Are you making others RICH with your hard earned money?

There is a price to be paid for being ignorant - i.e., Making others RICH with your hard earned money!

Series 1 - Housing Loan Funda!

When you take a home loan, pay the maximum EMI possible based on your monthly surplus.This would save you lakhs of rupees by means of total interest paid out by the time the loan is fully repaid. Most people opt for lower EMIs and end up making their bankers rich.

There are few other things which people are ignorant about –Do consider the following and save your hard earned money;

Closely follow the interest rate changes;

Whenever there is an interest rate change, take an updated loan repayment schedule to understand the impact of the rate change. Typically, for a 0.5% increase or decrease in interest rates,the proportionate change in the loan tenure will be 2 to 3 years depending upon whether the loan is on Daily rest or monthly rest. Utilise the benefit of reduced interest rates to the maximum, by paying more to outstanding principal.

It’s wise to shift your loan to a Financier/Banker who provides reduced interest rates;

Try and negotiate with your existing Financier/Banker for reducing the interest rates based on available commercial rates. As mentioned above, for 0.5% change in interest rates, you really benefit in a huge way. So, if your financier/bankeris reluctant to change, then consider CHANGING the financier/banker. Because for a loan where there is a 0.5% or more difference in the effective interest, shifting makes more sense.

Negotiating the Loan interest rate ‘Spread’;

You would have wondered why banks charge different interest rates for old/disbursed loans and new loans which they offer now. This difference in rates normally exists because of the Cost of Funding factor. Not many know about the option available to adjust this rate differences.

If you have a clear loan repayment track record (for your current loan), then discuss the option of increasing the interest rate spreads (this will effectively reduce the interest rates charged on your loan). For availing this facility, you will have to pay for the ‘cost of funding’ (normally comes to 0.5% - 0.55% of the outstanding principal amount). In Rupee terms, it comes to a half-month’s EMI. The result – your effective loan interest rates will getleveled with new loan rates. This facility is available for Flexible – interest rate loans.

HDFC Ltd. charges 0.5% and SBI charges 0.55% of the outstanding principal amount. Please ask your Loan counselor about this option.

So why wait – Talk to your Financier/Banker for availing these options.

Taking loan for getting ‘Tax Benefits’ – is it a wise decision?

I have seen people taking housing loans just to get the benefit of Section 24 b of the IT Act, even though they really don’t need a property/housing loan. (Section 24 b of the IT Act describes tax benefits one get for the loss incurred on house property – by means of interest payout to the tune of Rs.1.5 lakhs for self-occupied property.)

For calculation purpose:

Imagine you are paying Rs.1.5 lakhs towards servicing the loan interest. Also consider that you are in the highest tax slab of 30.9%(including cess). In this case, the maximum tax benefit you get is only Rs.46,350/-(150000*30.9%). The rest is what you are paying for making the bank RICH!

People in the lower tax bracket tend to lose more from what is shown above illustration. And those who have a bigger loan pay more interest too. So, next time if you think of taking a housing loan (for a new or on your existing house), take into consideration the REAL benefit you get out of the whole exercise.

Those who think of buying a house to trade for a profit, for them loan is just a source of fund. But they tend to lose on both tax benefits and also interest rates because those type of activities doesn’t qualify under the Housing loan category.

Housing loan or Loan against Property (LAP) for that matter should be taken only for;

1. Buying an ‘Appreciating asset’.

2. Meeting short-term liquidity requirements like funding for Marriage expenses, Education etc. (Some banks provide housing loans or top-up loans for these purposes)

3. For Home renovation purposes.

For the elderly citizen, Reverse mortgage is an option for getting Annuities.