift to fixed rates, since most banks charge a premium of 1 to 1.5% for fixed rates over floating rates. In my view, however, home loan rates are not expected to go beyond this band in the coming year or two. Hence, paying this premium upfront today would not be advisable. Banks also charge a fee for permitting such a switch. This would also add to the overall cost.”
Rakesh Singh, business manager - mortgages, Standard Chartered Bank, is of the same opinion. “Floating rate loans are cheaper by 100-150 bps compared to fixed rate loans. Also, switching from floating to fixed attracts an additional fee of around 1-1.5%. We feel interest rates in the short-term are not expected to increase by more than 50-100 bps. Hence, our advice would be not to shift from a floating rate loan,” he says.
The case of home loan seekers, however, is different. “Going by the trend, one cannot completely rule out the possibility of home loan rates inching up further. This being the case, home loan seekers should consider opting for a fixed rate loan (i.e. fixed for 3-5 years).
This will protect them from a potential interest rate hike in the near term. At the end of the said 3-5-year term, they have the option of considering either to continue with the ‘fixed’ rate (if interest rates continue to rise) or migrate to a floating rate loan,” informs Kapur, adding that “however, in case interest rates were to decline going forward, the truly fixed rate loan will not reflect the fall in interest rates and the consumer will forfeit any chance of benefiting from a decline in interest rates.”
Jain agrees. “Interest rates are not looking to stabilise for some time and with property prices going up, decision to wait may not be the right approach. It is suggested that consumers opt for a fixed rate for the initial years and subsequently be on the floating one,” he says.
Put simply, your home loan will be a lot more expensive, but still it is better to go for it rather than wait for interest and property rates to come down.So far as prepayment is concerned, this option looks ideal, but should be handled with care.
Jain is of the opinion that prepayment is not a good option considering returns on the investment with any other instrument is much higher. For instance, take the example of a Rs 25-lakh loan for 15-year tenor at 9.5% IRR. On making part-payment of Rs 5 lakh, the tenor is reduced to 119 months, with the total savings in interest amount being Rs 11.11 lakh. “If the same 5 lakh is invested in fixed deposits with at least 9% returns, earning for 119 months will be Rs 12.17 lakh, which is over Rs 1 lakh higher than the savings made in the interest. Similar investment in stock markets or other market instruments can fetch even better returns,” advises Jain
Moreover, prepayment is an option that comes mostly with a prepayment penalty clause which is generally based on outstanding principal. “This prepayment penalty ranges from 3 to 4% of the principal outstanding. So, the amount of penalty would vary from consumer to consumer, depending on principal outstanding,” says Kapur.
Thus, if a consumer has the money to prepay the outstanding home loan, he must calculate the total Net Present Value (NPV) of both the options, i.e. regular instalment vs prepayment. The option with the lesser NPV is preferable.
Of course, however, if you are making the part payment from your own fund, this generally doesn’t attract any penalty. But make sure that there isn’t a prepayment penalty associated with your loan.
Says Singh, “Prepayment decisions should also be taken by customers depending upon their cash flow situation -- availability of surplus funds. Customers with surplus funds should look at the option of maximizing their investment returns based on their risk appetite.”
Besides, other considerations like tax savings on account of principal repayment and interest should also be taken into account. The principal repaid in a home loan instalment is currently allowed for a deduction up to Rs 1 lakh under section 80C. You can also claim up to Rs 1.5 lakh in interest payments as a deduction from your income, the combined deduction being up to Rs 2.5 lakh. Not a small amount to be ignored! Also, you should clear your non-constructive debts such as credit card, personal and car loans first before focusing on your home loan.
Experts are also of the view that the current trend of rising interest rates is likely to put a lot of pressure on financial institutions offering housing loans and will force them to review their portfolio.
“They will now have to be more careful about while assessing individual’s ability to service the loan being offered. This is good as the tightening of norms will result in lower NPAs for the banks and help them earn better profitability. This in turn will ensure that genuine buyers/investors with adequate finance capabilities remain in the market providing an overall sustained growth for the real estate sector,” says Varun Pawha, director, Pawa Builders. Thus, actual users are also likely to benefit as it will deter speculators from over leveraging themselves and cornering/hoarding housing flats for speculative gains.
In the final analysis, prepayment makes lots of sense. After all, it’s a great feeling owning one’s own house, and residing in a debt-free world. But if wishes were horses, wouldn’t everyone have been riding them?
No comments:
Post a Comment