PrePayment Charges Calculation on Home Loan: How it affects you?

Continuing further from our first part on this series of articles on PrePayment Charges Calculation on Home Loan, here is the second part. Please read Part I Home Loan PrePayment Charges: With or Without PrePayment Charges Calculation Example, before continuing with this one.

Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount.
Also, something which cannot be quantified is the mental tension that one has to bear for the longer loan duration. Secondly, the loan borrower also carries the risk of increase in home loan interest rates over the longer period of time. So the shorter the loan period, the less you pay back to the bank, the less risk you take and the less tension period you have.
Have a look at these nos. Imagine you took home loan at 10% for an amount of 25 Lakh Rs. If you repay the loan in the mentioned time-periods, the lower money you pay back to the bank:
Loan Period - Total Amount Repaid
-----------------------------------
1 year - 26,37,477
5 years - 31,87,057
10 years - 39,64,522
15 years - 48,35,723

So the earlier you payback the better because the lower amount you have to repay. Please note that the above does not contain pre-payment charges

Related: Home Loan Tax Benefits and All Home Loan Articles

How does change in interst rate affect the prepayment of home loan?
This is the whole crux of the story - and is the central theme of this set of articles about which home loan you should take - one with prepayment charges or one without any prepayment charges.

Assume that you have taken a home loan from a bank for 25 Lakh Rs. for a period of 15 years at the interest rate of 10% per annum. So things go smoothly for a period of 1 year i.e. the home loan interest rate remains at 10% for a year and after that interest rates start to increase. In another 1 year, they shoot upto 12% per annum. With every change in interest rate, your bank will either increase the EMI amount or increase the loan tenure, or a mix of both. The first and the third scenarios are rare - almost all the banks by default increase your loan tenure.
As explained in previous section, increasing the loan tenure has adverse effect for the borrower both in terms of amount of loan to be repaid to the bank and the longer duration for EMI payments.
Now add to it the strict conditions applied by some banks and NBFC which do NOT allow prepayment of home loans, or charges heavily on prepayment charges. What happens in this case? Your loan tenure has increased - means you need to pay same (or more EMI) for a longer period of time. You can avoid that if you prepay some portion of your loan, but that may not be allowed by your home loan bank or NBFC or it may take prepayment charges for the same. So either way, you have to take the hit - either pay prepayment charges or pay more to the bank in long durations of repayment or higher EMI's.

Now what is the benefit if you take home loan from a bank which does not have any pre-payment charges?
Consider the same scenario discussed above - the interest rates increased causing a longer duration for your EMI payment or increased EMI's. Suppose that you have received some bonus amount from your employer, or you take money from your parents/relatives or sell any property and use that money to prepay your hoam loan. You can do so easily without any problems and without any pre payment charges - such early payments or prepayments of homeloans will ensure that your loan duration remains less and also the total amount of money to be repaid to the bank remains low.
So, definetely a bank offering home loan without prepayment charges is better than the one which is offering home loan with prepayment charges or limits on prepayment.
But do check in case the home loan offering bank or NBFC is having any hidden conditions attached.

Home Loan PrePayment Charges: With or Without PrePayment Charges Calculation Example

Details & Comparison about Home Loans which are without pre-payment charges and with pre-payment charges - Calculations & Examples to show which one is beneficial to take
Axis Bank has recently launched a new ad for their home loans, and the pitch of the ad focuses around the "pre-payment charges". The theme is that a couple wins a lot of money in one of the TV shows and they plan to prepay their home loan using the prize money. The anchor asks them about prepayment charges, which are usually levied when someone pays up a loan before his loan schedule i.e. extra money reapid early over and above the usual EMI payment amount, so as to close the loan early. These pre-payment charges are for this kind of early payment of loan. Then the prize winner hits the punchline - "Paise chukane ke bhi paise lagenge" i.e. to pay back money, you need to pay money (charges). Then her hubby says that "Dont worry, our loan is with Axis Bank who do not have any pre-payment charges".
This ad clicks (atleast to me and my fellow colleagues) - the reason? It hits right into the current economic scenario where banks are raising the interest rates every now and then and people are either required to pay higher EMI's or their loan tenures are increasing or both. What that ultimately means? Your loan amount is same, but what you repay to the bank is increasing considerably.

Home Loan PrePayment Charges Calculator

Disclosure: One of the authors has a home loan from Axis Bank which is without pre-payment charges. This article is based upon calculations done on those inputs and scenarios where interest rates have changed very frequently

Let's start from the basics:

What are home loan prepayment charges? Why do home loan banks or NBFC take such a prepayment charge?
Home Loan Prepayment charges are those charges which have to be paid in case one decided to repay his/her home loan earlier than the agreed loan achedule. However, please note that some banks & NBFC do NOT have prepayment charges on home loans, some banks have it if the amount being prepaid exceeds a limit (say 20% of the outstanding loan amount each year), while some banks or NBFC have it mandatorily.
NBFC - Non Banking Financial Companies (These are not banks so they dont come under Reserve Bank of India regulations directly. E.g. are Indiabulls, LIC Housing Finance Company, HDFC Limited). One thing which is important to mention here is that although HDFC is known to be one of the largest home loan providers in India, the home loan division is not under HDFC Bank, but it is HDFC limited, an NBFC.

Why do banks or NBFC charge prepayment charges amount?
Because when you take loan for a specified period of time (say 25 Lakhs for 15 years at 10%), your EMI will come to 26,865 Rs. Banks know for sure that you will contine to pay this EMI amount each month for the next 15 years.
So in this case, you pay back the bank a total of 48,35,700 Rs. in total, over your tenure of 15 years (assuming no changes to interst rates).

But when you decide to prepay your home loan amount i.e. add more amount to the paid EMI, then the calculations change. Your loan tenure comes down from 15 years.
Say after 1 year of you taking home loan, you got a bonus of 2 lakhs, or you sold your old property and use that money to prepay your existing home loan. So now, because of this prepayment of 2 lakh Rs. after 1 year of you taking the home loan, your total amount paid back to the bank has come down to 43,13,050 and your tenure has also come down from 15 years to 12 years and 10 months. So, because of this prepayment, you managed to save 5,22,675 Rs. and your home loan tension period shortened by 2 years and 2 months. So this is beneficial to you.
However, for the bank, it is a problem. The amount that they were relying upon as a steady stream for 15 years has come down to a lesser amount as well as for a lesser tenure. That is something which hurts their profits, as well as cashflows. Hence, they impose a charge for such prepayments.

Related: Home Loan Tax Benefits and All Home Loan Articles

Is it beneficial for the borrower to prepay his home loan as early as possible?
In short, the answer is YES.
Remember, the longer your loan tenure, the more money you repay to the bank for the same loan amount. Continue to Part II - PrePayment Charges Calculation on Home Loan: How it affects you?

NRI Home Loan & Property Purchase in India: Details, Procedure, Tax Benefits & Requirements

Details about how NRI (Non-Resident Indians) can purchase property in India and also take home loans from Indian Banks for their property buying

It has now become a common scenario for many Indians - they work for IT or some similar sector companies and their employer sends them abroad to work at client site for long term. Usually this is accompanied by payroll transfer for long term onsite assignment, and hence the employees take the NRI status to avoid double taxation. However, the future still remains uncertain - where to settle down, where to buy property, how to buy it if buying in India, can I get a home loan in India from an Indian Bank or NBFC if buying a property in India, what are the requirements for purchasing property on home loan in India by an NRI. In this article, we will attempt to address these common questions.

NRI Home Loans: Procedure, Details and Tax Benefits

What are the major differences for home loans for NRI as compared to that of a resident Indian?
Usually, there are no differences for home loans for NRI and that of a resident Indian. However, the loan amount, eligibility, tenure and interest rates charged may be different and that differs from one home loan providing bank to the other.
- Usually, the interest rate charged for NRI Home loans are sometimes higher than that charged to resident Indians - around 0.25% to 0.5% higher
- Maximum Tenure is also usually shorter, but still NRI can get loans for upto 15 years
- Eligibility calculation basis is same as that of resident Indians
- Repayment for EMI's can be made with ECS or post Dated cheques (PDC) or standing instructions on Non-Resident Ordinary (NRO) account or the NRE accounts

What are the home loan tax benefits available for NRI Home loans?
This is a not that tricky, although it appears to be.
Here is the simple scenario for NRI home loans:
1) If you are an NRI, and have income ONLY in foreign country (i.e. no income in India), then you CANNOT get any tax benefit on the home loan you take in India. The reason - you can claim tax benefit in India as per Indian IT rules. Since you do not have any income in India, you need not pay any taxes in India and hence you cannot get that tax benefit.

2) You are an NRI and along with your foreign income, you also have some income in India (say a part of your salary coming from Indian employer or you getting rental income from a property in India). Then, you can claim tax benefit on the NRI home loan you took in India.

For more details, please see Home Loan Tax Benefits.

What are the additional requirements for an NRI to take NRI home loan in India?
There are a few additional requirements for NRI to take home loan in India:
- Any NRI with a valid Indian passport can purchase property in India on NRI home loan
- Home loan amount shouldn't be 85% of the property value
- Individual amount should be from a legal clear channel, if the funds are being sent from abroad - i.e. it should be routed through a clear bank transaction from abroad
- Power of Attorney to a localite in India: NRI taking home loans have this need - they need to provide power of attorney (POA) to a local relative before the home loan is processed and approved. The reason for this requirement is for bank safety as well as for legal formalities. For e.g., it makes it easier for the bank to track down and communicate with a local representative in case of any concerns or queries. Also, for under contrcution properties, there might be legal formalities required multiple times like signing on releasing a portion of funds to the builder, etc. If the power of attorney is there with a local person, it becomes easier to process these steps for NRI Home loan.

What are the tax implications of this property purchase by NRI in the foreign country where they are residing?
The tax implication for the NRI's depend upon the country where they are residing. From whatever we are aware of here are the country wise details:

Related: Home Loan Tax Benefits and All Home Loan Articles

- USA tax implications for NRI property in India:
USA allows for tax deductions if the the house is taken on home loan and there is rental income from the home after the NRI receives the possession and puts it on rent. Remember, US laws require NRI's to pay taxes on their global income, so an NRI in USA having rental income in Indian property needs to pay tax in USA on that income.
One can claim dedcutions for registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. in USA

- UK tax implications for NRI property in India:
UK does not necessarily require an NRI to pay taxes on global income. It depends upon your domicile, residential status, etc. NRI can claim deduction on the interest on the loan taken for the purchase of the property.

If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page

- Australia tax implications for NRI property in India:
Like USA, Australia requires you to pay tax on global income. Interest payable on home loan is deductable and all expenses like registration charges, agent commission, stamp duty, proeprty insurance, maintenance charges, etc. can also be deducted.

- Gulf countries tax implications for NRI property in India:
Gulf countries like Dubai (UAE), etc. do not have any tax requirement for global income

Home Insurance for Home Loan: The Truth, Details & Actual Coverage of Home Insurance Policy

Home Insurance Details, Truth & Requirements
It was recently that I purchased a home by taking a home loan. I was made to (or better to say "forced to") take a home insurance also, along with my home loan. Now that policy detail was not shared with me earlier by the home loan providing bank, rather I was simply asked to pay for that insurance without much of discussion. So there it was - I had to get a demand draft for the home insurance premium and give it to my home loan provider bank, and the bank person would in turn pass it on to the insurance provider company who would then issue the policy for "securing" my home from all (??) kinds of calamities.

But then, even after paying for the insurance premium, I had no idea of what I was paying for (nor did the bank personnel seem to have, as whatever I asked him, he just kept turning down my questions by saying - Since you are taking a home loan, this home insurance policy is essential)

Home Insurance Policy: Truth, Details & Requirements of Home Loan Insurance Policy

So, after more than a month of home loan disbursal, I got the printed copy of my home insurance policy which was essential for my home loan. And there the surprises started.
Let me detail somethings which came out after a few follow-ups with the insurance company, about the truth of home insurance.

First, my observations about my own home insurance policy.

The first shocker was the one about the SUM ASSURED for my home insurance, and that's where I got into q and a's with the insurance company helpdesk.
The price of my purchased home was, say X. Add to it the registration and stamp duty cost, and the overall price rises to X+12%. Out of this, my home loan amount was only X*65% i.e. around 2/3rd of the total home price.
What was interesting is that I took this home loan for around 10 years, and was forced to buy home insurance policy for a tenure fo 10 years (i.e. loan period) by paying a one time premium, yet the sum assured amount mentioned on the policy document was only aroun 40% of X

So, if my home was of say, 50 Lakhs total cost, the insurance policy which was forced onto me was having the sum assured only as 20 Lakhs. So what is the actual worth of my insurance I'm forced to purchase???

I logged a query with the insurance company and that is what they came up with.

Irrespective of the amount of total money you pay to buy your home, irrespective of the amount of home loan you take, your home insurance policy ONLY covers the cost of construction for your house. i.e. in case something goes wrong with the flat due to say any natural calamity, then the home insurance policy only covers the cost of reconstructing that property.
It is in turn dependent on the area of construction (usually the carpet area) and interestingly, the locality where your property is located.

If you have any questions/queries regarding home loans, Insurance or HRA claims, the FT Times team will be happy to address them. Please post your questions in the comments section by clicking on the link "Post a Comment" at the end of this page

Although it sounds absolutely logical to take the cost of construction (hence insurance value) to be a factor of the carpet area, but it makes no sense to make it dependent on the locality within the same city. How will the cost of construction change significantly if the area is under the same city?

Although I've been insisting on the insurance company to give a written confirmation on this to me through email - they are trying to avoid it. Even though I've asked them explicitly to provide a written response through email, they simply call on my mobile and avoid putting the answers in writing.

Related: Home Loan Tax Benefits and All Home Loan Articles

So, there is nothing much that an individual can do about the choices he/she has for home insurance. The moment someone takes a home loan, he has to purchase some or the other stupid policy in the name of coverage. Some banks force only property insurance, some also force life insurance that too in favour of the home loan bank. With the property papers lying in the custody of the home loan provider bank, the home itself is the biggest security for the bank against the loan it has provided. So why should there be a force on the home insurance or life insurance?
Something for the authorities to think about and come to the rescue of the individuals.