Forced to prepay gold loan? Here's what you can do

Last week, Kochi-based Anjana Badoor discovered that the option to prepay a loan does not rest with the borrower after all. "I had taken a loan of Rs 50,000 last year from a public-sector bank against jewellery roughly worth Rs 75,000. Though the loan tenure was two years, I was asked to prepay the entire outstanding amount immediately," says the 53-year-old.

Given that she was servicing her EMIs on time and in full, Badoor can't understand what prompted her bank to force her to prepay the loan. The reason is plummeting gold prices, which fell from Rs 32,500 per 10 gm in September 2012 to below Rs 27,000 in May 2013, a 17% drop. And yes, banks and NBFCs are within their rights to demand part prepayment or complete repayment of a loan.

Says Harsh Roongta, chief executive officer of "The terms and conditions for loans against gold are similar to other products, such as shares or other types of collateral. So if there is a drop in the value of the collateral, financial institutions can insist on accelerated payments to safeguard their money."

Preventive measure
Till mid-2012, banks and NBFCs were allowed a loan-to-value (LTV) ratio of 80-95%. In other words, you could walk home with a loan that was 95% of the value of the collateral you put up. As is evident, a high LTV ratio will be seen as higher risk. "Now that the price of gold has come down, the worth of jewellery pledged by gold loan borrowers is less than that at the time of giving the loan," explains Rajiv Raj, co-founder and director at

He also adds, "Banks, therefore, run the risk of some borrowers defaulting on their loans." The default rates in leading gold loan companies are reportedly in the range of 7-9% of the total loans. As a preventive measure against collateral threat, they are likely to resort to prepayment notices.

Why April Inflation Could mean Lower Home Loan EMIs

Headline inflation eased below 5 per cent to over 40-month low in April. The inflation data should come as a relief to existing home loan customers, who have been saddled with high equated monthly installments (EMIs) for the last few years. Though an immediate respite from high EMIs is unlikely, a rate cut in June is almost a given, analysts say.

Here are five reasons why home loan EMIs should head lower:
  1. Inflation eases: Interest rates on home loans have remained in double digits over the last three years on the back of the Reserve Bank's war against inflation. With inflation slipping to 40-month low, a cut in interest rates looks a certainty.
  2. Outlook may change: The RBI has been cutting the repo rate (the rate at which it lends shot-term money to banks against securities) in the past too, but because its tone has been disappointing and extremely cautious, bankers have chosen to stay cautious. Now that inflation is in the Reserve Bank's comfort zone, the central bank's hawkish tone might change. A softening in Reserve Bank's outlook will give more confidence to bankers to lower rates.
  3. Large room for repo rate cuts: While inflation has eased to as low as November 2009, repo rates continue to be comparatively high. In November 2009, the repo rate was 4.75 per cent as compared to 7.25 per cent as of today. If inflation continues to ease, the repo rate will come down sharply and borrowing from the Reserve Bank will become less expensive, enabling banks to lower rates.
  4. Global investment bank Barclays says rate cuts of 75 basis points by the end of the year remain possible. This means the repo rate may come to 6.5 per cent by end-2013, leading to significant lowering of retail loan rates. On an average, a 0.25 per cent cut in interest rate on a Rs. 50 lakh home loan for 20 years translates into minimum savings of Rs. 800 per month.
  5. Cash Reserve Ratio may also be cut: Some experts say the RBI will not cut rates as early as June because of widening trade deficit and high retail inflation, which is still above 9 per cent. In that case, global investment bank Nomura expects the central bank to cut the CRR, which should immediately translate into a rate cut. A cut in the CRR, which is the amount of money banks have to park with the RBI, leads to immediate release of liquidity enabling banks to cut rates without a lag.

Lower Interest Rates, Lower Costs

What is the reaction of the real estate industry to the Budget? Of the key demands, post Budget, what needs to be done on a priority basis?

The National Real Estate Development Council (Naredco) is extremely disappointed with the Budget proposals. The Council in its memorandum to the finance and housing ministries had suggested conferring infrastructure status to integrated township and group housing and giving income tax relief to developers and buyers to stimulate demand and supply. Besides, there is a need for monetary interventions to lower interest rates, to bring down costs both for developers and home buyers. We hope that the RBI will address them to give the much needed boost to the sector.

The Budget offered an additional deduction of Rs 1 lakh for a first home loan up to Rs 25 lakh for FY14. How do you evaluate this proposal?

Naredco is happy that the proposal would benefit first time home buyers. The net deduction now available will be up to Rs 2.5 lakh and would definitely boost demand and supply in tier II and III cities. In metros, where average cost of house is above Rs 50 lakh, it would be of no help.

What are your views on the proposal to set up an urban housing fund?

It is a welcome step. Naredco had been advocating the ‘shelter fund’ to mitigate the problems of low income groups and economically weaker sections who are deprived of decent living conditions and are forced to live in unauthorised colonies and slums or be a squatter. This will help in eradicating slums, where nearly 25 per cent of urban population live. Housing finance institutions will get encouragement and their risk will be appropriately covered.

Are the Budget proposals to boost affordable housing different from the earlier pronouncements on ECBs for low cost housing?

External commercial borrowings (ECBs) permitted in Budget 2012-2013 for affordable housing has been operationalised. This will help in creating capital, at low cost, for the development of affordable housing projects. The urban housing fund will primarily help low income buyers in accessing home loans. This, and the interest subsidy scheme will help the poor in buying a house.

Corporate governance is a major issue in the sector, as the RBI pointed out. Does Naredco have a time-bound agenda in this regard?

Naredco is continuously working on it. Enacting the real estate regulation Bill, simplified project approvals and the new accounting procedure will help a lot in achieving this objective.

Before you Switch Your Home Loan

Home buyers had been facing a scenario of high interest rates which was in existence for a very long period of time. However, during the current year the scenario looks different with the Reserve Bank of India lowering key policy rates. It is widely expected that the central bank would continue to lower rates in its forthcoming announcement. Many banks, in response to the rate cuts, went ahead and announced lower interest rates on home loans, with State Bank of India taking the lead. Moreover prepayment charges on loans have also been abolished in line with RBI guidelines. With these changes happening, how can anyone not be tempted to switch to a bank with lower rate of interest?

Before you decide to take the plunge, halt, and evaluate. One should take into account key considerations before switching loans.

Interest rate variation
Check the existing rate of interest and the interest that you have been offered now. If the new lender’s rate is at least 1-1.5 per cent cheaper then it makes sense to switch.

For example, on an existing loan of Rs 75 lakh charged at 12 per cent for 20 years, your current EMI is Rs 82,582. If there is a reduction by 0.5 per cent, your EMI will change to Rs 79,982, a difference of Rs 2,600. However, if the interest rate comes down to 10.5 per cent, the savings would be substantial with your new EMI at Rs 74,879, which means savings of Rs 7,703.

Remaining tenure
It is a known fact that during the initial years of a home loan, major component of the EMI outgo is towards repayment of the interest component and a small part goes towards repayment of the principal amount, however this changes as the years increase.

For the loan of Rs 75 lakh at 12 per cent cited in the previous example, out of the EMI of Rs 82,582, the interest portion stands at Rs 75,000 and only Rs 7,581 goes towards principal reduction for the first month. So to get a better deal, it pays to switch during the initial years of the loan.

If you are servicing your loan at a very high rate of interest like 14-15 per cent (with interest rates continually being hiked), a switch towards the latter half of the tenure may still be beneficial, but you need to figure out how much interest remains to be paid to arrive at an accurate picture.

A good online loan calculator would show that the savings from switching is lowest when the remainder of the tenure is five years or less. If a switch is carried out towards the later part of the tenure, a significant proportion of the interest component would already have been repaid and the benefit from switching the loan is lost.

Processing fees for new loans
A new lender would typically charge a processing fee ranging from 0.25-1 per cent of the outstanding amount. The country’s largest lender, SBI, has currently capped the processing fee to maximum of Rs 10,000. Depending on the amount of loan outstanding, the processing fee will be a determining factor for deciding whether to switch loans or not. The processing fee should be lower than the cost saving that you would make on the interest differential.

However, here you have a catch-22 situation, as the amount of loan will be higher during the initial years of the loan and that is when the switch is more beneficial. But on a higher amount, the processing fee would also be higher. Further, some banks also charge a legal fee for property verification and such added extra costs. This also needs to be figured in the net savings available.

It is not possible to decide whether to switch or not based on a single cost. We will have to work a combination of all costs and decide prudently.

One can also try renegotiating the loan with the existing lender at lower rates to avoid processing fee. No lender would like to lose a borrower with good credit history. Hence this option could be explored before actually opting for loan switch from a different lender with its accompanying hassles.

Buying House in a Bank Auction? Take Care of Additional Costs

With the zooming real estate prices showing no sign of hitting a speed bump, many prospective buyers have begun to tap another avenue to buy cheap houses - auction properties. Though it’s not a common practice, banks auction the houses that they foreclose. What makes them attractive is that their selling price is usually advertised as being 15-20% less than the prevailing market price in that particular locality. However, before you jump at the prospect of buying one, consider the ramifications.

A bank auctions the properties for which the owner is unable to repay the home loan taken from the bank. This means that there could be various incidental expenses that you too could have to pay. When a borrower misses a couple of EMIs on his home loan, the lender sends him notices. If he continues to default for a few months, the bank takes over the house under the SARFAESI Act. The property is then put up for auction and this is advertised in the local dailies.

As the bank is only interested in getting its outstanding principal and some interest component, this amount is listed as the reserve price for the auction. This is usually much lower than the price that the property would fetch in the market. If the final auction price is higher than the reserve price, the extra amount is handed over to the original owner.

What to check
The low reserve price may seem tempting, but you need to ascertain whether the amount mentioned by the bank is the gross price or if there will be additional costs that you may have to pay later. Here are some questions you need to ask before you bid.

Are there unpaid dues?
When a bank auctions a property, it is sold on an ‘as is where is’ basis, so you should read the bid document carefully to find out if there are any unpaid dues. “The bid document is like the prospectus of an IPO, where all the facts covering the legal title and responsibility for pending dues are stated,” says Om Ahuja, chief executive officer, residential services, Jones Lang LaSalle India.

In most cases, the owner is not in a position to pay the dues to the bank and knows that the property will be seized. So he doesn’t bother to pay the associated fees, such as the society maintenance charge or property tax. From the time he receives the first notice till the property is taken over, there is a minimum period of six months. This means that if you buy the house, you will probably have to pay at least six months’ worth of outstanding dues.

Obviously, the utility bills are also unlikely to have been paid. It’s possible that some utilities have been disconnected or discontinued, such as the removal of the electricity meter. So, you will have to pay for renewing the connections, along with the late fee, if any.

How much repair work is needed?
Most banks do little to keep the property in good condition after taking possession. So, you may have to undertake some renovation or maintenance work to make it more habitable. It would be a good idea to visit the property and calculate how extensive the repair work is likely to be and how much it will cost.

Also, as the property is being sold on an ‘as is basis’, you will be responsible for any damages that may have been caused directly or indirectly to other properties around it. For instance, if there is water seepage while the house is in the bank’s possession and this damages an adjoining property or the one below it, you, as the new owner, will have to pay for it.

It’s also possible that the previous owner has left some stuff in the house. You will have to check with the bank about the person who will assume responsibility for it. Will you have to pay extra for any furnishings, furniture or appliances that have been installed by the previous owner? Will the previous owner collect these or will you need to dispose of these? Who will be entitled to the money received on the sale of these items?

Dream House costs too much? Get a Joint Home Loan

Buying a home is everyone's dream. And with a home loan, this dream is very much within the reach of an individual. One is eligible for a certain maximum loan amount from the bank, depending on one's income and credit rating.

Even if your dream home demands a slightly higher loan amount than what you are eligible for, no need to worry, a joint loan is the answer.
Apart from increased tax benefits, you get a higher loan amount too, but provided that the co-borrower also has a regular source of income.

Here is all you need to know on joint home loans.

Who can take a joint loan? A married couple or a parent-child duo. Some banks also allow brothers to take a joint home loan on the condition that they will both be co-owners of the desired property. Banks insist that all co-owners of the home must be co-borrowers in a joint home loan.

Sisters, friends or unmarried couples living together are, usually, not allowed such loans by banks.

Do both borrowers get tax benefits? Yes. You as well as the co-borrower can avail tax rebates on the principal and interest repaid on the loan. Therefore, you can also using a joint home loan to maximize your tax benefits.

Here's an example. Let's assume that the principal and interest repayment on your home loan for a given year are Rs. 2.4 lakh and Rs. 3.5 lakh respectively. Now, under Section 80C, you can get a maximum tax deduction of Rs. 1 lakh on the principal repaid and under Section 24, you can get a tax-break of up to Rs. 1.5 lakh on interest repaid. However, if you and your spouse take the loan jointly, you would collectively be able to claim a deduction of Rs. 2 lakh and Rs. 3 lakh on the principal and interest repaid respectively.

The tax benefits, however, are according to the proportion of a loan. That is, if the ratio of the loan is 70:30, then a loan of, say, Rs. 50 lakh will be split into Rs. 35 lakh and Rs. 15 lakh and tax benefits on the interest/principal repaid will also be calculated based on this ratio.
For tax purposes, it is best to procure a home-sharing agreement with details of the ownership proportion on a stamp paper, which will serve as a legal proof for the ownership.
Documents required
Here comes the harder part. You as well as the co-borrower of the home loan, both, need to submit the required documents as both of you are applying for the loan.

This list of documents, however, differs from one bank to another. Following is an exhaustive list of documents. Check with your bank or NBFC (non-banking financial company) which of these you are required to submit for the processing of your home loan. These documents can be classified into five main categories, which are - identity proof, address proof, age proof, income proof and property-related documents.

Here is a standard list of options for each of the five categories of required documents:
  1. Identity proof: Driving licence, voters ID, passport, PAN card, ration card, employee ID, bank passbook, letter from a recognised public authority/public servant verifying your photograph, or confirmation letter from the employer/another bank verifying your photograph.
  2. Address proof: Driving license, voters ID, passport, ration card, bank passbook/bank account statement, LIC policy/receipt, utility bill (telephone, electricity, water or gas (not older than 2 months), letter from any recognised public authority verifying your residence address, or letter from the employer.
  3. Age proof: Driving license, passport, bank passbook, PAN card, birth certificate, or 10th-standard mark-sheet.
  4. Income proof: The set of documents that detail your credit profile varies depending upon whether you are a salaried individual or a self-employed one.
    • For self-employed individuals/entrepreneurs:
      • A brief introduction of your business/profession
      • Balance sheet
      • Profit & loss account statement of income
      • Proof of I-T returns for the last 3 years (certified by a CA)
      • Receipts of advance tax payments, if any
      • Photocopy of the registration certificate of the establishment under the Shops and Establishments Act/Factories Act
      • Registration certificate for deduction of profession tax
      • Certificate of practice
      • Receipts of bank loans
      • Proof of investments (FD certificates, shares, any other fixed asset)
    • For salaried individuals:
      • Latest pay slip or a pay slip not older than 2 months with salary account bank statement, Form 16, increment/promotion letters, an appointment letter, a certified letter from your employer, or I-T returns (for 3 years)
      • Besides, you need to submit proofs of your investments (FD certificates, shares, any fixed asset etc.) and documents supporting your financial background (liability and assets, if any).
  5. Property-related documents:

    If you have purchased a flat from a builder, you need the following supporting documents to submit to the bank:
      • Agreement - Original copy of your agreement with the builder
      • 7/12 extract - This is issued by concerned land authorities giving details such as the survey numbers, area, date from which current owner is registered as owner and so on.
      • Property register card, which is obtained from the City Survey Department
      • N.A. permission for the land from the collector, if it is agricultural - If the land being utilised for residential/ commercial/industrial use is agricultural, then such it has to be converted to non-agricultural land and a Non-Agriculture Order has to be obtained from the Collector of the district where the property is located.
      • Search report and title certificate - A search report and title certificate can be obtained from an advocate who will conduct a survey of the title of the property by visiting the office of registrar. A legal opinion can avoid any legal hassles later and is mandatory to be filed with the agreement for sale.
      • Development agreement between the owner of land and the builder
      • Copy of the Order under the Urban Land Ceiling Act
      • Copy of building plans sanctioned by the competent authority
      • Commencement certificate granted by the Corporation
      • Building completion certificate
      • Latest receipts of taxes paid towards the land or property or flat to be purchased
      • Partnership deed or memorandum of association of the builders firm

      In case you are buying from a cooperative society, then ensure you have the following documents in place:
      • Original share certificate of the society
      • Allotment letter from the society in your name
      • Copy of the lease deed, if executed
      • Certificate of registration of the society
      • Copy of the society's byelaws
      • No-objection certificate (NOC) from the society
      • 7/12 extract or property register card in the society's name
      • Copy of N.A permission for the land from the collector
      • Search report and title certificate
      • Copy of the Order under the Urban Land Ceiling Act
      • Copy of the building plans sanctioned by a competent authority
      • Commencement certificate granted by corporation
      • Latest receipts of taxes paid for the property
      • Original agreement to assign/deed of assignment

      And if you are constructing on your own land, you will need the following set of documents:
      • Original sale deed of land and extract of Index II
      • 7/12 extract or property register card in your name
      • Copy of N.A. permission for land from the collector
      • Search and title report
      • Copy of documents related to the tax paid under Urban Land Ceiling Act
      • Copy of the building plans sanctioned by a competent authority
      • Building permission granted by the Corporation
      • Latest receipts of taxes paid for your land
      • Estimate of the cost of construction certified by the architect

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