Investment v/s Home Loan pre-payment

Owning a home of yours is indeed a good feeling but in today’s world, it is invariably accompanied with the burden of a housing loan. The question that bothers borrowers is that should they receive an annual bonus or a lump sum amount from some source, whether it should be invested in other instruments or be used to pay off that huge outstanding due. Here is an attempt to enlighten you on some pointers that may help you make that crucial decision.

The first condition is to understand your psyche. For some, settling the question of how to use the bonus is simple – repay the home loan. These people do not wish to reel under the stress of a large outstanding in their name.

Gaurav Mashruwala, Sebi-registered investment adviser opines that the home loan should be paid off at the earliest. Any inopportune events like job loss, death of the earning member, serious illness, etc can cause trouble during the 10-25 year long loan tenure. Clearing a big chunk of dues should be treated as a mind game and not considered as mere numbers.

The next variable is the tax component. If your psyche allows you to not think of that home loan as a sword hanging over your head, continuing with the regular EMIs may be the wiser option. This is because of the tax benefits that a home loan offers. While the principal component of the EMI is treated as investment under Section 80C, the interest component is deductable under Section 24 from your taxable income.

The annual deduction that can be claimed in respect of the interest component of a housing loan for a self occupied property is limited to Rs 2 lakh per annum.  Therefore, you won’t be able to claim deduction on interest paid above this cap. So, if your annual interest outgo is higher than Rs 2 lakh, it makes more sense to prepay the loan, and save on future interest payment.

For instance, the annual interest on an Rs 70 lakh outstanding loan at 9.5%, works out to Rs 6.65 lakh. After considering the Rs 2 lakh deduction under Section 24C, the interest component will reduce to Rs 4.65 lakh bringing down the effective cost of interest from 9.5% to 8.64%, including those in the 30% tax bracket.  The tax benefits can be further optimized if the loan has been taken jointly. “If joint holders share the EMIs, both can claim Rs 2 lakh each in interest deduction,” advises Harsh Roongta, Sebi-registered investment adviser. In case of joint holders, prepayment may not be required if the outstanding amount is less than Rs 40 lakh.

Further, since there is no limit for interest on loan against second or rented out homes, there is no need to prepay the loan either. One should also bear in mind that with pre-payment of the loan, you may miss out on future tax benefits. For example, after prepayment, outstanding loan amount comes down to Rs 20 lakh; your annual interest outgo for subsequent years may fall below Rs 2 lakh. Here, pre-payment is not a prudent strategy as you won’t be able to avail of the entire tax-deductible limit.

The third important aspect during decision making in this regard is returns from investment of the lump sum available with you. You should opt for investment instead of prepayment only when the post-tax return from the investment is expected to be higher than the effective cost of the home loan.

For those falling in the 30% tax bracket and having outstanding home loan balance is less than Rs 20 lakh, the effective cost of loan is merely 6.65%. Since there are several risk-free, tax-free debt options like PPF, Sukanya Samruddhi Yojana and other listed tax-free  bonds offering higher annualised return than this, it is advisable to invest in them rather than pre-paying the loan. If your risk-taking ability is higher and you are market savvy, you may also consider investing in equities where the return on investment is also higher.

You may also consider home loan products that provide an overdraft facility or a home loan bundled with a current account. This will help you maintain liquidity also. All you have to do is to park the surplus money in these products. It’s like prepayment with the option of withdrawing it in times of need, either for personal use or for investment purpose. The strategy of maintaining the housing loan interest close to Rs 2 lakh per annum can also be managed with these special loan products.

Fixed Rate for longer term Home Loans from SBI

If you are wondering whether With the new benchmark rates being reviewed every month, should new home loan borrowers keep checking rates or will the annual reset take care of everything, Arundhati Bhattacharya, Chairman of country’s largest lender State Bank of India explains it all here.

The Base Rate is reviewed quarterly and banks cannot lend below it. The Marginal Cost of Lending Rate (MCLR) which is a rate derived out of incremental cost of deposits, and is reviewed every month, are apples and oranges. Borrowers will have to keep checking the rates. They’ll have to understand what the MCLR is and identify their risk appetite.

If they believe that it is better to know for sure what their future EMIs will be, then they may opt to fix their rate for a longer tenure. A borrower can also choose MCLr, which is a floating rate; but for optimum management, the consumer will have to keep a track of the oscillating rates.

First dream home? You have something to cheer about!

If you have been vying on that dream home for a long time but were waiting for the right time, it has arrived! In the 2016 Union budget, the Finance Minister has proposed an introduction of additional deduction on interest for home loans up to Rs 35 lakh, with a rider that the value of the house doesn’t exceed Rs 50 lakh.

Isn’t it a reason to cheer for first time home buyers, especially when the costs of property units have increased manifold over the recent years?

As per Indian tax laws, a home buyer is entitled to claim both the interest and principal components of home loan repayment for tax benefits. Presently, interest payable on a ‘self-occupied’ house is subject to a maximum deduction of Rs 2 lakh under the head ‘Income from House Property’.

Real estate industry experts and tax payers were looking forward for the government to increasing the tax exemption limit for home loans, particularly in metro cities, by about Rs 1 lakh to Rs 3 lakh as the current limit of Rs 2 lakh is very trivial. Moreover, the interest, a component of one’s EMI that goes towards principal repayment is allowed to be claimed under Section 80C which can be claimed within the overall limit of Rs 1, 50,000 only.

Further, the government was also urged to consider creating a separate category of deduction for principal re-payment of housing loan, since the principal paid is currently clubbed under Section 80C with other tax-saving instruments, which is insignificant in terms of the relief it provides to the home buyer. If this demand is met, it would leave behind a higher disposable income in the hands of the borrowers, at the same time encourage investments in real estate sector.

Budget 2016-17

In today’s scenario where possession of the property within stipulated time is a challenge, Budget 2016-2017 proposes tax relief under Section 24 of I-T Act on interest payment on home loan if the property bought, or under construction, is completed within 5 years from the end of the financial year in which the loan was availed instead of the current 3 years. This could actually help save tax up to Rs. 60000.

In addition to above, Finance Minister Arun Jaitley has announced an additional interest deduction of Rs. 50,000 a year for loans up to Rs. 35 lakh sanctioned during 2016-17 provided cost of the house does not exceed Rs. 50 lakh.

Tax benefits in FY 2016-17 for home loan borrowers are summarized below:

Home Loan eligibility

Before even looking out for a property, buyers like to know the quantum of home loan they are eligible for. While that’s a good approach, there is always more clarity needed to make the final decision. We have attempted to throw light on some aspects to aid your decision making.

Banks or financial institutions determine the home loan eligibility of an applicant based on the valuation given to them by the evaluators they appoint. Your loan eligibility is also derived on the basis of your income, your regular outgoings and repayment track record. Your overall loan eligibility will be restricted to 80% of the agreement value or the valuation as determined by the bank, whichever is lower. Some banks also offer 90% of the agreement value to lure borrowers.

What is the eligibility for joint owners of a property and its tax implications?

To avoid Title issues later, it is a good idea to buy a property in joint name. The joint owner must become a co-borrower when applying for loan. In case the second applicant is also employed, it helps to improve your eligibility in terms of the loan amount. If the loan is taken in joint names and the property is self-occupied, both applicants can claim deduction under Section 24 (B) up to the limit of Rs 2 lakh each as well as claim deduction u/s 80 (C) for repayment of principal portion of the home loan.

 What is the time allowed between plot purchase and construction in case of composite home loan?

While Different banks have different clauses for starting construction on a plot, most banks permit a period of one to two years, within which, the construction must begin. If you construct the house within a year from purchase of the plot, the bank may give you home loan including cost of plot of the land. No tax benefits are available in respect of loan to buy a bare plot or in any year during which the construction is not complete.

 Can you get two home loans on a single property?

It is not possible to get two separate home loans on the security of the same property. However, you can avail a joint loan with a co-applicant if your incomes can justify the higher quantum of loan. You can get the tax benefits on the loan repayments provided you are an owner or a co-owner in the said property.

Home Loans for Women

Are you a working woman desirous of owning your dream home? Then you have reasons enough to cheer! In India, women are privileged in terms of the schemes and concessions given to them as borrowers of a loan. Especially in home loans, women enjoy greater benefits as compared to their male counterparts.

The financial sector in India as a whole provides special consideration to women seeking home loans as they are generally perceived to be more sincere in paying their dues and less likely to default. Women are offered home loans at cheaper rate of interest by several banks.

One of the most decisive factors while buying a home loan is the rate of interest. Even a small variation makes a huge impact on the EMI (Equated Monthly Installment) that you pay to the lender. Since a home loan is a large chunk of money, allowances on the interest rate helps one save big in the complete term of the loan period. However, it is important here to know that the woman can enjoy benefits of lower rate of interest only if she becomes the primary applicant or the co-applicant in the borrowing. Again, no bank or financial institution will lend to a woman or a man if the credit track record and documentation is not satisfactory.

Some major banks that offer preferential rate of interest to woman borrowers are State Bank of India and ICICI Bank. While SBI offers Her Ghar loan at 9.85 per cent, HDFC has Woman Power home loan at the same interest rate & lends at 9.90 percent for purchase of a plot. The Terms and conditions are similar for both the banks that require women to be the sole or joint owner and first applicant of the property. Any woman who is a resident of India or non-resident Indian can apply for this loan.

ICICI Bank has two options for woman home loan seekers. First, Floating interest rate, 9.85 percent for loans up to Rs75 lakh. And second, for loans up to Rs30 lakh, fixed rate of 9.85 per cent is charged for 10 years and from the 11th year I-Base + 0.10 per cent. For loans between Rs30 lakh and Rs75 lakh, fixed rate of 9.95 per cent for 10 years and I-Base + 0.20 per cent from 11th year.

Although these schemes and offers are not widely publicized by banks or NBFCs, they are usually enthusiastic about lending to women borrowers. In addition, some states in India also provide some relief to woman owners of properties in stamp duty and registration fees.