A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market. Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens.

Such individuals could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

How does the process work

You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.

The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty was earlier levied by the existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. However recently  NHBs and some banks like ICICI and SBI have waived this fee, but some banks could still charging a penalty. Do check with your bank and try to negotiate a waiver as the RBI and NHB mandate clearly are not in favour of penalty for prepayment in the case of a floating interest rate loan. Also, remember that you will also need to pay a processing fee to the new lender, which could also be negotiated and waived in this high interest rate regime.

This can range anywhere between 0.5% to 1% of the loan applied, most banks restrict this amount to Rs.5000.

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

The current interest rate climate however looks unfavourable for a switch unless you want to do it for other reasons. Starting this new year all major banks have increased their interest rates by 0.25% to 0.75%. More hikes are expected after the RBI monetary policy review slated for the end of January.

Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank  etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.

Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.

Service issues: Sometimes you might just be unhappy with your bank’s service and accessibility, which might prompt a change.

Things to watch out for:

-        It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.

-        In the recent past a loan transfer was the most sought after when teaser loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.

-         Get a statement from your current lender stating that property documents will be dispatched within a certain time frame to avoid hassles on this front.

-        Remember that a loan switch will not be possible if you have been irregular with your loan repayment with your current lender.

It is a good idea to categorize your payments under different headings like daily living expenses, entertainment and vacation, health etc. This will give you a fair idea of how much you spend on different categories. It is easier to keep track and also control your expenses once you know how much portion of your earnings goes into each expense.

Getting married? Starting a job? Getting further education? Starting your own family? Have you planned for these important phases in your life? Good control over your personal finances will help you achieve the goals you have set for yourself and cope with changes in your life. How can you achieve that? The answer is having your own personalized budget.

How do you draw a budget that suits your need? Say, you are interested in taking an educational course and are thinking of taking a student loan. How will you accommodate this additional expense? To begin with, you need to draw your personal budget.

- The first step is to calculate your monthly income. Consider income from all sources including income from your investments. ——- A

- Next, make a list of your monthly expenses. For example, if you are a salaried employee, list your routine expenses like expenses on commute, food expenses, utilities, clothes, charities etc. Then think of any extraordinary expenses that you may have to incur during the budgeted period, such as home improvement projects or purchasing a car. ——- B

- It is a good idea to categorize your payments under different headings like daily living expenses, entertainment and vacation, health etc. This will give you a fair idea of how much you spend on different categories. It is easier to keep track and also control your expenses once you know how much portion of your earnings goes into each expense.

- Calculate the difference (A – B = C).

- The next step is to redraft your personal budget to include expenses related to the educational course like interest and principal payment, course fees, expenses on tuitions and books, loss of wages etc. If you still have a comfortable surplus of cash (C), you can finalize this budget. If not, consider the expenses that you can avoid and reconsider the amount of loan. Once you reach a bottom line that you are comfortable with, finalize your budget.
- When you decide the cash surplus / short you will be comfortable with, you should also think of the percentage of income you would ideally like to save for your future. Think of short term as well as long term or retirement savings.

You may compile your budget into an excel sheet or use a physical book or diary. Alternatively, there are several free softwares available online for the taking.

Here are a few tips of a working budget:

- Keep your working sheet as simple as possible and keep it clean. Each item and category should be clearly defined.

- It is a good idea to create a flexible spreadsheet or if you have a hand written budget in mind, leave – enough space to add items of income or expenses in the existing budget.

- Maintain budgets on a continuous basis. Ideally, one should have a monthly budget rolling into an annual budget. The annual budget should also be in line with the long-term budget.

- An important part of budgeting is keeping track of actual income and expenses and calculating variances. If variances are beyond acceptable limits, then it is time to revisit your budget and make necessary changes.

- If you have a long list of income or expenses, it is advantageous to use excel or other computer software. For example, by using excel you can add comments, format your sheet, create reports using certain information from the excel sheet.

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Make provision for important events in your dependents’ lives. Your dependents will experience certain important life events, and you have to provide for these events. E.g. illness of the dependents, children’s education and marriage. Also once your children leave home or start working, then your household expenses will reduce. So from then on, you just have to think about your spouse.

Satish was married with a wife who was a homemaker and a 2 year old son. He bought a life cover of Rs. 5lakhs. But one day, Satish met with an accident and passed away on the spot. His wife got the sum assured from the insurance cover. However the claim amount she got was very less. She found it difficult to meet her household expenses after the untimely demise of her husband, as the compensation she received was not enough to meet her regular household expenses. Why did it happen? The reason: HLV was not taken into account when determining the life cover for Satish.

Here we cover what is HLV, its importance and the steps to determine the actual HLV. 

What is HLV?

HLV or Human Life Value is the probable income of the insured person, or the total income the person is likely to earn during the remaining part of working life. E.g. A person aged 24 will work till 60 years of age. If he is expected to earn Rs. 90 lakhs throughout his life, then his HLV is Rs. 90 lakhs. This is not the actual income but rather the target that you should try to achieve in order to live a secure life and to take care of your dependents should you die in unfortunate incidence.

Importance of HLV

We all want our dependents to remain safe and well provided for in case of our death. This can be achieved by buying the appropriate insurance cover. To get the correct insurance cover, you must compute the HLV. Unfortunately most people tend to ignore this important calculator.

Steps to calculate HLV

Are you wondering how to calculate HLV? Then here are 6 simple steps to help you achieve that goal.

- Calculate the period over which you intend to provide for your dependants. If you are married, the period should include the remaining lifetime of your spouse. To do this you have to assume how long you expect your spouse to live. Then subtract your spouse’s age from this expected lifespan. E.g. if your spouse is 35 and you expect your spouse to live for 100 years, then you will be required to provide for next 65 years.

- Make provision for important events in your dependents’ lives. Your dependents will experience certain important life events, and you have to provide for these events. E.g. illness of the dependents, children’s education and marriage. Also once your children leave home or start working, then your household expenses will reduce. So from then on, you just have to think about your spouse.

- Calculate your present household expenses. Find out what are your present monthly expenses and from that deduct the amount you spend on yourself. E.g. if your monthly household expenses is Rs. 30,000 and you spend Rs. 10,000 on yourself. In case of your death, your dependent’s monthly household expenses is Rs. 20,000 (Rs. 30,000 – Rs. 10,000) or Rs. 2,40,000 per year.  So you should provide for this sum after taking into account the inflation.

- Calculate the effect of inflation on expenses. This is essential to compute the future household expenses. This is important step in the process of computing HLV. Inflation can erode the value of money. So if you have not considered inflation, the provision you make for your family will lose its worth. Hence for longer periods, you have to take into account the effect of inflation on the expenses.

- Find out the current value of your expenses. This is the next step in calculating HLV. A rupee spent in future is worth less than the rupee spent today. This happens due to inflation. E.g. Rs. 1000 today will be worth less in 5 years from now. So you have to calculate the value of your future expenses in current monetary terms. It will give you an estimate of the amount you should put aside for your dependents.

- Take into account the current value of current liabilities and medical expenses. If you have any unpaid loans and/or medical expenses should be considered while calculating HLV. This is because in case of your untimely death, your dependents will have to pay off.

Once you complete all the above steps, you have reached the correct HLV. But remember, computing HLV is not a one-time affair. It is a continuous process as you move through life. Any change in your lifestyle will mean fluctuation in the expenses. Also you are assuming certain things like rate of inflation, how long you expect your spouse to survive etc. These will affect your HLV and so it is advisable to calculate it each year to ensure your dependents are sufficiently provided for in case of your death.

Currently there is an increasing awareness about the importance of a credit score and the
impact it has on any loan who wish to opt for in future! If you are one of those individuals who plan to take a home loan a few years down the line and do not have a credit score at all, then it is time to thought of starting a credit score record, which will benefit you in the long run.

What does a score look like and what is a good score?

A credit score is generally a three digit number within the range of 300 and 900. Higher the score the better it is. This score will reflect information from several lenders and across various loans.

What information does a credit report contain?

Apart from containing all personal identification information the credit report records your repayment history if any in the case of a loan or a credit card.

Your credit card can be the single most important factor in improving and increasing your credit score. On the other hand it can also plummet your score to dark depths if you
are not careful. Think smart and use your credit cards to your advantage.

Here are some pointers on what to do and what not to do in order to achieve this reality.

No debts so far. Opting for a brand new credit card for the first time.

This makes sense for your credit score. Making use of a credit card judiciously will help
you improve your credit score. Just make sure you open your credit card with a respected and popular brand name.

Low credit limit.

Keep a tab on the credit limit of your credit card. Open a credit card account with a
company that will provide you with the highest credit limit possible. High credit limits,
even if they are not used will add merit to your credit score and improve it.

Choosing the ideal credit card to close.

The number of years you hold a credit card account has an impact on your credit scores.
Hence, let your oldest credit card be, if you must close a card opt for the most recent
cards and close them one at a time, maybe once a month over a period of time.

Bargain for a lower interest rate

If you have never defaulted on a payment for a few years, make use of your good
repayment track record and speak to the bank officials for a better bargain. Request them to lower your interest rate citing the good track record you hold with them. Keep following up with your bank from time to time and you may just get your wish!

Request for an increase in credit limit

You may have purchased your most recent card because of the higher credit limit. If at
a later date you wish to close some of your cards and you know it makes better sense to
close the most recent card, you have a dilemma. The most recent card has the highest
credit limit. The oldest card has the lowest credit limit. What do you do? In such instances, if you have a good repayment track record, approach the bank and negotiate for a higher credit limit especially since you have been their customer for quite a few years. Most banks will oblige and you can then proceed to close the most recent card if you absolutely must do so.

Keep a self imposed credit limit, which is much lower than the actual credit limit.

Never exceeding 40% of your credit limit has a very beneficial effect on your credit
score. This shows your credit limit is high but you have not burnt it up and have plenty in
reserve. This logic helps you attain a much higher credit score. This is the same logic that
suggests you should not close any credit card accounts, as they collectively will provide
you a high credit limit, which is good for the score.

Paying off credit card dues quickly will dramatically improve your credit score.

Try not to encourage too much credit card debt. Be wise and pay the dues quickly and
keep rotating your cards. Paying off dues will cause a spike in your credit score, which is
highly favourable.

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don’t have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the downpayment, when the time is right.

Down payment generally amounts to 10-20% of the total cost of the home, as banks generally fund only about 80- 85% of the loan amount. This is to make sure the buyer has some stake in maintaining the property. Also, this ensures that the loan amount lent by the bank is always lower than the market value of the house.

Age of the building

Another factor banks consider while determining the total amount to lend, is the age of the building. Depending on the age of the building the down payment is likely to increase, the older the more down payment, you may need to shell out. The Bank always decides the home loan eligibility based on the property first. This means if the building is old and the down payment chunk is huge, banks will still insist on the down payment, even if your income can easily qualify for larger loan amount.  Banks adhere to such measures to safeguard their interests and to help them indulge in safe lending operations.

Make as much down payment as possible

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don’t have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the downpayment, when the time is right.

The concept of a down payment exists due the following reasons:

a. It indicates borrower’s credit worthiness due to access to the down payment

b. The amount of real investment a borrower has in their purchase, and their fidelity in continuing to make payments regularly are linked

c. It acts as a sort of insurance for lenders, since borrowers know that if they default on their loan; they will not only lose the property but their down payment as well

d. It ensures that the buyer (borrower) has some stake in maintaining the property

e. It ensures that banks are protected from fall in interest rates since the amount that they lend is lower than the market value of the house. Therefore, if there is a fall, they can still recover the losses

Most of us are now aware of some of the critical reasons a bank might refuse a loan and gear up for it well before a loan needs to be sought! This is very true in the case of a home loan, which requires preparation on various fronts. You are likely to pep up your credit score, ensure you pay your credit card dues in full, on time, increase your income levels, close out previous loans etc. in preparation for the loan you plan to apply for. However did you know these are the not the only reasons you might face a loan rejection for?  There can be others for which you may not be directly responsible. Yet you need to be aware of them to understand how you can tackle the issue if it arises in your case and obtain a loan without any hassles. The views in this article are based on standard underwriting principles as applicable in US, European and Indian markets and not reflective on any particular institution in any country.

You are a compulsive impulsive job hopper who does not stay in a job for more than a few months!

It is quite a common practice with the current generation to switch jobs often. This in the bank’s book implies instability and will be a good reason to reject your loan request. Banks place a lot of importance on job stability and banks internationally often insist that an applicant needs to be employed with a particular concern for one to three years or more to be eligible for a home loan.

Tip: Remember, constant job shifts may affect your credit worthiness. Try to stick to a company for a minimum period of a year if you plan to apply for a loan or shift post your loan sanction! Even this time period is only fine during the initial years of your career. As you gain experience its augurs well for you to have a longer stint at the companies you work for to account for job stability!

Your residential address is on the defaulter list!

If you live under the same roof as someone who has slipped up on a loan payment or credit card dues and hence been reported to the national credit bureaus, then the probability of your loan application to be rejected is likely to be high. The reason being your residential address will find a match with the one on the defaulters list. This also holds true in the case of a family member who resides in the same address.

Tip: Take this issue up for discussion with your relationship manager at the bank. Indicate that the previous tenant (if that is the case) does not have a personal relationship with you. In the case of a family member you need to stress that he or she is not dependant on you.

Your profile doesn’t fit into the bank’s internal policy!

Each bank globally is guided by its own internal policies. If some income or debt profiles or geographic areas are listed in their policy guidelines as not appropriate for lending, the bank will not be able to fund your loan.

Tip: In case your credit profile does not fulfill the criteria of your bank, you can take it up for discussion and provide additional security either in the form of a guarantor or in the form of insurance policies, fixed deposits, collateral securities etc. or provide proof of your repayment ability (for eg. if you run your own business).

If the property is outside the geographic limits specified by the bank, try applying to the nearest bank or branch. Also, check if the option of providing additional security is available.

You want a loan to purchase an old building!

Some banks will not fund for old buildings especially if it is more than 20-30 years old! This criteria (age of the building) varies from bank to bank.

Tip: Land value will be always considered while deciding on funding for older buildings. Try to increase the down payment and add in some form of security to negotiate for a lesser loan amount.

Your loan application has been rejected before!

Most banks have records of all rejected loan applications in their database. When you apply with a bank, this will show up in your application verification checks and could pose a problem as it affects your loan worthiness!

Tip: Remember it is not a wise thing to keep applying for a loan without any rhyme or reason. So weigh the pros and cons before you apply for a loan simultaneously to different banks. It would be best to wait till you know you cannot receive an offer before you apply to another bank. This will give you a chance to rectify errors or update your credit records in case there is an issue with it before you approach another lender. In the same vein, if the reason for your previous loan rejection is something other than a default, you can take it up with the bank explaining the exact reason for the rejection. In genuine instances, the bank could reconsider its decision.

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

With the increasingly uncertain times, what with terrorist attacks and tumultuous financial markets, getting an insurance cover for you and your family has become imperative. However, many of us do not take decisions because of it being such a big ball of wax.

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

First and foremost, choosing an insurance policy must be based on your current and projected income or simply put your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans etc.

Secondly, you also need to look at:

Cost-Benefit Ratio

The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.

Cover

You need to ensure that the insurance covers all your dependants and that it also covers the majority of health problems.

Thirdly, the promises made by different insurance companies are all fine; however, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. The four major kinds of insurances that most people opt from are:

• Term Insurance – Term life insurance or term assurance is life insurance which provides coverage for a limited period of time
• Endowment Policy- An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death.
• ULIPs – Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.
• Money-back Policy – Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy

When comparing between these plans it is important that you keep in mind the factors that were talked about in the first point. Let’s take a look at an example:

Arun is a 25 year old businessman who wishes to take an insurance cover for Rs. 20 lakh for a period of 20 years. There are two options he can choose from.

• Option 1 – He can opt for an endowment/money-back policy and pay a premium of Rs 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.
• Option 2 – He pays Rs 4,000 annually and enjoys the risk cover of Rs 20 lakh. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.

Whereas under Option 1, he has earned an annualized return of about 6%; Option 2 gives him about 9% returns during the period. Therefore, it is important for Arun to decide what he wants and opt for a plan accordingly.

It’s important to correctly identify your dependants’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly. Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

We discuss here what you need to know about computing taxes on the rental income for a house and the capital gains from the possible sale of a house is taken up for discussion in this article.

A. Tax on Rental Income from a property

When you own two houses and let out one of them for rent, you receive an income for which you need to pay tax. In such a scenario, the taxable income from the total rent income received by you for that particular financial year will be computed in your tax returns.

How your rental income is computed

For rented out properties the gross rent needs to be the greater of the three values below:

a. Municipal valuation of the property – The rental value fixed by the corporation based on your locality and property value.

b. Actual rent received during the financial year – The rent received by you from your tenant for that particular financial year.

c. Fair rent – The rent of a similar property in the same or similar locality.

From this gross rent, the property tax is deducted to arrive at the net annual value of the rental income.

Deductions possible from the net annual value of the rental income:

1. 30% of the net annual value for repair, maintenance and rent collection expenses for the property

2. Interest paid towards any type of home loan on this particular property.

3. Any property insurance premium you have paid for the financial year.

Here is a simple example:

Actual rent received from property - Rs. 15,000 x 12 = 1.8 L

Less: Municipal Tax/Property Tax paid by you – Rs. 5,000

Balance: i.e. Net Annual Value -Rs. 1.75 L

Less:
(1) 30% of the net annual value – Rs. 52,500
(2) Interest paid on a renovation loan for the house – Rs. 30,000

= Taxable rent income = Rs. 92,500

The taxable rent income will be included by your auditor under income from other sources, along with other such incomes as well as your salary income and deductions you are eligible for, to calculate your final tax outgo.

B. Capital gains tax on selling a property

Let us also quickly consider what happens if you decide to sell your property.

Any profit that you receive by selling any asset at a price higher than at which it was acquired by you is classified as capital gain and clubbed under income from other sources.

Short term and long term capital gains

If you sell your house within 3 years from the date of purchase you will incur a short term capital gain or loss which is included under other sources of income.

In case you sell your house beyond three years then it is considered as a long term capital gain/loss.

Exemptions from capital gains tax

If you choose to use the capital gains from selling your house to buy a residential property, you will not be taxed and there is no tax liability from such a sale as stated under Section 54F of the Income Tax Act.

You can also be exempted from tax if the long term capital gains or profit from the sale is invested for a period of 3 years in specific bonds of National Highways Authority of India or Rural Electrification Corporation Limited as stated under Section 54 EC.

In case you do not choose to make any investments and opt to pay tax, the income is calculated using the indexation method which is nothing but accounting for the effects of inflation.

For example, if you had purchased a house for Rs 5 L and then sold it for 9 L, the capital gain would be Rs 4 L. However, for the sake of income tax calculation a number called indexation number is used which is a percentage of the gain that is assumed as value addition due to inflation.

Thus if indexation is 20% then only Rs. 3 L (Rs  9L – 20% of 5 L + 5 L = Rs 3L) would be taken as capital gain. A capital gain is usually charged @20% in most cases where the calculation is based on indexation.

A better understanding of the tax rules can make your life easier and help you file your tax returns with clarity.

Photo credits: familymwr

In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements.

Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan commitments, if you have lost your job or are entangled in a debt trap because of too many commitments?  Default becomes imminent. A default occurs when a customer repeatedly fails to make payments to the lender as per the schedule outlined by the lender at the time of giving the loan.

Does a default mean that you need to give up ownership of the asset for which the loan was taken?

When you find that you are in a situation where you will not be able to meet your loan obligations, running away from the lender is the last thing you should do. Banks/lending institutions understand that there could be genuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on time, every time before events took an unfortunate turn.

You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefit because he will be able to retain his asset and the bank will also benefit because this agreement will prevent an addition to its NPA portfolio.

The various options that can be worked out include:

• Reschedule your debt: After having analyzed your financial position, if the bank feels that the quantum of EMI is what is troubling you, they may be willing to reschedule your debt by extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean more interest outgo in the long term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old or higher EMI or even prepay your loan, closing it early and saving excessive interest outgo if it makes sense post the pre-payment penalty.

• Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of change in job or any other reason, you may seek temporary relief from the bank for a few months. The bank may permit the same but may charge penalty for not paying within the time frames agreed upon earlier.

• Restructuring the loan: In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

• One time settlement: If you express your desire to pay back, and make known to the bank your current financial condition, banks may be willing to enter into a one time settlement on a case to case basis. This is a good way to get rid of your loan if you have some money as usually the settlement will be done at a lesser value i.e. the bank may waive off some amount/charges. If your financial situation is really bad, then you may need to file for bankruptcy to free yourself from the loan commitment.

• Conversion of loan in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured one by offering a security. That should bring down the rate of interest and thus the EMI burden.

Running away from the problem is not the solution. Not only will you undergo emotional stress, you will also end up losing your asset. What is important is that your intent to pay off the loan should be evident to the lender. It is in the banks interest too, to ensure that the loan doesn’t turn bad. So be wise and engage in a dialogue with the bank the moment you figure out that you will not be able to meet obligations and don’t wait till the last moment. That should help you tide over the temporary crisis you could find yourself in.

What happens if none of the above options work out?

If none of the above options work, the bank after giving you time for repayment will go in for repossession of the asset for the purpose of recovery of dues.

Movable asset (Car/Auto)

• Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. In case of non payment within this notice period, the Bank will repossess the pledged vehicle..
• After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a time line of 7 days to make payment of the outstanding dues. The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of vehicle.
• In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realization of the payment.
• The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.

Immovable Asset (House/property/land)

A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is classified as NPA as per the guidelines set by RBI

• The customer will be allowed 60 days post issuance of the notice to regularize the account or come forward to settle the account. .
• If the borrower refuses to pay, then the authorized officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower
• The Bank shall proceed with the auction of the attached property post 30 days of taking possession of the property, in the event, that the customer does not come forward and settle the loan. The Bank shall send the customer a letter intimating him, of the venue of the sale indicating date and time of the same.
• The bank will consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the bank dues are cleared in full.

Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

Borrower’s rights

The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of your assets, but your credit score too will take a beating. Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an issue which is a huge financial setback. Make sure you take a loan only if you’re sure of timely repayment. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments.

Owning a home gives you a sense of pride and liberty, but also many responsibilities. For a first timer, it would be a rather complicated process, especially ‘saving’ for down payments. The savings for a home purchase can be started at any time, much before you seriously start shopping for a home.  With the RBI increasing the down payment limit to 20% of the actual price of the property for loans above Rs.20L, an early start in saving for your downpayment is the best option.

Planning is the most important step for buying your first home as in with any other purchase. And here, the key for planning is an honest financial self-appraisal with a budget planner. The idea of budgeting may be distasteful to those who have not tried it. However, budgeting is a fabulous diagnostic instrument to analyse your income-expenditure patterns and thereby your true financial position. It helps you to identify and eliminate discretionary expenses.

House ownership typically involves multiple costs like down payments, loan repayments, property taxes, insurance, maintenance, interior designing, stamp duty, etc.  So, if you don’t fix your overspending before you buy a home, you will not be able to protect yourself from the cash flow problems which may affect you.

Also, tracking your income and expense patterns will give a realistic picture of what you can afford to repay each month, considering your other living expenses. Once you understand exactly what you can borrow, start looking out for a home like a shrewd shopper.

Aim for a home you can really afford to pay. Loans can be good friends in the hour of need but an inconvienient burden, if not properly managed. It is wise to restrict your monthly loan repayments to 40-45% of your monthly income. Real estate values are always on increasing trend, except for a few mid term hiccups. So, even if you buy a small house now, in a year or two the prices will double, especially if you live in the city giving you the option of liquidating it and opting for a better residence.

Banks will finance upto 80% of the property value. So, the remaining 20% are expected to be shelled out of your pockets. If your savings allows, it is always better to make the maximum down payment possible, to reduce your monthly financial burden in the form of an EMI.

Familiarize yourself with available options

It is crucial to find the right lender and the right loan in the process of buying a home. It is always good to know the basics of loan terms and clauses from your friends or through online sources, before you speak to the lender.

Compare the EMI payable for different tenures with your monthly income. Higher the loan tenure, lesser the EMI, but at the same time you will be shelling out more interest. There are also schemes like step up loans, where EMIs accelerate every year in proportion to the increase in your income, however it comes with a certain amount of risk. Banks even allow the customers to switch the current EMI options to longer loan tenures, if they are unable to take it forward.

Banks sanction in-principle loan based on the customer’s eligibility for those who have not yet decided on the property. This helps home buyers guage the loan amount that a bank would be able to give them and the the money they will have to manage. This will help set a budget limit before looking out.

Few saving tips

• Those who started planning early can slowly save and invest in good investment schemes. But you need to make sure that your savings are working for you. Money that is put in a savings account earns less and will not help you much to reach your goal faster. Look forward for a high-yield savings or low risk investment in debt funds. Investing in share markets is a good option, but not a guaranteed one. However if you stay invested for a long term and make your exit at the right moment, it will immensely help you in meeting your money requirements.

• Those who save late also have many options like gathering additional sources like tax refunds, bonuses, dividends etc. Immediate money requirements can be arranged from sources like- gold loan, personal loan, borrowing from relatives, collateral security etc.

• If you are selling your current home for a new one, do it right when the real estate market is up. Or if you have already done it, invest the money in low risk investments which have a flexible liquidity option.

• If you are servicing multiple loans, if possible clear the costlier loans or try to pay off most of them. Personal loans, credit card debts and business loans are costlier, while home loan is the cheapest among them and the tax advantages on home loans is an additional benefit. You can also make part prepayments for all loans whenever you have excess money which will directly bring down your outstanding prinicipal amount.

• Individuals often take personal loans to bridge the immediate finance requirements. The average interest rate of a personal loan is 16-30%. Ideally you should go for other loans such as loans against property, collateral security loans, top up loans, loans against fixed deposits, gold loan, with lower interest rates for immediate requirement of funds.

• Always say a strong ‘no’ to borrowing on credit cards. Always pay off all your credit card dues on or before the due dates, as it is the most difficult one to break off if debts mount.

• While planning, consider not only your current position but also the future changes that could impact your situation like changes to your income, expected costs etc.

Once you begin to understand all the parts of the home buying journey, you’ll feel confident. No matter how a home buyer accumulates funds to purchase a home, careful planning will always make the road to home ownership smooth.