What To Do When Interest Rate Goes Up?

As interest rates continue to rise, especially in the past few quarters, opting for a loan has become more and more difficult. According to financial services industry trends, the interest rate is only expected to rise further. In such times, the borrower needs to tighten their wallets and find out ways to reduce the impact. There are ways in which you can save a significant amount of money if only you be a little bit more vigil, well informed and proactive.

What can you do for Home loans?
There could be tough times ahead for home buyers since that is usually the largest loan one has. Many banks today are charging from 8.5% to 10% which is a far cry from a few years back when interest rates were as low as 6%. With such rates, your monthly EMIs won’t be affected but your total payable interest will certainly go up and the tenure of your loan. Following are just some of the key ways in which you can tackle this situation and save more than a few bucks!

1. Increase your EMI instead of tenure
Most of the lenders will extend the loan tenure instead of increasing the EMI itself. A smart borrower should increase the EMI and look out for a tenure deduction to save from paying more than what they had planned for.
For instance, let us take a look at the example below to have a more clear understanding

As you can see, when there is a hike in interest rate and the tenure increases, you end up paying ₹84,978/- more than your actual payable. However, if you only increase the EMI amount by a meagre ₹120/- you must pay only ₹21,294, which is much lesser than the amount you had to pay in case your tenure was increased. This is just an example and you can save depending on your requirement.

2. Pay off a goodly chunk
If you are able to, pay off the loan as much as possible to reduce your tenure. In this way, you will be saving a lot of excess money which would’ve been spent and will also relieve the mental burden. In the above example, you can pre-pay Rs 15000 and keep the EMI and tenure same, neutralizing the impact of interest rate hike. You may know that pre-payment on home loans do not elicit any charges.

3. Review how your interest rate is pegged
Over the years, RBI has issued guidelines to banks and housing finance companies to keep changing the pegging for home loan interest rates. You would have heard terms like PLR, Bank Rate and MCLR. MCLR is the latest reference for lending rate by banks, and it allows better benefits for consumers. Do ensure your home loan interest rate is now pegged to MCLR and not to Bank rate, if you have taken loan from a bank.

4. Switch your lender
As a final option you can also consider switching your lender. While changing lender could result in saving on total payable interest, you should also take into consideration other expenses such as processing charges and documentation fees. If you are saving more in Interest after the payment of a few thousands as processing fees, then that would be a good deal. However, if you are closer to the completion of your loan, it would not make much sense to peep into other schemes. While you’re at it, make sure that your credit score is not hampered or affected due to multiple inquiries.

4 Things to Consider Before You Apply For A Home Loan

A home sweet home is a personal asset that you have dreamt of owning for a long time now. If you are planning to buy a home, there are two things that you think of: a pretty home and a not-so-pretty usually-unavoidable home loan. However, what matters the most is qualifying for the home loan. It is very important for lenders to assess your repayment ability, which is essentially evaluated on the basis of your earnings, expenses, savings, work profile, financial capability and repayment history of loans and other dues. A bad credit score and the ghosts from the past, i.e. your credit debts or poor payment history can pose a problem while qualifying for a home loan. Here are 4 important tips to check before you go for a home loan:

1. Check Your Credit Score: A credit score lays the foundation for your easy home loan application process. This score depends on how consistent you are or how good your record is for paying your EMIs and credit card dues. The credit information report (CIR), which contains your Credit Score, is basically the credit history of your borrowings from different institutions such as banks or NBFCs (Non-Banking Financial Company) or Housing Finance Companies (HFCs). A trusted credit bureau prepares and maintains your credit records and shares it with the banks/lenders whenever an enquiry is made by the loan provider. The higher the credit score, the higher the chances of the loan getting approved. And also once can expect the best rate of interest on the home loan as a bonus. Ensure you check your credit score at least six months, preferably 12 months, before you plan to buy a home.

2. Consider your budget, down payment and EMI: Define your budget for buying a home, how much money you can consider for down payment and how much of home loan would you require. Typically, you can get 80% of the value of the property as a home loan if your income seems sufficient. Identify the EMI range that you are comfortable with, as that will help you decide the tenure of the loan. You can use online EMI calculators to play with various options in helping you here. In case your income is not sufficient, you can think of adding your parents or spouse as a co-borrower.

3. Documents Required for Home Loan: Before you go and apply for a home loan, it is necessary to understand the necessary documents required and ensure they are available before you approach a bank or housing finance company. Here is a list of documents that you should be ready with:

  • Income Tax Returns or Form 16 for past 2-3 years make sure all taxes are filed
  • PAN Card – the lender would carry out a PAN Verification to know its authenticity
  • Aadhar Card – the bank would also do an Aadhaar verification to verify your identity
  • Bank Statements for past 6-12 months for a bank account where your income and expenses reflect. Make sure you maintain a reasonable balance in this account over past 6 months.
    – Last 3 Months Salary Slips if you are salaried
    – Application Form with Photograph Duly Signed

4. Identify the right banks and lenders: Avoid applying to many lenders at the same time, as many credit inquiries can negatively impact your Credit Score. It doesn’t mean that you should not compare your options. Identify the banks or housing finance companies which have pre-approved the property where you plan to buy a house as that can reduce your loan approval time. Understand the eligibility criteria of such lenders in terms of the cutoff for credit score and the loan scheme (processing fees, the rate of interest etc.). Select one or two lenders which best match your requirements and get your loan sanctioned from them before booking the property.

Taking into consideration all the above points will prepare you well for your home loan and thus, improve your chances for a quick home loan approval. If co-borrowers are being considered for, do ensure you prepare them to check their credit score and keep their documents handy.

Take the first step now towards your dream home. Check your credit score on CRIF today!

 

Renting a House Know Tax Implications

A couple of days back, Rakesh had a talk with Aditya about buying out his rented flat, as his landlord was shifting to Australia to stay with his son now. Since the deal was a total steal, Rakesh was all excited to close it as soon as possible and hence, had already talked with his bank for a housing loan. Read the conversation here where they also talk about how housing loan helps you save tax. Having got educated with respect to the tax benefits given by his housing loan for personal use, Rakesh was now all curious to know what difference did it make it the house was going to be let out. Unable to hide this curiosity, he went to Adityas office right after getting back from bank.

Hi, Rakesh. Good to see you here. So, when are you getting the deal executed? I am so excited to have a cup of tea in your own house. Aditya was equally excited about the deal.

Housing loan formalities are all done with. The purchase should close next week. We are equally excited to host you in our new house. Rakesh informed him about the current status of the transaction.

By the way, I was just wondering if the tax benefits will get higher if I opt to rent my house, instead of using it for self-occupation. Not that I am planning to execute such a thing, but just the curious me wanted to know. Rakesh added.

Well, I know how hard it gets sometimes to put down the curiosity quotient within us. Let me try my best to answer your question. Until the year 2016-17, the deduction towards home loan interest was given on the basis of actual interest charged by the bank during the year, if the house was rented out. However, from the year 2017-18, the loss from house property due to interest has been limited to Rs. 2 lakh, be it towards a self-occupied house property or a rented one. Aditya tried to cover all the points in one go.

He further added, While this limit is for all the house properties taken together, you can save t, as well as the loan,s well as the loan is taken in joint name, as the ceiling limit of Rs. 2 lakh will be on individual basis.

Aditya thought that Rakeshs queries were all sorted now, but this wasnt the case to be.

And what about the rental income so received? Is it fully taxable? Rakesh was still on learning mode.

While the rental income is indeed taxable, there are certain deductions allowed for that as well. Recognising the fact that property tax is paid by the owners, 100% deduction is allowed from the rental income in respect of property tax actually paid by the owner. Further, Govt. has also a maintenance standard deduction towards repairs and maintainence of the house property. So, you deduct this 30% from the net amount i.e. rent minus property tax so paid and then offer the balance 70% for tax. In a nutshell, your taxable income from house property shall be your rental income minus property tax paid minus 30% standard deduction less interest on home loan. Aditya summarised the tax provisions in a nutshell beautifully.

The smile on Rakeshs face was the true indicator of the simplicity Aditya used to explain the provisions.

Even while a cup of tea at your place will be possible next week only, lets have one now. Aditya smiled.