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How to save money on your home loan
In an online chat with Get Ahead readers, Rajiv Raj of CreditVidya.com answered home loan queries.
Here are the unedited chat transcripts.
romil: Is this the right time to go for a home loan?
Rajiv Raj: The Home loan rates are softening and builder are offering discounts on property. This may be time to evaluate your loan requirement, please research and negotiate with lenders to get the best deal on loans
vijay: How can I save money after I get a home loan? Where can I make a cut?
Rajiv Raj: You can save money even if you have taken a loan by evaluating on interest options in the market. You can now switch your loan and close without prepayment charges. You need to have a strong credit profile to get loans at cheaper rate of interest.
bhanu: Builders are also promoting schemes like no stamp duty, free stamp duty and registration. How reliable are such schemes?
Rajiv Raj: You need to ensure that they are not building these cost on the sale price of the property. Please do a research on the market offering before taking such schemes
omi: How to negotiate with banks to reduce processing fees and other administrative charges?
Rajiv Raj: You will be able to negotiate with lenders if you have a good Cibil score along with your ability and stability of employment or business as the case may be.
Hiya: Many builders are now promoting the 20:80 scheme? Is this a con? How do builders benefit out of such schemes? How to buyers benefit?
Rajiv Raj: There are pros and cons to 80:20 schemes, the reputation of the builder is key factor in such schemes. The borrower is liable to banks in case the construction stops due to any reasons. RBI has also disallowed this approach recently
jitesh: Schemes promoted by banks like money-back, one EMI less, no processing fees etc... are they just traps to entice borrowers? Or are there any tangible benefits?
Rajiv Raj: These schemes are to attract customers, however you need to evaluate the offering in detail before agreeing to the terms
hardik: What role does credit score play in saving money on home loans?
Rajiv Raj: With good Cibil score you will be able to negotiate for attractive rate of interest resulting in saving on money. If you can get 25 basis point low on Home loan it will result in reasonable saving over a period of time
dananjaypuri: Any idea despite there being flat sales in all major metros, housing prices are increasing despite falling down? What are the reasons home rates are not falling down in Mumbai despite high inflation, high borrowing costs and developers building up huge inventories? What makes these builders not blink despite such adverse economic conditions?
Rajiv Raj: Yes builder will hold the property but beyond a point in my view they will have to reduce the price if sales are not happening to liquidate the stock
The recent study by NHB has indicated that home loan prices have come down in 22 cities which they have data. I am sure pricing will moderate as demand goes down. Builder may have holding capability but will blink some point in time
Vinayak Tavade: What negotiations or things one must keep in mind before applying for home loans and reducing costs? Are there any sure fire ways to get low EMIs?
Rajiv Raj: You need to first build a good credit profile in order to negotiate with banks, Banks normally evaluate you basis your ability, stability and creditworthiness. You negotiate for cheaper rate of interest if your credit score is good
rakesh: Is it legal for banks to take conversion charge to increase spread? Is it allowed by the RBI?
Rajiv Raj: This is banks policy to levy conversion charge and may apply till it is disallowed by RBI
naman: Why do banks charge higher interest in the starting resulting in low payment of principal amount?
Rajiv Raj: This is how banks have structured your EMI. In my view you can make part prepayment in the initial year of the loan tenor to save money on interest. Banks now allow prepayment to loans without any additional charges.
shahin: Why do banks charge higher interest rates if the CIBIL credit score is low? Will they charge a fine interest rate if my CIBIL score comes out at 950?
Rajiv Raj: Banks may decline loans if your Cibil score is low. If you have a high score you would get loans from lender seamlessly. Cibil score is in the rate of 300 -900, a credit score of 750 plus is a good score
hitansh: What should existing customers look forward to when banks offer discounts and low interest rates to new customers but continue with high interest rates for their old customers?
Rajiv Raj: If your loan is linked to the base rate of the bank, you will get benefited whenever the bank reduces their base rate. You have alternative of switching the loan to another lender if the offer is attractive and you may save money on interest payments
tushar: My home loan from a premier lender is under dual home loan scheme in which initially it was fixed basis and from April 2013 its on floating basis. I want to shift my lender but my current bank is asking for a foreclosure charge of 2 per cent. Is this foreclosure charge too high? Can I negotiate with them to make it 0.5 per cent.
Rajiv Raj: Tushar - Banks cannot levy foreclosure charges as RBI has removed the penalty on home loan foreclosure. Please check with your lender, it is advisable to transfer if the interest rate differential is reasonable
Jeswal: What do you think is the future of home loan rates in India? I want to buy a home in Mumbai sometime next Diwali. My budget is 70 lakh including the home loan? What kind of ineterest rates will prevail next Diwali in India?
Rajiv Raj: In my view the home loan rates will soften, today major lenders such as SBI and HDFC have reduced home loan rates. Please start doing a research on the rate available in the market and build a strong credit profile to get loans seamlessly
jinny: I have an existing home loan from one of the best lender in the country. To reduce my interest by one per cent they asked me for a fee of 0.5 per cent of the outstanding loan amount. Shall I go for it? Will it save me money?
Rajiv Raj: Jinny - this would depend of factors such as your loan size, tenor remaining, interest rate differential. It is advisable to transfer if the interest rate difference is more than 100 basis points
sheetal: What is more advisable in the current economic scenario: Fixed or floating rate home loan? In which type do we save more money?
Rajiv Raj: I would advise to go for floating rate of interest as you will get benefited as and when interest rate go down. In the current scenario there is strong possibility of interest rate softening in future. Further you will not get fixed rate home loan for longer tenor and the rate of interest is higher to floating rate loans
mustafa: Dear Rajiv. How much money can one save on a Rs 18.5 lakh loan, that results in an EMI of Rs 23k per month. When I started this loan my interest rate was 10.25. Now it is 11.75. How do I save money on my home loan?
Rajiv Raj: You will be able to save 100 to 125 basis points on your home loans, your actual saving will depend on the tenor left for repayment
alex: Can switching my home loan lender help me save money? How much? How can I get the best rate if I change my current home loan lender?
Rajiv Raj: You will have to do a research on the market rate prevailing few of the lending banks today have reduced the rate of Home loan. Evaluate your saving before switching your home loan
Amit Shellar: How will HDFC and SBI cutting interest on home loans affect people who have already home loan borrowers?
Rajiv Raj: You have the option to reprice the loan with the existing lenders by paying a nominal processing fees if gap in interest rate is high, however please do a math on total saving before taking this decision
Manasi Nath: What are the ways you would suggest in which we can save money on home loans?
Rajiv Raj: Few steps which you need to do is research the market, negotiate with lenders and build a strong credit profile so that you get attractive rate of interest on loans
kavita bavekar: Is this the right time to go for home loans? Since inflation is so high what are the chances that interest rates will come down the next year?
Rajiv Raj: For genuine home buyers this would be right time to buy as in few location prices of homes have moderated and there is possibility of interest rate softening
Aatish Jagmanani: Are there any ways in chich home buyers could negotiate with developers to get the best rate per square feet?
Rajiv Raj: Yes your can negotiate with developers, now few of the developers do offer some freebies and discount on the property
Sonal: Hi Rajiv, how do i get my Cibil report?
Rajiv Raj: You can now get your Credit report from any of the credit information companies such as Cibil, Equifax or Experian. You can get your report online from Cibil by successful authentification
Visit http://rediff.ly/1gsxk and duly fills in the online request formStep 2: Make payment of Rs. 470 Step 3: Answer 3-5 questions based on your credit history to authenticate yourself
neetasinha: How do we go about negotiating a better rate for home loans?
Rajiv Raj: You can negotiate with banks basis your creditworthiness, ability and stability of repayment
Sonal: Why do banks charge penalty if one repays home loan before the end of their tenures?
Rajiv Raj: Now there is no penalty for home loan prepayments, RBI had removed the penalty on floating rate of interest last year
hezal: What kind of measures should i take to help me save money on home loans after I start paying EMIs?
Rajiv Raj: You need to maintain a good credit history and score. This will provide you with bargaining power with existing lender or new lender should you wish to reprice the loan
Nitin Deshmukh: Why do banks always have lower interest rates for new customers but treat their old customers shabbily when it comes to reducing home loans?
Rajiv Raj: You can go back to the bank to renegotiate on the rates and can avail new rate by paying a nominal processing fees.