RISING INTEREST RATES ARE FORCING MIDDLE-CLASS CONSUMERS TO PRE-PAY THE ENTIRE LOAN OR MAKE PART PAYMENTS.

With housing loan rates hitting the roof and no respite in site, walking away from property mortgages may seem to be a good idea. After all, the northward movement in home loan rates in the last 3-4 years has already sent the monthly budgets of middle-class consumers for a toss, forcing many to even sell their properties to clear the dues.

However, walking away from property mortgages right away involves clearing of entire dues in one go and won't be feasible for many of us. Another option is pre-payment. In fact, those of us who cannot prepay the whole loan immediately can consider making a lump-sum part pre-payment.

"In pre-payment of a property loan, the borrower pays all or a large part of his loan with a lump-sum. The objective is either to close the loan or to reduce the number of installments, usually to negate the impact of rising interest rates. The bank adjusts the lump-sum amount against the outstanding balance of the loan, and depending on the bank, charges a pre-payment penalty," says Pankaj Renjhen MD (Mumbai), Jones Lang LaSalle Meghraj. Pre-payment, thus, brings down the principal amount and in turn the EMI or the tenure of the loan. Depending on what your concern is — paying a higher EMI or having a longer tenure — you can ask the bank to recalculate your loan.

If the consumer has surplus cash (after keeping a reserve for contingencies) or if his/her fiscal situation has improved, one can consider repayment of a portion of his loan so as to keep the EMI burden at an affordable level. "In consultation with his personal financial adviser, one can also consider liquidating some fixed income investments (such as fixed deposits) to repay a portion of the home loan," advises Harsh Vardhan Roongta, CEO of apnaloan.com.

Another option is to leverage 'surplus' such as a bonus or maturing fixed deposits/life insurance policies or national savings certificates etc, and prepay. "There are some investments which are 'locked up' for a time period and liquidating these right then might entail losses — so this might result in a delay before the investment can be 'liquidated' and then, pre-paying the home loan on that future date makes sense," says Kapil Wadhawan, VC and MD of Dewan Housing Finance.

Part-prepaying should, however, be done "if the consumer is absolutely sure that the finances available will not be required keeping a 3-5 year horizon in mind," says Ashish Mehrotra, business manager — mortgages, Citibank India

However, in the first place, one should decide whether the benefits of closing one's home loan early outweigh the income tax benefits of keeping it live. Before one makes the actual prepayment of one's loan, one needs to keep sufficient cash reserves to pay the pre-payment penalty, if any, and to address any unforseen charges that the bank may levy.

Banks allow prepayment of a certain number of EMIs or a fixed number of prepayments during a year free of charge. Beyond that, prepayment attracts charges. This prepayment penalty ranges from 2-3% of the principal outstanding.

You can, thus, save on prepayment charges by making partial pre-payments. "The definition of what constitutes partial pre-payment varies from bank to bank. You can make enough pre-payment to ensure that you still need to pay a few more EMIs (normally 12) to completely clear off the loan. This will ensure savings in pre-payment penalty and at the same time help you to save on high interest costs on a substantial portion of the loan," says Roongta.

However, "if a consumer has the money to pre-pay the outstanding home loan, he must calculate the total net present value (NPV) of both the options i.e. regular installment vs pre-payment. The option with the lesser NPV is preferable," advises Ashish Kapur, CEO, and Invest Shoppe.

In case a customer is servicing multiple loans such as housing loan, vehicle loan, personal loan etc and has to make a choice to repay, he should first evaluate the various loans and then repay the loan based on its cost and impact on cash flows. "As far as housing loans are concerned, they are long-term loans and as such increase in interest rates on home loans would have a much lower impact on the cash flow as compared to car and personal loans which are generally shorter duration loans. Moreover, housing loans have great tax benefits, which makes the effective interest rate lower," says an HDFC Bank spokesperson.

Also, prepayment penalties can be negotiated if you have a good credit history. For a select few consumers, banks may sometimes also waive this penalty. They may be more inclined to ignore or reduce the penalty in situations where interest rates have been climbing after the disbursement of the loan and the loan carries interest lower than the market rates.

                                                                           Courtesy:- ET, dtd:- 21st Sep 2008

PNB SHUTTERS LOANS AGAINST PROPERTY

Other Public Sector Banks Such As Bank of India, Bank of Baroda & Indian Overseas Bank Go Slow On Mortgage Loans Banks have started taking proactive measures to prevent defaults in their real estate portfolio by cutting exposure to loans against property. State lender Punjab National Bank (PNB) has taken a lead and has stopped giving such loans while Bank of India, Bank of Baroda and Indian Overseas Bank have decided to go slow on such loans. While banks have always been cautious and selective on real estate loans, this is the first time a bank has taken a decision to avoid this business. Banks' real estate exposure includes loan against property, and loans to builders. Although home loans are a part of real estate exposure most of them constitute priority sector loans and are not a part of bank's exposure to sensitive sector.

Loan against property

popularly known as mortgage loans — is mostly availed by small businessmen and trader community. Officials from PNB say the decision was taken a few days ago. Other banks have been going slow on such loans for the past few months, although they have not completely stopped it.

Bankers point out that this section of borrowers is typically the one which does not have a balance sheet culture. This makes it difficult for lenders to foreclose a property. "Most traders do not disclose their cash flows to banks nor do they draw balance sheet. Traders avail loans based on property pledged with banks. In case of defaults, banks are unable to gauge the cash flow position," said a senior official from PNB, justifying the stand taken by the bank.

Senior officials from Bank of India and Union Bank of India pointed out that they are encouraging loans where the trader is willing to avail a business loan with property as security. But for a business loan, they need to draw balance sheet. "We are discouraging loan against property by refusing to provide overdraft facility and charging higher margins," they added. Other banks are discouraging such loans by valuing the property at distress level or by valuing the property at the price it was purchased.

Resistance towards such loans is also because real estate loans attract higher capital requirement than other loans. "Besides, if we have to take real estate exposure on our books we would prefer giving loans to builders where we can charge higher interest rates rather than to loan against property to traders," said senior officials. At present, most builders avail loan at interest rates much higher than benchmark lending rates, while loan against property is usually pegged at PLR or slightly higher. PSU banks' PLR stands between 13.75% and 14% while private and foreign banks have pegged it at 16-18%.

In the last two years, banks have been going slow on loans to builders as on several occasions the Reserve Bank of India and finance ministry had expressed concern over these loans. To discourage banks from aggressive lending to builders, RBI had stipulated a higher risk weightage of 150 basis points on loans given to them. This is much higher than 50-75 basis points risk weightage on top-rated borrowers and retail loans

Courtesy: - ET dtd: - 25th Sep. 2008