The home loan that you had taken three years ago at 7.5 per cent has shot up to almost 12 per cent now.
In this scenario, does it make sense to prepay that costly home loan if you have surplus funds? What should you keep in mind before doing this?
Alternately, should you transfer this expensive loan to some other lender offering a lower rate of interest? Will this help you save on interest costs?
In a chat with Get Ahead readers on July 3, home loan expert Harsh Roongta answered these and several other queries related to home loans at a time when ordinary people are burdened with increasing EMIs.
For those of you who missed the chat, here is the transcript.
Part I: Have you taken an 'Offset' home loan?
deepak asked, Considering today's market conditions would you advice prepaying the principal home loan amount? If yes, how will this affect my taking tax benefit in the long run?
Harsh Roongta answers, If you have the money, then not only now, but at any given point of time, prepayment make sense. There are some broad exceptions to this rule but, more or less, the rule is reasonably accurate.
vaibhav asked, Hi, we had taken loan from Stanchart bank on my father's name. Now they have increased the interest rate from 9.75 to 14.26 per cent in three years. What can I do? It seems it is because of his age & income criteria. Is there any way I can transfer that loan on my name and get low interest rate? Is part payment a good option?
Harsh Roongta answers, Part of the question has already been answered in the previous question. As far as your question on balance transfer is concerned, the rate of 14.26 per cent does appear to be very high. If your own income is good, and the repayment track record on the existing loan has been good, you should be able to get a transfer of the loan to another bank at around 11 per cent per annum on a floating rate basis.
samir asked, Hi I am earning Rs 14,000 per month and if I want to repay in 20 years, considering current interest rates how much maximum amount could I get?
Harsh Roongta answers, A good rule of the thumb is that, at the current rates of interest (11 per cent), the eligibility for a home loan will be about 3 - 3.5 times your annual income. So, you should be able to get around Rs 5-6 lakhs as a home loan.
Pavan asked, Hi Harsh, I am a 27-year old male from Hyderabad planning for a home loan. As interest rates are shooting up these days, I had a wait and watch policy. I have a question, why loans for open plots are not considered for tax benefits? I am interested in buying an open plot than a house. What do you suggest? For your info I am drawing a handsome salary and do not have own a house yet. Eager to hear from you!
Harsh Roongta answers, It is not entirely correct that no tax benefits are available on a plot loan. True, there are no immediate tax benefits but, as and when you build on the plot, the past interest payable on the plot loan will make you eligible for some additional tax benefits. Plus, the interest payable for the period after which the construction is completed is treated like the interest payable on any loan taken to acquire/ construct a property.
tewari70 asked, Hello. I am planning to take a home loan in Ahmedabad. My age is now 37 years. As interest rates are on the higher side, should I wait for two - three months for the rate of interest to come down? My take home salary is Rs 20,000 per month. What is the loan amount I can get?
Harsh Roongta answers, The question to ask is not whether it is the right time to take a loan but whether it is the right time to buy a home. In any case, when you take a floating rate loan, you are exposed to interest rate risks, so the current interest rates cannot be the only reason for a delay in the decision to buy a home.
Normally, you should not time the market when you are buying a home to live in, but the expectation that rates will soften is so widespread that prudence demands you wait for a couple of months to finalise this. But it may not be advisable to delay the decision beyond September 30, 2007.
premtiwari asked, Hi Harsh, I had taken Rs 14.77 lakhs home loan from Stanchart Bank in December 2004 at 7.45 per cent. Presently the rate of interest is 12 per cent. The net principal outstanding is Rs 14.5 lakhs. I have 2 options:
1. Let the present status continue and pay EMI to Stanchart.
2. I work for a PSU and the company gives Rs 8 lakhs (maximum) loan at the rate of 6 per cent. So by withdrawing Rs 4.5 lakhs from my PF account & by taking Rs 2 lakhs loan from my Father/ sister, I could bring the amount to Rs 8 lakhs and then transfer the loan to the company. Pls tell me which is the BEST option 1 or 2?
Harsh Roongta answers, The answer is self-evident. The savings in interest rate is so high that, if you have to transfer the loan to your company, you should do it immediately.
Satish asked, If I make the prepayment, can the entire amount be deducted in my principal?
Harsh Roongta answers, Yes.
Venkatesh asked, Which type of interest rate is preferable: floating/ fixed?
Harsh Roongta answers, Apnaloan recommends that you should go for floating rate loans. See the detailed response at http://www.apnaloan.com/articles/home-loan-india/tostayputortofloathomeloanarticle.html.
hr asked, I know nobody can predict the interest rate of a home loan at a given point of time. Do you see any indication that leads the chances of declining home interest rate in the near future?
Harsh Roongta answers, You have answered your own question. Nobody can predict interest rates and nothing currently indicates a softening of interest rates in the immediate term.
HomeHome asked, I have one typical question. In home loans, whether one should go for long term or short term, considering that s/ he is able to pay amount even in the short term? Also please do consider the tax benefits added thereof.
Harsh Roongta answers, Lower tenure also means lower loan eligibility as the EMI for shorter tenure loans is larger than longer tenure loans. So, one should go in for the lowest tenure loan that will still give you the loan amount eligibility that you are looking for. Try and negotiate the repayment charge so that you can prepay as and when you have surplus funds.
GK asked, IDBI is providing me home loan @ 11 per cent floating. As per the present market condition, should I take home this loan? Can the present home loan interest come down in near future? If yes, how much reduction do you expect? Thanks.
Harsh Roongta answers, The rate appears to be very good and, unless you are working in the top 10 corporates in India, it is unlikely you will get a better rate. Check out other fees and prepayment charges before finalising.
Part I: Have you taken an 'Offset' home loan?
Harsh Roongta is the CEO of apnaloan.com, an online guide for retail loan seekers. Apnaloan also enables loan consumers get best rates by making banks compete for their loan.