Will RBI’s new base rate guidelines help borrowers?

The much-awaited Reserve Bank of India (RBI) guidelines on calculating the benchmark lending rate are finally out. In yet another attempt to make banks pass on policy rate cut benefits to borrowers, the RBI has brought out a new methodology: Marginal Cost of Funds based Lending Rate (MCLR). Marginal funds refer to money raised by banks in the last month or quarter before the lending rate review. The new methodology will come into effect from 1 April 2016 and is expected to curtail banks' ability to hold on to higher base rates despite the RBI slashing rates.

How it works

So far, banks followed diverse methodologies for computing the minimum rate at which they could lend—the base rate. Now, the RBI has asked all banks to follow the marginal cost of funds method to arrive at their benchmark lending rate. MCLR will be calculated after factoring in banks' marginal cost of funds (largely, the interest at which banks borrow money), return on equity (a measure of banks' profitability), negative carry on account of cash reserve ratio (the cost that banks incur on account of keeping reserves with the RBI), operating costs and tenure premium (longer the loan term, higher the interest/premium).

The actual lending rate will be MCLR plus the spread determined by banks after taking into account their business strategy and credit risk of the borrower, among other parameters.

Banks can review MCLR once a quarter till March 2017, after which they will have to publish the MCLR on a monthly basis. Lenders will also have to specify the interest reset dates on their floating rate loans. They can either grant loans with reset dates linked to the date of sanction, or the date of MCLR review. The Home Loan Interest Rates charged to a borrower will be applicable until the next reset date. The gap between two reset dates cannot be longer than a year.

Core benefits

The RBI expects the new formula to make floating lending rates more responsive to its policy rate cuts. Ratings agency ICRA believes that the norms will improve policy transmission for new borrowings. "(MCLR) will impact new borrowers immediately: they will benefit in a declining interest rate scenario and take a dent when interest rates are rising," says ICRA. Even existing borrowers will have the option to switch to MCLR when it is introduced.

[Source: http://economictimes.indiatimes.com/wealth/borrow/will-rbis-new-base-rate-guidelines-help-borrowers/articleshow/50330944.cms]

Loan Basics: A guide to NRI home loans

One of the most sought-after investments for Non-Resident Indians (NRIs) is buying property back home. At a time when the Indian rupee is weakening against the US dollar, taking a home loan in India could be a good option for the NRIs rather than using up all the money earned in the foreign currency. Are NRIs allowed to take a home loan in India? Yes, they have. “NRI Home Loans” are offered both by banks and Non-Banking Financial Companies (NBFCs). Here we take a look at what is required to avail this loan and how it differs from a normal loan taken by a resident Indian.

Paper work

For the documentation process, a copy of your passport, visa and employment related documents such as your three to six month salary slips, appointment letter, and employment contract if any and address proof are mandatory. These documents can be submitted to the overseas bank branch located the closest to you, in the country where you reside. The documents are then sent to the Indian branch for processing. Note that the overseas branch just acts as an intermediary for collecting and sending the documents to India. The verification process happens only in the Indian branch.

Loan tenor and interest rate

Earlier there were differences in the interest rate charged for a NRI home loan and for the ones offered to resident Indians. But now the rates are the same. “The Home Loan Rates and other charges like processing fee for NRI home loans are the same as offered to resident Indian. Also, loans to NRI are of larger average size of ₹40 lakh when compared to an average size of ₹23.5 lakh for a resident Indian home loan.

Tax implications

On a home loan, a resident Indian can avail a tax benefit on repayment of up to ₹1.5 lakh on the principal component and ₹2 lakh on the interest component. Can the NRI who repays the home loan also avail of tax benefits? Most of the NRIs who are currently serving their home loans are not aware of the tax implications on their loan repayment. They just earn their incomes abroad and repay their loan.

[Source: http://www.thehindubusinessline.com/portfolio/beyond-stocks/loan-basics-a-guide-to-nri-home-loans/article7880720.ece]

Selling a house? Watch out for tax implications

It's critical to keep an eye on the calendar when you sell your house. If you don't time it well, you could end up paying a hefty tax. If a property is sold within three years of buying it, any profit from the transaction is treated as a short-term capital gain. This is added to the total income of the owner and taxed according to the slab rate applicable to him. For those earning over Rs 10 lakh a year, this shaves off 30% of the profits from the sale.

Also, if a house is sold within five years of the end of the financial year in which it was purchased, the tax benefits claimed go out of the window. The tax deduction claimed for the principal repayment, stamp duty and registration under Sec 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched.

This is why it is advisable to hold a property for at least three years. If you sell after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the inflation during the holding period and accordingly adjusts the purchase price, thereby slashing the tax burden for the seller. There are other benefits too. The owner can claim various exemptions in case of long-term capital gains, but no such benefit is provided for short-term gains

"Expenses incurred on repairs and renovation can be added to the cost of acquisition of the house while computing long-term capital gains. Also, the interest paid during the pre-construction period of the house can be added to the cost, if not already claimed as a deduction earlier

How to avoid tax

There are several ways to avoid paying tax when you sell a house and Home Loan Processing Fees. There is no tax to be paid if you use the entire gain from the transaction to buy another house within two years or construct one within three years. The two- and three-year period applies even if you bought another house a year before selling the first one. But the property should have been bought in the name of the seller.

If you are not keen to lock-in your gains from sale of the house in another property, there is another way out. You can claim exemption under Section 54 (EC) by investing the long-term capital gains for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house. However, one can invest only up to Rs 50 lakh in these bonds in a financial year.

Tax tips for house sellers

1. If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.

2. The exemption is still allowed even if the builder of the new residential construction fails to hand over the property to the taxpayer within three years of purchase.

[Source: http://economictimes.indiatimes.com/wealth/tax/selling-a-house-watch-out-for-tax-implications/articleshow/52583834.cms]

Get the right value of your money by calculating interest rates….

Owning a house is one of the biggest financial goals for many people who wish to buy their dream property. Till a few years back, buying a home seemed to be a daunting task for the common man because of huge property rates, tedious process of application and waiting for months for loan approval. Traditional finances were always a costly option in terms of extremely high-interest rates, stringent payment measures with no time flexibility. 

Borrowing from friends and relatives always had a chance of creating a rift in the relation. Thanks to the efforts taken by leading government and private sector banks & finance companies in India who offer home loans under several customized schemes to common masses to buy their dream homes easily. The process of home approval is quite simple as gone are the days when people had to visit branches to collect the form, filling up, attest the copies, submit with demand drafts and then wait for months on home loans approvals.

While availing housing finance, home loan interest rates are one of the most essential elements associated with it. Without sufficient and careful guidance, it may make a big hole in your pockets in the long run. The most important thing for housing finance interest rates is the fluctuation in the rates based on the market volatility. Therefore, a careful consideration has to be done when it comes to avail a loan and the interest rates applicable to it.

Home loans in India can be taken at interest rates as low as 9 to 10% and come under fixed or floating rate basis concept. Under fixed rate loan the ROI remains constant throughout the loan period, while in floating rate loans the ROI is linked to market conditions and may change periodically. They could be linked to the base rate, inflation, or other parameters, each bank selects its own methodology to fix this base rate. These home loan interest rates have to be declared by the bank each quarter. Some leading private sector banks offer loans in the form of adjustable rate of interest loan, Trufixed loan (2 to 3 year fixed rate variant) or Trufixed loan (10-Year Fixed Rate Variant).

The most beneficial aspect of a person starting with a fixed rate is the interest applicable stays almost constant through the payment tenure. Although, it’s revised every 5 years but the margin is more or less the same. You can have a preset mind towards your loan repayment. You can cut down the expenses, save money in advance and keep the repayment at a set mode. 

In case of floating home loans interest rates, the rate depends on the market volatility, inflation and other economical parameters that could impact the home loan policy. Although, there is always a plus point of getting fairly low rate of interest in floating basis, but you will  also have to save for the days of shooting interest rates. Thus, the fluctuations in the financial market are very sudden and volatile for the common person and rapid changes can hold anyone unprepared.

An understanding of what influences current and future fixed or adjustable rate mortgage rates will help you make financially sound mortgage decision. This knowledge can help you take a decision about whether to choose an adjustable over a fixed rate. You can decide when it makes a sense to refinance your home loan structure. The main objective is home loan interest rates should be curbed so that your home loan gets easier on your pockets in the long run.

Smart moves in a falling interest rate regime

In their first policy review, the new Reserve Bank of India (RBI) governor and the Monetary Policy Committee (MPC) debuted with a repo rate cut of 25 basis points (bps), bringing it down to 6.25 per cent. While fixed-income investors stand to lose from falling interest rates, borrowers stand to gain. Both need to realign their strategies to make the most of this low rate environment.

One more rate cut, perhaps

Experts say rates may soften a little more. "RBI is comfortable with an inflation range of four to six per cent. India is experiencing significant disinflation, with further disinflation possible in pulses. The next few inflation readings may print significantly lower than the RBI's suggested inflation trajectory.

The majority view is that we may now be close to the end of the rate cut cycle. Only a few believe that interest rates are headed structurally downward, allowing for further rate cuts of 100-125 bps over the next 18 months.

Fixed deposits

Fixed-income investors should invest in products that match their risk profile. "When rates begin to fall, investors typically begin to invest in products that are too risky for their profile.

Investors in the highest tax bracket looking to lock into current rates for the long term may buy tax-free bonds from the secondary market. These offer a yield-to-maturity of 6.25-6.35 per cent. Those in the lower tax brackets may bet on highly-rated corporate deposits.

Shift to lower rates

(Home Loan Offers) Interest rates on home loans have come down by around 50 bps since the beginning of the year, with the best rate available declining to 9.25 per cent. If banks decide to pass on a greater portion of the fall in interest rates to customers, home loan rates could fall further.

While new borrowers get the benefit of the latest rates, older borrowers could still be stuck at higher levels, especially if they had borrowed under a different regime, say, base-rate linked, instead of MCLR-linked.

[Source: http://www.business-standard.com/article/pf/smart-moves-in-a-falling-interest-rate-regime-116101200927_1.html]

Indian Real Estate: Looking Back... And Forward

The structural adjustment programme of the early 1990s initiated the liberalization of the Indian economy. The roots of the high appreciation rates on India's property market witnessed during the boom period lie in the reduction of interest rates that were instituted from year 2001 by Government’s continued policy of liberalization of economy initiated in 1991. In early 2004, home loan rates sank to a record low of under 7.5%, and this paved the way for the spiking that typified the country's property rates in many Indian cities.

The very amenable borrowing rates encouraged individuals to avail of home loans to buy residences, where actual property purchase had only been an option for the considerably rich before that. This also brought down the average age of a home purchaser from late 50s to mid-20s, a big change in the way India was buying houses before.

This resulted in a huge demand for real estate all over the country post 2003. After March 2005, Indian real estate rates displayed a seemingly unstoppable upward curve. This was also related to the opening up of FDI in real estate. The market then proceeded to expand at an unbelievable rate, both size-wise and price-wise - in three years, prices were doubled, and so was the construction activity. Adding to this was purchases of large land parcels by developers all over the country. Land banks of this size were never created before. Developers were going places and exploring new territories, and a sense of national players was building up.

This continued right until the slowdown that manifested itself in 2008. The Lehman debacle and the subsequent foundering of global economies were indeed hugely operative factors in this, with changes in House Loan Interest but the fact remains that India’s real estate sector had also reached a stage where maturity was of the essence. In any case, the slowdown served the purpose of bringing many a location and its overenthusiastic rates to its knees.

Tracing the bust…

The slowdown was predominantly brought on by the sharp rise in property rates seen over the preceding 2-4 years, and a large proportion of investor purchases (at times as much as end user purchases) eventually added to the supply of houses. The result was a misleading demand assessment. An adjustment of such irrational growth was therefore natural and expected.

Today, real estate prices have corrected in most overheated locations. Residential, office and retail were all impacted at various levels, but the greatest need for correction was in the residential sector, which had seen the highest price appreciations and as a segment is more sensitive to non-amenable lending norms. The exact degree of impact varied across locations, influenced by local market dynamics and property formats.

In ‘Real’ terms…

The current market dynamics have served the purpose of bringing about a renaissance in the Indian real estate sector. Realistic retail and commercial spaces which are in tune with actual market demand dynamics are now becoming a reality. In the residential space, developers who had previously focused largely on luxury spaces for the cash-rich IT/ITeS and HNI buyer segments have begun launching housing projects for the common man.

Granted, this dynamic is a fluid one which is primarily influenced by the overall performance of the economy. In other words, developers have in the past reacted to upward movements by diluting their focus on affordable housing and going back to higher-priced formats and offerings. However, the incumbent Government's determined drive towards 'Housing for All by 2022' has made its mark with several new incentives for developers and buyers of budget housing. This will ensure that a good cross-section of Indian builders will retain their focus on affordable housing and mid-income housing for at least a few more years.

Even today, the dominant trend in India is a huge demand-supply mismatch in the housing sector. This would indicate that residential property prices will rise again – and we are indeed witnessing the first signs of this happening already. The corrections that have taken place in overheated cities were required, since developers had priced themselves out of the market. The fact that the slowdown forced them to rationalize their rates has been working to the developers' advantage, and one would have assumed that the recent market dynamics had delivered a clear and unequivocal message.

That said, the rollercoaster ride that Indian real estate was on will not see the same exhilarating twists and turns for some time to come. The onus from now on will be on affordable housing and mid income housing in the residential sector, efficient buildings – in terms of both energy consumption and space utility, at infrastructure serviced locations in the office sector and well-researched expansion plans in the retail sector. The present market vagaries have force-fed transparency into Indian real estate.

[Source: http://www.indiainfoline.com/article/article-latest/indian-real-estate-looking-back-and-forward-116080100157_1.html]

Home Loans