Providing relief to borrowers, Reserve Bank on Wednesday directed banks not to levy any penalty on individual borrowers for pre-paying floating loans.
"...it is advised that banks will not be permitted to charge foreclosure charges or pre-payment penalties on all floating rate term loans sanctioned to individual borrowers, with immediate effect," RBI said in a notification.
Floating loan products include housing, and auto loans.
In the first bi-monthly monetary policy statement for 2014-15 released last month, the RBI had said banks should consider allowing their borrowers the facility of prepaying floating rate term loans without any penalty in the interest of their customers.
Some banks are charging pre-payment penalty of up to 2 per cent of the outstanding loans.
Two years ago, RBI had barred banks from levying foreclosure charges or pre-payment penalties on home loans on floating interest rate basis.
On Tuesday, the RBI asked banks not to levy penalties on customers who don't maintain a minimum balance in any inoperative account, as part of a consumer protection initiative.
Tuesday, May 13, 2014
Financial Planning
Many
thoughts around our goals or investments drive an urge for financial planning. Financial planning is a process of knowing
where we stand, deciding on what we want to achieve and making plans to bridge
the gap. The analysis of where we stand represents our financial health.
Financial health stands as a reflection of our past financial decisions and mistakes. It also helps in analyzing how our past financial decisions would help is in achieving what we want.
To know your financial health, you must understand the following parameters:
Expense analysis:-
The core of our financial health revolves around our savings rate. This savings rate is essentially governed by the spending habits we develop over the years. The irony behind money management is that most of us talk about reducing our spending and increasing our savings but never act upon it. It is our spending habits which decide our current and future financial well-being, especially when sources of income are fixed and finite.
We must list down all our expenses and categorise them as committed or non-committed spending. Expenses like groceries, medicines, school fee of children, EMI payments and all such expenses which are mandatory account for committed expenses, whereas expenses incurred by dining out, hobbies, vacation and other such non-mandatory expenses account for non-committed expenses. Knowing these areas of high non-committed spending and controlling them helps us in improving the rate in which we save.
Committed vs. non-committed expenses:-
When it comes to committed expenses, debt management plays an important part. Closing high interest, non-productive loans or refinancing those for a competitive rate can help in improving our savings rate.
Insurance is often perceived as a safe, effective long-term investment and tax-saving tool. In reality, insurance is an expense and is considered a committed expense. Many of us commit our financial mistakes when it comes to insurance. We often fail to analyse our insurance requirement and end up being under insured or over-insured. One should also analyse the choices made wile selecting insurance products. The premiums being paid towards sub-optimal insurance policies have a direct impact on the rate of our savings and, hence, increase the gap between what we have and what we want in terms of our goals.
Apart from life insurance, one should also analyse existing medical insurance policies and the cover provided by them. Being reliant on company-provided medical insurance would leave us without any medical cover in case of an unexpected event of job loss. Similarly, an inadequate medical insurance cover would force us to liquidate our assets in case of a major medical emergency.
Net worth Analysis:-
Net worth analysis will help you in analysing the efficiency of your debt management skills. It will also help in realising how efficiently you have put money to work towards what you want to achieve. One should differentiate liquid assets and illiquid assets accumulated over years.
Liquid vs. illiquid assets:-
Assets which can be liquidated or converted to cash with ease can be termed as liquid assets, while assets like real estate, which normally require more effort and time to convert to cash, illiquid assets. One should maintain a healthy ratio of liquid assets to illiquid assets.
One should also strike a balance in maintaining optimal levels of cash reserve. Cash should not sit idle in your bank account and at the same time should not be less than your emergency fund. Analysing your existing assets also reveals how well diversified your investments are. This analysis also helps us in knowing the level of diversification we have employed in our past investments.
This insight should then be analysed along with your outstanding liabilities to know how you can fund your existing liabilities using existing assets in case of a major financial mishap.
Conclusion:-
Giving your financial health a check can be termed as a reality check from the perspective of finance. It is an efficient way of correcting your past financial mistakes and analysing the financial decision-making process. Until and unless we know where we stand with respect to managing our finances, we cannot lay plans for the future. This allows us in setting realistic expectations from the future rather than setting over optimistic financial goals.
Financial health stands as a reflection of our past financial decisions and mistakes. It also helps in analyzing how our past financial decisions would help is in achieving what we want.
To know your financial health, you must understand the following parameters:
Expense analysis:-
The core of our financial health revolves around our savings rate. This savings rate is essentially governed by the spending habits we develop over the years. The irony behind money management is that most of us talk about reducing our spending and increasing our savings but never act upon it. It is our spending habits which decide our current and future financial well-being, especially when sources of income are fixed and finite.
We must list down all our expenses and categorise them as committed or non-committed spending. Expenses like groceries, medicines, school fee of children, EMI payments and all such expenses which are mandatory account for committed expenses, whereas expenses incurred by dining out, hobbies, vacation and other such non-mandatory expenses account for non-committed expenses. Knowing these areas of high non-committed spending and controlling them helps us in improving the rate in which we save.
Committed vs. non-committed expenses:-
When it comes to committed expenses, debt management plays an important part. Closing high interest, non-productive loans or refinancing those for a competitive rate can help in improving our savings rate.
Insurance is often perceived as a safe, effective long-term investment and tax-saving tool. In reality, insurance is an expense and is considered a committed expense. Many of us commit our financial mistakes when it comes to insurance. We often fail to analyse our insurance requirement and end up being under insured or over-insured. One should also analyse the choices made wile selecting insurance products. The premiums being paid towards sub-optimal insurance policies have a direct impact on the rate of our savings and, hence, increase the gap between what we have and what we want in terms of our goals.
Apart from life insurance, one should also analyse existing medical insurance policies and the cover provided by them. Being reliant on company-provided medical insurance would leave us without any medical cover in case of an unexpected event of job loss. Similarly, an inadequate medical insurance cover would force us to liquidate our assets in case of a major medical emergency.
Net worth Analysis:-
Net worth analysis will help you in analysing the efficiency of your debt management skills. It will also help in realising how efficiently you have put money to work towards what you want to achieve. One should differentiate liquid assets and illiquid assets accumulated over years.
Liquid vs. illiquid assets:-
Assets which can be liquidated or converted to cash with ease can be termed as liquid assets, while assets like real estate, which normally require more effort and time to convert to cash, illiquid assets. One should maintain a healthy ratio of liquid assets to illiquid assets.
One should also strike a balance in maintaining optimal levels of cash reserve. Cash should not sit idle in your bank account and at the same time should not be less than your emergency fund. Analysing your existing assets also reveals how well diversified your investments are. This analysis also helps us in knowing the level of diversification we have employed in our past investments.
This insight should then be analysed along with your outstanding liabilities to know how you can fund your existing liabilities using existing assets in case of a major financial mishap.
Conclusion:-
Giving your financial health a check can be termed as a reality check from the perspective of finance. It is an efficient way of correcting your past financial mistakes and analysing the financial decision-making process. Until and unless we know where we stand with respect to managing our finances, we cannot lay plans for the future. This allows us in setting realistic expectations from the future rather than setting over optimistic financial goals.
Volatility in interest rates in India
The volatility in
interest rates in India has affected borrowers of all types of loans.
However, home loan borrowers are the most affected, as home loans are by far
the biggest loans quantum-wise. Discrepancy in interest rates between existing
borrowers and new borrowers, porting of home loan, stringent rules by lenders
and clauses on fixed rate home loans are some of the issues faced by home loan
borrowers in the country.
Let's look at them in detail:
One of the most common issues faced by existing home loan borrowers is the discrepancy in interest rates paid by them vis-a-vis a new borrower. While this is a valid complaint, let's first see what causes this discrepancy.
Interest rates on home loans are usually linked to the benchmark rate of the bank (be it the Prime Lending Rate - PLR or the more recently introduced Base Rate, as the case may be).
From this benchmark rate, a fixed rate is either deducted (in the case of a PLR) or marked up (in the case of a Base Rate) to arrive at the floating rate on the home loan. Any changes in the benchmark rate will thus automatically result in a change in the interest rate on the home loan as well.
For example, consider a borrower who has taken a home loan from a Housing Finance Company (HFC) at terms which state that his interest rate will be 300 bps lower than the prevailing PLR. This was the agreement entered into with the bank at the time of availing the loan. The PLR at the time of granting the loan was 15 per cent, and the interest rate on the home loan thus stands at 12 per cent. Now, if after 2 years, the PLR is reduced by 50 bps to 14.5 per cent then the interest on his home loan also automatically falls to 11.5 per cent.
On the other hand, in order to attract customers, a new borrower may be offered terms with a mark down of 350 bps. As a result, the interest rate he gets on his home loan will be 11 per cent only. This is the reason for the discrepancy in interest rates.
In recent times, in view of the increasing incidence of customers switching banks to avail better rates, the existing borrowers are being offered an option to change to new rates in the same bank by paying a switch fee or a conversion fee. This can be 0.5 per cent to 1 pre cent of the outstanding loan amount. This is a good way of availing interest rates offered to new customers. However, this scheme is not actively pushed by banks, and not all lenders offer this.
In such a situation, most existing borrowers resort to porting their home loans to banks which offer lower interest rates. This has been encouraged by RBI by removing the prepayment penalties on floating rate loans.
However, it is important for customers to read the fine print before taking this step, as there may be many unanticipated costs to be borne. Processing fee, stamp duty, notarization charges, franking charges and insurance premium are some of the likely costs which a customer needs to bear.
This can easily work out to be 0.5-0.75 per cent of the loan amount. Add to this the requirement of submitting all documentation again to the new bank. It is therefore important to understand the merits of switching your home loan, and try to use the option of staying with your old bank using the switching fee option, wherever possible.
Another issue faced by fixed rate home loan borrowers in the applicability of the reset clause. Fixed rate loans are not fixed for the entire loan tenure. The reset clause is invoked as and when applicable according to the terms of the agreement. Thus, if there is a scenario of increasing interest rates in the economy, banks will reset the interest on the fixed rate home loan. Although there is no option to remove this clause, borrowers can search for banks that offer fixed rate loans with no reset clause.
Borrowers also sometimes face the issue of the inflexibility on the bank's part to adjust the EMI amount or tenure in case of an interest rate revision. The hassle of reworking EMIs as well as changing ECS mandates may deter banks from changing the EMI amount. However, from the customer point of view, it must always be remembered that reducing the tenure is a better option compared to reducing the EMI amount in case of a downward interest revision, to save on interest costs.
It is hoped that RBI and the government will continue to take proactive steps in addressing the concerns of home loan borrowers - both existing as well as new borrowers
Let's look at them in detail:
One of the most common issues faced by existing home loan borrowers is the discrepancy in interest rates paid by them vis-a-vis a new borrower. While this is a valid complaint, let's first see what causes this discrepancy.
Interest rates on home loans are usually linked to the benchmark rate of the bank (be it the Prime Lending Rate - PLR or the more recently introduced Base Rate, as the case may be).
From this benchmark rate, a fixed rate is either deducted (in the case of a PLR) or marked up (in the case of a Base Rate) to arrive at the floating rate on the home loan. Any changes in the benchmark rate will thus automatically result in a change in the interest rate on the home loan as well.
For example, consider a borrower who has taken a home loan from a Housing Finance Company (HFC) at terms which state that his interest rate will be 300 bps lower than the prevailing PLR. This was the agreement entered into with the bank at the time of availing the loan. The PLR at the time of granting the loan was 15 per cent, and the interest rate on the home loan thus stands at 12 per cent. Now, if after 2 years, the PLR is reduced by 50 bps to 14.5 per cent then the interest on his home loan also automatically falls to 11.5 per cent.
On the other hand, in order to attract customers, a new borrower may be offered terms with a mark down of 350 bps. As a result, the interest rate he gets on his home loan will be 11 per cent only. This is the reason for the discrepancy in interest rates.
In recent times, in view of the increasing incidence of customers switching banks to avail better rates, the existing borrowers are being offered an option to change to new rates in the same bank by paying a switch fee or a conversion fee. This can be 0.5 per cent to 1 pre cent of the outstanding loan amount. This is a good way of availing interest rates offered to new customers. However, this scheme is not actively pushed by banks, and not all lenders offer this.
In such a situation, most existing borrowers resort to porting their home loans to banks which offer lower interest rates. This has been encouraged by RBI by removing the prepayment penalties on floating rate loans.
However, it is important for customers to read the fine print before taking this step, as there may be many unanticipated costs to be borne. Processing fee, stamp duty, notarization charges, franking charges and insurance premium are some of the likely costs which a customer needs to bear.
This can easily work out to be 0.5-0.75 per cent of the loan amount. Add to this the requirement of submitting all documentation again to the new bank. It is therefore important to understand the merits of switching your home loan, and try to use the option of staying with your old bank using the switching fee option, wherever possible.
Another issue faced by fixed rate home loan borrowers in the applicability of the reset clause. Fixed rate loans are not fixed for the entire loan tenure. The reset clause is invoked as and when applicable according to the terms of the agreement. Thus, if there is a scenario of increasing interest rates in the economy, banks will reset the interest on the fixed rate home loan. Although there is no option to remove this clause, borrowers can search for banks that offer fixed rate loans with no reset clause.
Borrowers also sometimes face the issue of the inflexibility on the bank's part to adjust the EMI amount or tenure in case of an interest rate revision. The hassle of reworking EMIs as well as changing ECS mandates may deter banks from changing the EMI amount. However, from the customer point of view, it must always be remembered that reducing the tenure is a better option compared to reducing the EMI amount in case of a downward interest revision, to save on interest costs.
It is hoped that RBI and the government will continue to take proactive steps in addressing the concerns of home loan borrowers - both existing as well as new borrowers
Interest Rates for Premature withdrawal
Many of us invest in fixed deposits (FDs)
as they are safest investment option available today. But most of the time
while investing, we don't spend too much time on thinking where to park our
FDs. However, the fact is we can save quite an amount if we carefully select
our fixed deposit option.
In order to maximise returns, while it is useful to get high interest rates, it is also a good idea to minimise the cost of unplanned FD closure. Often, when we are need of funds, we tend towards breaking the fixed deposit. As a result we not only we lose on interest rates, but are also penalised as much as 1 per cent in the name of premature withdrawal penalty.
While this may seem a small number, it becomes sizeable when actual cost is calculated. Most banks calculate interest rates for premature closure of FDs by the following formula:
Interest Rates for Premature withdrawal of FDs = Interest Rate applicable for actual period of FD as per the rates prevalent at the time of investment - 1 per cent
Most of the banks charge premature withdrawal penalty as per the above formula for all fixed deposits, including linked FDs with sweep in facility and FDs with periodic interest payouts.
In case of FDs with periodic interest payouts, where banks have already paid the investor interest as per the committed rates, banks calculate the applicable penalty at the time of redemption, and reduce the final payout by the same effectively reducing the interest rate to the rate as per the above formula.
However, the premature withdrawal penalty can be completely avoided as several banks have started offering premature withdrawal without penalty. In fact, you will be surprised to know that some of them also offer the best interest rates on FD's. The following table lists interest rates offered on FDs and premature withdrawal penalties levied by major banks:
In order to maximise returns, while it is useful to get high interest rates, it is also a good idea to minimise the cost of unplanned FD closure. Often, when we are need of funds, we tend towards breaking the fixed deposit. As a result we not only we lose on interest rates, but are also penalised as much as 1 per cent in the name of premature withdrawal penalty.
While this may seem a small number, it becomes sizeable when actual cost is calculated. Most banks calculate interest rates for premature closure of FDs by the following formula:
Interest Rates for Premature withdrawal of FDs = Interest Rate applicable for actual period of FD as per the rates prevalent at the time of investment - 1 per cent
Most of the banks charge premature withdrawal penalty as per the above formula for all fixed deposits, including linked FDs with sweep in facility and FDs with periodic interest payouts.
In case of FDs with periodic interest payouts, where banks have already paid the investor interest as per the committed rates, banks calculate the applicable penalty at the time of redemption, and reduce the final payout by the same effectively reducing the interest rate to the rate as per the above formula.
However, the premature withdrawal penalty can be completely avoided as several banks have started offering premature withdrawal without penalty. In fact, you will be surprised to know that some of them also offer the best interest rates on FD's. The following table lists interest rates offered on FDs and premature withdrawal penalties levied by major banks:
The above comparative shows that Axis Bank, Yes Bank and IDBI Bank offer high interest rates and also allow premature withdrawal without penalty.
On the other hand, major retail banks like ICICI Bank and HDFC Bank offer lower interest rates and charge hefty premature closure penalties.
Let us take an example where Ajay has invested Rs. 3 lakh each in Axis Bank and HDFC Bank for a period of 3 years but withdraws the money in 1 year. The following is the return Ajay gets from both FDs:
While both the FDs are offering same returns for 3 year period and the interest rate applicable for 1 year is also same in both the cases, Ajay loses out Rs. 3,479 only due to penalty in case of HDFC Bank.
One might think about the case where FD rates are lower for the actual deposit period than the original period; and the case where FD rates at the time of booking were higher than rates prevailing at the time of FD closure. In such cases, banks take the lower of the two rates to pay interest.
So, next time when you book your FD, do not forget to check the premature withdrawal penalty along with interest rates, else you may land up losing out on easy money
5 Tips - For House Purchase
You may have gotten a home loan approved after zeroing down on a
house you want to buy, thinking half the work is done and hoping for smooth
processing here on. Think again, because once you complete these formalities,
you will have to protect your dream from the legal traps your builder might
throw your way.
There are a few very important points to consider when you are about to enter into an agreement with a developer. Here we will take a look at 5 such points you need to remember and also various measures you can take against them.
1) Actual price of the house:-
A home agreement details various costs that you will need to bear for buying the house. This would include the cost for utilities like electricity, water, parking space, many kinds of taxes, and in some cases even registration charges. However, the builder may then levy extra charges for any of these.
Tips:-
There are a few very important points to consider when you are about to enter into an agreement with a developer. Here we will take a look at 5 such points you need to remember and also various measures you can take against them.
1) Actual price of the house:-
A home agreement details various costs that you will need to bear for buying the house. This would include the cost for utilities like electricity, water, parking space, many kinds of taxes, and in some cases even registration charges. However, the builder may then levy extra charges for any of these.
Tips:-
·
Check the agreement thoroughly
for all applicable charges.
·
If possible, get the agreement
checked by a lawyer for hidden charges and get the anomalies (if found)
rectified by your builder.
·
If a builder charges extra for
altering the original plan, you can always ask for the sanction letter provided
by government authorities for such changes.
2. Actual size of the house:-
Your agreement would clearly mention the size of the house you are purchasing. However, there would be a clause stating "plans, designs, specifications are tentative and the developer reserves the right to make variations and modifications". Therefore, you may agree for a certain size but the builder can give a different size.
Tips:-
Your agreement would clearly mention the size of the house you are purchasing. However, there would be a clause stating "plans, designs, specifications are tentative and the developer reserves the right to make variations and modifications". Therefore, you may agree for a certain size but the builder can give a different size.
Tips:-
·
Before going ahead with a
builder of your choice, do some research about the builder's past projects.
·
If possible, talk with other
buyers (who have already gotten possession) about problems faced by them.
·
Try and include a clause in
the agreement stating the minimum and maximum size beyond which the builder
cannot increase or decrease.
3. Carpet area:-
The area of an apartment or building excluding the area of walls is known as carpet area. This is the area in which literally a 'carpet' can be laid in your house. When the area of walls, including the balcony, is calculated along with the carpet area, it is known as built-up area. The built-up area along with the area under common spaces like lobby, lifts, stairs, garden and swimming pool is called super built-up area.
Carpet area can be 15-30 per cent less than super built-up area. However, you will not come to know the exact size until the constructions have been completed.
Tips:-
The area of an apartment or building excluding the area of walls is known as carpet area. This is the area in which literally a 'carpet' can be laid in your house. When the area of walls, including the balcony, is calculated along with the carpet area, it is known as built-up area. The built-up area along with the area under common spaces like lobby, lifts, stairs, garden and swimming pool is called super built-up area.
Carpet area can be 15-30 per cent less than super built-up area. However, you will not come to know the exact size until the constructions have been completed.
Tips:-
·
Purchase a property based on
its carpet area.
·
Ensure that this area is
mentioned in the agreement.
·
Try to get a clause included
which will ensure that the contract can be terminated if the builder provides a
house with the carpet area lesser than what is mentioned in the contract.
4. Date of possession:-
The agreement normally mentions a tentative date of possession. However, there have been instances where builders have delayed possession by more than a year.
Tips:-
The agreement normally mentions a tentative date of possession. However, there have been instances where builders have delayed possession by more than a year.
Tips:-
·
Check the progress of the
construction from time to time personally.
·
On finding that the progress
is slow and the construction is not going to finish by the date of possession,
you can always pressure on your builder.
·
Forming a society with other
buyers sometimes helps a lot in getting things to speed up at the builder's
end.
5. Completion certificate:-
On handing over the house to you, the builder also needs to provide you with a completion certificate. This is issued by municipal authorities that establish the building complies with its approved plan. You would need this certificate for the registration of your house and other government formalities.
Tips:-
On handing over the house to you, the builder also needs to provide you with a completion certificate. This is issued by municipal authorities that establish the building complies with its approved plan. You would need this certificate for the registration of your house and other government formalities.
Tips:-
·
If the agreement does not
mention the certificate, ensure that the agreement has a clause which states
that the builder will provide the certificate while handling over the house to
you.
·
If your builder delays a lot,
putting pressure on the builder along with buyers like you is a good idea.
·
Besides, there are a few more
points - such as the quality of the construction, management of the society -
which one should clarify before entering an agreement with a builder. For this,
you can try to add clauses to the agreement or form a society to get the
builder to meet your demands. Since there is no industry regulator you can turn
to any issues you may face during the course of buying your home, it is
important that you are aware of what you want and what you are getting.
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