No prepayment penalty for Home & Auto Loans

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.

Home Loan Interest Rate Details

Buying home is a lengthy and tiring process especially when you avail home loan to buy it. Tenure of loan is normally in the range of 15 to 20 years and a fair share of anxiety is caused by changing interest rate scenario for floating rate loans during this period. Old customers frown when key policy rates go up and they frown again when it goes down. Read on to understand how housing loan interest rates are linked to key policy decisions like variation in repo rate and CRR together with its impact on old/new home loan borrowers.

How Home Loan Rates are Calculated?

RBI has defined guidelines based on which banks fix their base rate for lending. No bank is allowed to lend below the base rate and base rates differ slightly from bank to bank.

Once a customer approaches a bank for home loan, he is charged a premium over base rate. Premium charged may vary from customer to customer based on his creditworthiness and other factors. Hence, the exact home loan rate a customer will be charged is as follows:

Home Loan rate = Base Rate + Premium

(Premium varies from bank to bank and customer to customer)

Relationship between Policy Rates and Home Loan Rates

Base rate for banks is calculated based on cost of funds for them. Repo Rate and CRR bears direct relationship with the cost of funds. Repo rate is the rate at which RBI lends money to banks and CRR is cash which banks need to keep with RBI as a regulatory requirement. As repo rate increases, cost of funds increase for the banks and this puts upward pressure on base rate. RBI pays no interest on CRR amount hence, when CRR goes up cost of funds increases for the banks. Similarly, situation reverses when there is repo rate and CRR cut.

Correlation between the repo rate and CRR with base rate is direct as they move in the same direction, but the correlation is weak for repo rate and strong for CRR.

Key Observations – How banks behave in case of variation in repo and CRR

It’s easy for banks to lower the base rate in case of CRR cut and pass on the benefit to its customers as compared to repo rate cuts. Same is visible in their action. They respond slowly to repo cuts and hesitate in passing the benefits to customers while CRR cut affects base rate quickly. Banks act more swiftly when policy rates are increased. Increase in repo rate or CRR immediately impacts the base rate resulting in a proportional increase. As a borrower few important points to note here are:

1. Banks push base rate up immediately once RBI increases the repo rate and CRR
2. Most banks hesitate to reduce the base rate in case of repo rate and CRR cut by RBI
3. Private banks in general are more responsive to policy rate variations by RBI

Effect of policy rate cuts – Existing customer vs. new customer

One should not forget that banks are business houses and they will always try to increase their profit margin. This is the reason why they respond slowly while policy rate cuts are announced and swiftly when rates are revised upwards.

Changes in key policy rates affect the existing and new loan customer in the following way:

Existing Home Loan Customers – If you are an existing customer you will always be at the receiving end. Base rate will swiftly increase in case of increase in policy rates resulting in increase in EMI or increase in tenure of your loan. Contrary to this, when policy rates will be cut, bank would hesitate in passing on the benefit to you by reducing the base rate. If the bank is too hesitant in passing the benefit, you can opt for loan transfer and choose a more ethical vendor.

New Home Loan Borrowers – To acquire new borrowers, banks play with the premium they charge over base rate rather than the base rate itself in case of policy rate cuts. They reduce premium to lure new customers and make it sound like passing benefit to the customers. This is the reason new customer gets loan at lower rate compared to the existing one in falling interest rate scenario. If you are planning for a home loan, just wait for the right moment as you can negotiate better rates.

Conclusion

Banks and home finance companies will always try to protect their profit margins, hence you should not expect too much from them. But if you feel that you are getting a raw deal every time, you can look for a loan transfer facility. Talk to an advisor for getting more clarity on the transaction cost involved in the loan transfer process and opt for it if benefits exceed the cost.

Tax Savings on Home Loan

Tax Savings on Home Loan

Tax benefits on home loan means you can save a considerable amount of money on taxes if you have taken a home loan.

Tax provisions relating to home loans are as follows:

Interest paid on home loan

As per the provisions of Income Tax Act 1961, a deduction of up to Rs. 150,000 can be claimed as tax exemption on housing loan. This deduction is claimed towards the total interest that we pay on the home loan towards purchase or construction of house property while computing the income from house property. The interest payable before you acquire home or start the construction work would be deductible in five equal annual installments commencing from the year in which the house has been acquired or constructed.

In case of self- occupied property, housing loan tax benefit is allowed only for one such self – occupied property. The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under Section 24(b).

Principal Repayment of Housing loan

An individual can avail deduction on the principal loan repayment u/s 80 C (Max Limit Rs. 1 lakh) subject to fulfillment of prescribed conditions.

Let us consider an example:

Your taxable income is 5,50,000.  Principal Repayment for the same year: 1,20,000 and interest payable is 1,70,000.

Total deduction allowed is 2,50,000 (Rs. 1,50,000 towards interest paid on housing loan and Rs.100,000 on principal repayment)

Total Taxable income is Rs. 300,000 (Rs. 550,000 – Rs. 250,000)

Joint Home loans

Tax exemptions on housing loans will be available only to the person on whose name the property is registered irrespective of the fact who pays for the loan. In case the property is jointly held then the exemption can be availed in proportion to the EMI paid.

For example, if a couple has taken a housing loan whose details are as follows:

Loan Amount: 20 lakh

Loan Tenure: 20 Years

Interest rate: 11%

EMI: 20,644

Amount paid per annum: 2, 47,725  (2, 18,559 towards interest and 29,167 towards principal)

Where in Husband pays 70% of EMI and Wife pays 30% of EMI then only then the amount of exemption available is as follows:

Interest payment: Since husband pays 70% of EMI he is allowed exemption on the 70% of the interest paid per annum i.e. (218,559*70% is 152991 limited to 150,000) and wife is allowed exemption on 30% of the interest amount paid i.e. (218,559*30%) 65,567

Principal Repayment: Similar rule applies with the principal repayment, husband can avail exemption up to 70% of the principal amount repaid in a year (i.e. 29,167*70%) 20,417 while wife can avail exemption of up to 30% of principal amount repaid in a year i.e. (29,167*30%) 8,750

Under construction house

Most of the people whose house is under construction are lost as how to claim the exemption on the interest paid on housing loan which is under construction. Well, you can avail the tax exemption only when the construction is completed. In this case the Pre- Emi is paid while the house is under construction. So, you cannot use the Pre-Emi as the Tax deduction source. Once the construction is completed, the total Pre-Emi interest paid can be availed as exemption in five equal instalments in the subsequent years

For example, if you have paid Rs.100,000 as the pre-EMI, then Rs.20,000 will be shown in the next five years as tax deduction. Note that pre-EMI is only the interest paid during the period. If you have paid any principal amount, that is not eligible for the tax deduction

Home Loans

In the past, people used to purchase a home (flat) when there were enough savings in account to afford own (larger sq feet) flat or when retirement period was nearby. But now, people in tier I, tier II and tier III cities are investing to purchase a dream home at a young age. They consider dream home to be a place that gives us unconditional love, happiness and comfort after stressful a day at work. Now, home loans are easily accessible to purchase a dream home from private and public sector banks. So, people opt for home loans while purchasing a flat.

It seems SBI has truly become a synonym when anyone considers a home loan. We will discuss the benefits of applying for home loan from SBI bank in later part of this article.

Home loan products offered by SBI

SBI offers home loan under various products with some variation to basic home loan features. In this article, we will understand the process to apply, documents required, pros and cons, eligibility criteria, rate of interest, etc. for two home loan products offered by SBI:

•  SBI Home Loan: Loan is disbursed to applicant in the form of a term loan with monthly EMI’s for tenure as decided between bank and applicant.
• SBI MAXGAIN: Loan is disbursed in the form of an overdraft facility (current account) which is an equivalent amount to your home loan, wherein you can park surplus funds and withdraw them in the time of need. This is a useful mechanism, thus maximizing savings on interest burden each month. It also reduces the tenure of the loan.

Some of the other home loan products offered by SBI are SBI Flexi, SBI Yuva Home Loan, SBI home loan for NRIs, etc.

Interest Rates

SBI offers home loan at the lowest interest rates among other PSUs and Pvt Banks. However, w.e.f 19th Sep, 2013 SBI revised its base rate i.e. minimum lending rate to 9.8 per cent. This led to increase in interest rates on home loans. Now, interest rates for home loans are as follows:

Loan Amount	Effective Rate of Interest
Up to Rs 30 Lakhs	10.05% p.a.
Above Rs 30 Lakhs	10.2% p.a.

Under SBI Maxgain, you have to pay additional interest rate of 0.25 per cent for loan above Rs 1 crore. 

Computing EMI chart

EMI chart for Rs 1 Lakh at applicable interest rates is calculated below:

	EMI for Rs 1 Lakh
Yr/Rate	10.05%	10.2%	10.45%
5	2,127	2,135	2,147
10	1,324	1,333	1,347
15	1,078	1,087	1,102
20	982	978	995
25	926	923	941

Savings while applying for a loan in SBI MAXGAIN

Consider, Mr.XYZ has taken a loan of Rs 30 lakhs for a period of 15 years. So, interest rate applicable will be 10.05%. She has taken a home loan under SBI Maxgain scheme and will keep the surplus funds of Rs 10,000 every month from her savings into overdraft (current) account with SBI Maxgain for 3 years during her repayment tenure. Now, let’s compute a repayment table with this information for SBI Home Loan and SBI Maxgain products. Then, we will analyse interest and tenure of loan saved in her case with SBI Maxgain.

Particulars	Normal Loan	Maxgain
EMI	32,330	32,330
No. Of Payments	180	180
Actual No. Of EMIs	180	167
Surplus Investment to Maxgain (3 years * 10,000)	-	3,60,000
Total Interest Paid	28,19,397	27,34,118
Interest saved in Maxgain		85,279
Tenure of loan saved in Maxgain		13 months

Process of Home Loan from SBI

You can visit the nearest branch and apply for home loan after inquiring with representative or else visit their website www.sbi.co.in and click on apply for housing loan in personal banking. Fill the online form and then submit it. You will receive a call from a relationship manager of SBI to guide you through the loan process. In online process too, you will be asked to visit nearest branch and meet a representative to complete the procedure / verify the documents to submit.

Check list of home loan documents needed 

General documents for home loans

• Duly filled application form and 2 photographs
• Identity proof of applicant (PAN card/ passport/ drivers licence/ voter id card)
• Current residence address proof (Telephone bill / electricity bill, ration card, etc)
• Bank a/c statements (salary /individual/ business)
• Loan a/c statement of last 1 year for any previous loan

For Salaried Employees

• Salary certificate or last 3 months salary certificate
• Income tax returns of last 2 years and form 16
• Photocopy of employee id-card
• Employer certificate, appointment letter, increment letter, etc.

For Self Employed / Professionals

• Income tax returns of last 3 years
• Balance sheet and profit and loss a/c for last 3 years (certified true copy)
• TDS certificate (Form 16 A, if applicable)
• Business proof (Sales tax registration, etc.)
• Challans of advance income tax paid (photocopy)

For NRI’s and PIO’s

• Passport with visa copy
• Work permit, work contract and appointment letter
• Employer’s id card and employment profile for last 5 years
• Valid residence address proof
• Statement of overseas bank a/c and Indian NRE a/c which reflects salary credit of last 6 months
• Salary slips (3 months) or tax returns
• Power of attorney in bank format

Property documents from builder / society

• NOC from builder / society in bank’s format
• Sales agreement (Registered)
• Letter of allotment from private builder / housing board/ society
• Blueprint stamped by municipal authority
• All payments receipt to builder / seller
• Occupancy certificate and share certificate (for resale flat)

For Disbursement

• Demand letter from builder / seller
• Architect certificate with stage of construction for new flat
• Post-dated cheques for 24 months of EMI
• Original NOC in bank’s format

Agreement for sale, payment receipts (original) and a/c statement showing debit of payments made to seller (builder)

Applicable fees and charges for home loan process with SBI are as follows:

• Processing fee is 0.5% of the loan amount (Max Rs 20,000). This fee is the lowest among all other banks. However, with other banks you can negotiate on processing fees, but with SBI it’s fixed.
• Mortgage charges of 0.2% of loan amount (as per stamp duty act)
• Title clearance and search report is Rs 2,750
• Documentation cost is Rs 1,500
• Fees for valuation report is Rs 750 + Sales tax (Rs 827)
• Fees for structural engineer report is Rs 1500 + Sales tax (Rs 1654) (applicable to property older than 15 years)
• Home insurance premium. It’s mandatory to have your home insured from SBI while taking a loan from them. So, in case of any unfortunate event, your home is insured and safe.

Approval time for home loan from SBI

Approval time for home loan from SBI is on an average 1.5 months. Approval time at SBI is much higher than private banks, but it feels wait is worth since at the end you will get the best interest rate in the market. Also, you can take an advantage of loan from SBI Maxgain scheme which saves the interest payable by reducing tenure of loan.

Eligibility Criteria

Particulars	Salaried	Self-employed
Age	21 years to 60 years	21 years to 70 years
Income	Min. Rs 1.2 lakhs p.a.	Min. Rs 2 lakhs p.a.
Tenure	5 years to 30 years	5 years to 30 years
Experience	Min. 2 years	Min. 3 years

Margin required from an individual while taking home loan is:

Particulars	Margin (Min)
Loan up to Rs 20 lakhs	10%
Loan above Rs 20 lakhs and up to Rs 75 lakhs	20%
Loan above Rs 75 lakhs	25%

Repayments

Loan is to be repaid in EMI over the tenure of the loan which can be maximum 30 years or up to the age of 70 years.

Advantages of home loan from SBI are as follows:

• Lowest interest rates
• Interest rates are calculated on daily reducing balance
• Lowest processing charges
• No prepayment penalties
• Reducing interest burden and loan tenure by taking home loan in maxgain scheme
• Network of over 13,700 branches nationwide which gives access to your home loan account at nearest branch

Disadvantage of home loan from SBI are as follows:

• Processing time is approx. 1.5 months, which is much higher compare to private banks
• No door step service. Required visit to nearest bank branch at least 3 times to complete the   procedure of loan
• There are complaints from borrowers regarding service and slow process by executives to disburse the loan amount
• Exhaustive list of documents required while applying for home loan
• Getting a sanction of home loan is an issue if you are a salaried person working with a small firm or self-employed (We recommend you create a strong credit history in such cases and improve your CIBIL score)

To conclude, let’s have a look at steps for getting a home loan from SBI:

Step 1: Contact nearest SBI branch to understand your eligibility criteria for home loan and documents required to submit with application form

Step 2: Submit required documents with application form to relationship manager at bank

Step 3: Field investigation by bank

Step 4: Sanction of loan and credit appraisal by the bank

Step 5: Borrower will receive an offer letter from bank

Step 6: Submission of legal documents and legal check

Step 7: Valuation check by third party technician (engineer) appointed by bank

Step 8: Evaluation of third party technical report

Step 9: Registration of property documents

Step 10: Submit post-dated cheques to bank and signing of agreements

Step 11: Disbursement of loan