The Telegraph
Since 1st March, 1999
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On the home front

On the crowded footpaths of Dalhousie Square where you could barely complete your stride without kicking the man ahead, you could even buy a house now.

On the doorsteps of the Dalhousie branch of a leading home loans company, sat a few young men with the model of a housing complex that is under construction in the eastern fringes of Calcutta.

They approach everyone emerging from the office or passing by. “Sir, have you thought of buying a house' Why don’t you take a look at this building that we are constructing'” they ask, as they give you a backgrounder on the builders and the property.

There is no paucity of choices and no dearth of lenders either. The amount that you could borrow is linked to your income and it can be as much as Rs 1 crore. The funds can not only be used to buy a new house but also to upgrade your present dwelling.

Banks would provide up to 85 per cent of the cost of property in loans.

Says an HSBC executive: “Sir, we offer the best rates — we charge 7.75 per cent for loans repaid in five years. We don’t have a rack rate as such, but we normally say it’s 8.75 per cent for loans repaid in 10 years and 9.25 per cent for loans paid back in 20 years. But give us a better deal and we would match it.” HSBC could cut interest rates on home loans by up to 1 per cent, he claims. Thanks to intense competition, you could manage a bargain discount of 25-50 basis points on the rack rate from all private institutions.

Every banker would egg on you to settle for floating rate. It’s cheaper than fixed rates, but mind the fact that the World Bank thinks interest rates in India might have bottomed out.

The World Bank says in a recent report that interest rates in India could start moving up, and if that happens, you might eventually have to pay a much higher interest by opting for floating rate.

An HDFC executive, however, says. “It shouldn’t be too concerning for customers. We have allowed our old customers paying 12-14 per cent in interest previously, to switch to current floating rates. I am sure we should be able to work out a solution if rates start moving up.”

It’s not HDFC alone that has allowed its old customers to switch to current interest rates. Even nationalised banks — the likes of State Bank of India, Central Bank of India and Allahabad Bank — have allowed customers to switch to current interest rates. Switching entails a small fee, which ranges between 0.5 per cent and 2 per cent of the outstanding amount.

If your bank isn’t as generous, you should consider prepaying the outstanding amount by borrowing from another lender. Transferring a loan would cost a small processing fee besides the prepayment penalty that ranges between 2-4 per cent of the outstanding amount.

Some private banks like Standard Chartered have introduced innovative products to beat competition. Its HomeSaver scheme operates like a current account, and interest is calculated on daily reducing balance.

“The balance in your HomeSaver account is deducted from your loan amount when calculating the interest. If you maintain a considerable balance and pay the EMI regularly, you could actually repay your loan much faster, and effectively pay a much lower interest,” explained a StanChart officer.

A similar facility is offered by HSBC to customers borrowing at floating rates. You could prepay up to 25 per cent of your loan amount in a year without having to pay any penalty. This means whenever you have surplus cash you could pay down your debt and save on interest.

Thanks to cheap funds and the tax benefits on home loans, some experts have been recommending real estate as a good long-term investment. For some, home loans are a tax-saving device. The interest paid on home loans is deducted from your salary for calculation of taxes, which effectively reduces the interest by 30 per cent.

However, the government had nearly withdrawn the tax incentives on home loans earlier this year. Banks and housing finance companies have managed to convince the government to extend it, but the incentives may not be available for too long.

If you are planning to buy a house, you should not only shop for the best deals on loans, but also pay a great deal of attention on the legal issues.

Builders are known to promise more than they deliver, and you shouldn’t rely entirely on your financier to sort out the legal issues. Jargons are confusing and it’s quite common for people to find later in the day that the property they bought is smaller than what they paid for.

And if you are the sole earner in the family, you could consider buying a credit insurance to ensure that in the event of your death before repayment of the loan, your survivors do not have to repay it. Insurance companies like HDFC Standard Life and SBI Life have custom-made products for credit insurance. It costs a few thousand rupees, but guarantees peace of mind.

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