Author: nilesh.harde

Home Loan Charges

Home Loan Charges

What are charges you may have to pay while taking a Home Loan?

Processing Fee :
Processing Fee is a fee charged by the lender to service the cost of the credit appraisal. This fee can be ranging from 10,000/- upto as high as 1% of the loan amount depending upon (i) Profile of the borrower, (ii) Product that you choose, (iii) Income sufficiency in available documents, (iv) Profession of the borrower, etc.

Legal Fee:
Most lenders engage external law-firms to scrutinize the legal documents of the borrowers. Generally lenders absorb this cost in the processing fee itself. But some PSU lenders take the fee separately from the borrowers.

Franking Fee on the loan agreement:
Some States in India do not have it at all, some have 0.1%-0.2% of the loan amount being payable. For example, if you are taking a 1.50 crores loan, then the stamp charges payable is 30,000/- in Maharashtra & Karnataka.

Application Fee:
Banks take a minimal fee to cover their preliminary expenses towards home, office verification etc. This can range between 1000/- to 5000/- depending upon the lender.

Administrative Fee:
Some lenders split the processing fee into two parts. The one charged after the loan is sanctioned is called administration fee.

Technical evaluation Fee:
For properties which are of high value(depends on lender to lender as to which value they consider as high), there are two valuations done for higher caution. The lower of the two valuations is considered for the lending. Fees if not absorbed by the lender, is collected from the borrower by some PSU lenders.

Franking Fee on the sale agreement:
In some states of India, there is a stamp duty payable on the property agreement with the builder or seller. This used to be a flat fee of 200/- earlier but now been revised to 0.1% of the property cost subject to a maximum of 20,000/-. The good news is, in those states which follow this, allow adjusting the amounts with the final property registration deed upon submission of the agreement in which the fee was paid to the Sub-registrar’s office.

Intimation of Registration:
Intimation to the Sub-registrar’s office is a new introduction of process in Maharashtra. Generally not done by any other States as of now. Though the cost is very low, only 1300/-, but to visit the SRO and doing it is tedious.

Notary: 
If you are an NRI, then all your KYC and the POA(power of attorney) you are executing, depending on the bank’s requirement, needs to be notarized by the Indian Embassy or a local Notary available abroad.

Adjudication Fee: 
To start the process for a home loan application, if you are the POA-holder of an NRI, the notarized POA needs to be adjudicated here in India before submission to the lender.

Indemnity:
This is the way you safe-keep the interest of the lender. the documents reads that if there is any issue because of unavailability of the said document, the sole responsibility is on the borrower and that the borrower indemnifies that the cost of such risk will be completely bourne by the borrower and not the lender. There could be indemnification required for many aspects in your borrowing. For example, if the builder is yet to receive some minor approval from authority or the property tax is yet to be paid completely by the seller or the ‘Khata'(in Karnataka) is not yet transferred in the seller’s name though the deed is registered in his name or the OC(occupancy certificate) is yet to be received by the builder, then the borrower needs to indemnify the lender. There is stamp fee of a few hundred rupees(depending upon the State) and a notarization may also be required.

Mandatory Fire Insurance:
Most lenders who are having a wing of bank assurance insist on this. This is just a list of expenses a borrower might incur.

Documentation Fee: 
For getting the loan agreement signed, getting the ECS mandate activated or a few other formalities, few lenders still do charge this fee. This is generally nominal, 500/- to 2000/- approximately.

Fixed vs Floating rate of interest – What suits you the best

Fixed vs Floating rate of interest – What suits you the best

A home purchase is probably the biggest financial decision and transaction in a person’s financial life. It is a decision that has an impact for many years to come. It is also a transaction that requires planning around your income outflow for many years to come.

A home loan is a prolonged financial commitment that typically stretches for 20 to 30 years during which time, interest rates can change, depending on the economic environment of our country. Considering this, home loan providers give you two options with regard to interest rates. One is the fixed rate and the other is the floating rate.

As evident from their names, the fixed rate loan comes at a per-specified interest rate for a certain period, after which it is repayable at a floating rate; in the case of a floating rate loan, the rate can vary throughout the loan tenure as it is tied to a reference interest rate which changes based on economic compulsions. Each has its own attributes and either can be chosen based on your requirement.

Here’s a look:

Fixed rate home loan

  • Safety from Fluctuations for a predetermined period of time: There could be instances when economic conditions result in an increase in interest rates in general. Opting for a fixed rate gives you a shield against such fluctuations initially and you will be paying a fixed amount of EMI each month during the fixed term. However, after the fixed term is over, your rate of interest will move to a floating plan, e.g., if you have opted for a 5-year fixed term plan, then from the 6th year onwards, your home loan will be subject to the current floating rate of interest. So during the time your interest is fixed, you do not have to keep watching over your shoulders to see where the interest rates are headed

Floating Rate Home Loan

  • Marginally cheaper: Floating rate loans generally carry a slightly lower rate of interest since there is a fluctuation dependency on economic conditions like inflation or growth factor etc. The lender hikes or reduces the rate based on the market conditions. So a floating rate can turn out to be most beneficial during low inflation period.
  • Lower EMI when rates fall: If interest rates remain static or are on a downward trend, you could save money in a floating rate loan as you benefit from the fall in interest rates.

In a nutshell:

The type of loan you should go in for depends on your needs. It’s up to the borrower to decide what to opt for based on what suits him/her the best. If your foremost concern is safety and certainty, you may opt for a fixed rate of interest at the cost of some interest rate premium or otherwise.

Factors to Consider before applying for a Home Loan

Factors to Consider before applying for a Home Loan

Before applying for your home loan you should keep in mind some vital factors such as

  • Rate of interest

Interest rate determines the amount of EMI you will pay. Select a viable percentage which doesn’t pinch your pocket too much and moreover, doesn’t eat up all your income. Home loans generally have 2 kinds of interest rates i.e. fixed and floating. In case of fixed, the rate of interest doesn’t change whereas in floating, it fluctuates as per market conditions and change in government policies. Consumers have an option of switching from fixed to floating or vice versa at any point of time during their loan tenure. Nonetheless, banks may charge a fee for the switch or in some cases the facility might not be available in your chosen home loan. Always clarify these doubts to avoid any hassles later. In addition, it is a good idea to get your credit score from CIBIL prior to applying for a home loan to receive competitive rate of interest and higher financing.

  • Processing fees

Each home loan lender charges a certain amount of processing expenses for carrying out the necessary documentation of your loan. This fee is generally 0.25% to 2% of the loan sum. Although it seems like a small amount, it can increase your home loan expenditure considerably. Some banks offer schemes in which the processing charges are waived in order to draw more buyers. Try and look for banks which levy minimum or no such fees.

  • Documents required

Apart from the basic application form, most home loan companies ask for documents such as residence and valid photo ID proof, bank statements, salary slips, income tax returns, processing fee cheques etc. However, it might vary at times so it’s suggested that you verify if there are any other documents which need to be submitted. Incorrect/late documentation can hamper the loan approval process.

  • Sanction Period

Usually, home loan approval takes approximately 5-7 days if all the documents are correct. But this duration may vary for different banks. Do some research online or speak to friends who have opted for home loans and understand which bank has a good reputation and efficient disbursement.

Growth & dividend options in Mutual Fund

Growth & dividend options in Mutual Fund

What are the options available to a mutual fund investor?

There are three primary options available:

  • ‘growth’,
  • ‘dividend’ and
  • ‘dividend reinvestment’.

If no choice is exercised at the time of application, the fund house will select the default option for that scheme as mentioned in the application prospectus.

How does the dividend option work?

Under this option, you will get paid from the profits made by the fund. Most debt schemes aim to pay a monthly dividend. In the case of equity-oriented schemes, a dividend is declared as and when there is a surplus. An important point to note: dividends in mutual funds are not guaranteed. In the dividend reinvestment option, dividend is not paid to the investor, but is used to buy more units of the same scheme.

What happens to the NAV when dividend is paid?

This dividend gets deducted from the net asset value (NAV) of the scheme. For example, if your scheme has an NAV of Rs 25 and the fund house declared a 10% dividend (Rs 1 on a face value of Rs 10 per unit), the NAV will decline by Rs 1 to Rs 24 after paying the dividend. The NAV goes down to the extent of dividend paid. Investors, who need a regular income, choose this option. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.

What happens under the growth option?

In this option, the scheme does not pay any dividend but continues to grow. If the fund buys or sells stocks and makes a gain, the amount is reinvested into the scheme. This gain is captured in the NAV, which rises over time. If your aim is to build long-term wealth, then the growth option would be the right choice.

Key features of ELSS

Key features of ELSS

With the tax-saving season having begun, many people are thinking of investing in equity-linked saving schemes (ELSS), where they can get equity-like returns along with the benefit of tax saving.

Here is a look at some of the key characteristics and benefits of ELSS:

Benefit of tax saving: Tax Benefit under section 80c of the Income Tax Act can be availed through ELSS upto Rs 1.5 lakh per year by either SIP or Lumsum

Shortest lock-in period: ELSS has the lowest lock-in period of 3 years as compared to other investment avenues.

Discipline savings & potential of high returns: Besides giving tax benefits, ELSS also leads to ‘forced savings’ because of the lock-in. This allows investors to earn market-based benefits over a longer period of time. Returns are more likely to beat the inflation unlike some of the other tax-saving schemes.

No minimum and maximum investments limit: ELSS funds have a lower threshold of Rs 500. Even a one-time investment of Rs 500 can be held till perpetuity. There is also no maximum limit specified for investing in ELSS. However, the tax savings are available on a maximum of Rs 1.5 lakh per year.

In a nutshell, for wealth enhancement and savings for tax exemptions, ELSS could be a preferred choice.

Systematic Transfer Plan (STP)

Systematic Transfer Plan (STP)

What is Systematic Transfer Plan (STP)?

Systematic Transfer Plan (STP) is a strategy where an investor transfers a fixed amount of money from one category of fund to another, usually from debt funds to equity funds. Investing a lump sum amount in stocks or equity mutual fund could be dicey for the investor as equity markets are volatile and returns in equity mutual fund is linked to the performance of stock market. Systematic Transfer Plan helps to keep a balance of risk and return.

BENEFITS OF STP

1. Consistent return – Money invested in debt fund earns interest till the time it is transferred to equity fund. The returns in debt fund are higher than returns from savings bank account and assure relatively better performance

2. Averaging of cost – STP has some integral features of systematic investment plan (SIP). Similar to SIP every month an amount is invested in an equity fund. One of the differences between STP and SIP is the source of investment. In case of the STP, money is being transferred from a debt fund and in case of SIP, from investor’s bank account. Since it is similar to SIP, STP helps in averaging out the cost of investors by purchasing fewer units at a higher NAV and more at a lower price

3. Rebalancing portfolio – An investor’s portfolio should be balanced between equity and debt. STP helps in rebalancing the portfolio by reallocating investments from debt to equity or vice versa. If investment in debt increases money can be reallocated to equity funds through systematic transfer plan and if investment in equity goes up money can be switched from equity to debt fund

How does STP work?

Say if a person wants to invest 60,000 amount in an equity fund through STP, he will have to first select a debt fund which allows STP to invest in that particular equity fund. After selecting the debt fund invest all the money that is 60,000 in the debt fund. Now you have to decide an amount which will be transferred from debt fund to equity fund and the frequency (i.e he may choose 10,000 amount to be transferred in 6 installments on a monthly basis).

Every month on the fixed date amount 10,000 will be transferred from the debt fund to the desired equity fund.

What are types of STP’S?

Fixed STP – In this type of Systematic Transfer Plan the transferable amount will be fixed and predetermined by the investor at the time of investment

Capital Appreciation – The capital appreciated gets transferred to the target fund and the capital part remains safe

Flexi STP – Under Flexi STP investor have a choice to transfer variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market. If the NAV of the target fund falls investment can be increased to take benefit of falling prices and if the market moves up the minimum amount of transfer is invested to take advantage of increasing prices. Transfer facility is available on a daily, weekly monthly and quarterly interval

Systematic Withdrawal Plan (SWP)

Systematic Withdrawal Plan (SWP)

What is Systematic Withdrawal Plan (SWP)?

A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. Systematic withdrawal plans are used by investors to create a regular flow of income from their investments. Investors looking for income at periodical intervals usually invest in these funds. Often, a Systematic Withdrawal Plan is used to fund expenses during retirement.

Systematic Withdrawal Plans is of advantage to investors who require liquidity as it allows account holders to access their money exactly when they need it. This makes it easier for the account holders to carry out their financial plans and meet their goals.

How does SWP work?

When you want to sell mutual fund you usually have two options either sell all at once or opt for a Systematic Withdrawal Plan. Systematic Withdrawal Plan, allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.

As per your instructions the Mutual fund will redeem an equivalent amount of mutual funds from your account as per the prevailing Net Asset Value (NAV). This process helps investor to get a fixed amount of money every month or quarter.

Let’s understand this process with the help of an example:-

Let’s say you have 5,000 units in a Mutual Fund scheme. You have given instructions to the fund house that you want to withdraw 8,000 every month through SWP. Now let’s assume that on 1 December, the Net Asset Value (NAV) of the scheme is 20.

Equivalent number of MF units = 8,000 / 20 = 400
400 units would be redeemed from your MF holdings, and 8,000 would be given to you.
Your remaining units = 5,000 – 400 = 4600
Now say, on 1 January, the NAV is Rs. 21.
Equivalent number of units = 8,000 / 21 = 380
380 units would be redeemed from your MF holdings, and 8,000 would be given to you.
Your remaining units = 4600 – 380 = 4220

In this way, units from your mutual fund holdings are redeemed in a systematic way to provide you with continuous income.

What are types of SWP’S?

Under SWP, withdrawals can be fixed or variable amounts at regular intervals. These withdrawals can be made on a monthly, quarterly, semi-annual or annual schedule. The holder of the plan may choose withdrawal intervals based on his or her commitments and needs.

SWP is usually available in two options:

Fixed Withdrawal: Under this you specify amount you wish to withdraw from your investment on a monthly/quarterly basis

Appreciation Withdrawal: Under this you can withdraw your appreciated amount on a monthly/quarterly basis

Steps to secure your child’s future using mutual fund

Steps to secure your child’s future using mutual fund

When it comes to future of your child, you do not think twice. You will do whatever it takes. You can build it brick by brick and one step at a time without hurting your finances. Mutual Funds are a way to go.

Here are 5 steps to secure your child’s future with mutual funds

1. Set Goals

Know the purpose you wish to save for and invest the money accordingly. It could be an international school admission or a professional degree at a university. Set your sight on a figure that will ensure your child gets the education he or she wants.

2. Save First

Once you know your goals, set aside some money before you spend the rest. It is important to get into a good savings habit every month as this is the stepping stone to your child’s secured future.

3. Start with SIPs

A way to get into a discipline of investing is by using SIPs. Systematic investment plans or SIPs help you in ‘rupee cost averaging’. This means you buy more units when markets fall and lesser units when markets rise. You can start with as little as Rs 500 every month.

4. Use SIP Top Up

As your income grows, you could boost your allocation to SIPs by using the SIP top up. This increases the amount you set aside each month for your child’s future. A timely top up can make a significant difference to the final amount you receive when you need it.

5. Do not stop investing

You must continue with your monthly MF investing habit till you meet your goals. If you stop investing for some reason, figure out a way quickly to replenish the child education kitty. The more you stay away, the more you hurt your prospects of reaching your goals on time. It makes sense to allocate your SIPs into diversified equity funds. You money grows along with your child. To reap the benefit, you need to give your money that much time

Tax benefit on Home Loan – Part 2

Tax benefit on Home Loan – Part 2

Tax benefit on home loan interest

  1. The interest component in the EMI can be claimed as deduction from “income from house and property“ under Section 24 of the Income Tax Act.
  2. The maximum tax deduction allowed under Section 24 is 2 lakh for self-occupied property and if the property is not self-occupied, there is no maximum limit.
  3. The interest payments for the year shall result in a loss under the head “income from house property“ which can be adjusted in the same year against other heads of income including salary.
  4. If the property is not completed within three years from when the loan was taken, then the interest benefit drops to 30,000.
  5. The pre-construction interest can be claimed from the year when the construction is complete in five equal installments.
Tax benefit on Home Loan – Part 1

Tax benefit on Home Loan – Part 1

Principal repayment of home loan

  1. The principal repayment component in the home loan EMI is allowed as deduction under Section 80C of the Income Tax Act.
  2. The maximum tax deduction allowed under Section 80C is 1.5 lakh, which includes investments in other instruments also.
  3. This deduction is allowed only after the construction is complete and completion certificate is awarded to the buyer.
  4. Payment made towards stamp duty and registration charges are also allowed to be claimed under Section 80C in year in which paid.
  5. In case the assesse transfers property on which he has claimed tax deduction under Sec 80C before 5 years, deduction claimed shall be deemed as income in year that the property was sold and taxed accordingly.