Thursday, September 9, 2010

Home/Housing Loan Selection: What to Look for? Types of Home Loans

In this blog I'll help the readers of this blog on how to select thehome loan finance company, what are the points to look for, how & what to negotiate, ...

Home Loan can be taken for construction / purchase / repairs / additions / renovations of residential house / flat including the purchase of land and construction thereon. Home loan is kind of a benefit where you can get tax exemption for the interest & principal components. More info regarding this tax benefit can be found in this post -> "Home Loan, Tax Benefit & HRA Explained"

Home Loan are of 2 types, fixed & floating.
In Fixed, your rate of interest is locked for few years. So even if there is any change in the RBI rates, your interest rate won't change. Good right :) But for Fixed, the rate of interest will be very high. So good time to take a fixed home loan is when the home loan rates are really low. Like for Ex, if you get a deal of 7.5-8.5% then fixed is good.
In Floating, your rate of interest keep changing when there is a change in the RBI's rate of interest. Go for this when the interest rates are high.

Home Loan is provided by the Nationalized & Private Banks, I would strongly advise the customer to take a home loan in a nationalized bank rather than private banks.

Advantages of Nationalized Banks:
* Quick change in the interest rates to customers when there is a Change in RBI interest rates
* Loan would be approved only if there is no litigation & legally clear on all documents, so this would help you to check if the property has legally all clear documents.
* No hidden charges, all fees are transparent to customers.

Disadvantages of Nationalized Banks:
* Getting the loan approved is a tedious job
* Loan amount sanctioned would not be sufficient for your project
* Only 75-85% of the total construction/purchase amount will be sanctioned, the rest 15-25% depending on the loan amount & banks, you need to take care of yourself
* Most of the nationalized banks give loan only for 50% of your monthly net pay as EMI. That is if your monthly net pay is 40,000/- then you can get a loan with EMI of 20,000/- max
* Online facility is not available in most of the nationalized banks
* Customer service is not so great

Points you need to look for before selecting the banks:
* Interest rate: Always negotiate maximum possible for the interest rate. This negotiated rate remains until loan completion. Generally every bank have their own PLR (Prime Lending Rate) here its the HPLR (Home Loan PLR). This HPLR keeps changing based on RBI's rate change. So when you negotiate they will set a value 'x' with respect to HPLR, this value 'x' can differ from person to person, that is why you need to negotiate this.
Ex: If the current HPLR of a bank is 13% & you negotiate with the bank for 10%, then your 'x' value is 3, so if there is any change in HPLR due to RBI's rate change then your rate will change with 'x' value. If HPLR is decresed to 12% then your new rate of interest will be 9%

* Processing fee: In some banks its 0.5% & in some banks its a fixed value. Try to negotiate this value also. Generally they waive off this amount, atleast some amount if not fully.

* Prepayment Clause: Prepayment is if you have some money then you can pay that extra money to the bank & this amount will be directly deducted from your principal amount. Generally some banks have a restriction of only 2 prepayment in a year, some fine you need to pay if you do a prepayment, some banks will have min 3 EMI amount if at all your want to do prepayment. Nationalized banks generally don't have any clauses for prepayment. Its better not to have any clause for this.

* Foreclosure Clause/Fine: If you want to close a loan, then some banks will attract a fine of 2% of remaining principal amount, some banks will have only 80% preclosure can be done, ...

* Any hidden charges:

* Loan Insurance: Some banks will give you free insurance for the loan, but generally not many banks give this facility.

* Past History: How good is the bank with the customers, customer reviews, talk to existing customers.

Wednesday, September 1, 2010

What is Repo rate, Reverse repo rate, CRR, SLR & PLR

Repo Rate:

In simple terms, repo rate is the rate at which the central bank of a country lends money to the banks. In the Indian Banking context repo rate is the rate at which Reserve Bank of India (RBI) lends money to the Indian Banks.

A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. It is also a financial & economic tool in the hands of government to control the availability of money supply in the market by altering the repo rate from time to time.

For Ex. The current repo rate is 5.5%
If RBI increases the repo rate by 50 basis points, then the new repo rate will be 6.0%

Reverse Repo Rate:

This is exactly the reverse of the repo rate, i.e. the rate at which the central bank borrows money from the banks. In the Indian banking context its the rate at which the RBI borrows money from the Indian Banks.

The reverse repo rate will/should always be less than repo rate.
The current reverse repo rate is 4.0%

For the current rates you can check the RBI website

CRR (Cash Reserve Ratio) :

Its the ratio of total deposits of all the public sector bank that should be kept with RBI. RBI regulates all these banks & also decides the rates & ratios like Repo Rate, Reverse Repo Rate, Bank Rate, CRR, SLR to control the money supply in the banking sector. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

For the current CRR you can check the RBI website

SLR (Statutory Liquidity Ratio) :

Its the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.

For the current SLR you can check the RBI website

PLR (Prime Lending Rate):

PLR is the rate at which the commercial banks charges to their best & most credit-worthy customers though this is not always the case. The rate is determined by the RBI's decision to raise or lower prevailing interest rates for short-term borrowing. Though some banks charge their best customers more and some less than the official prime rate, the rate tends to become standard across the banking industry when a major bank moves its prime up or down. Many consumer loans, such as home loan, car loan, personal loans, are tied to the PLR.

For the current PLR you can check the RBI website