Avoiding prepayment penalty on home loans

The prepayment penalty that is applicable when the borrower decides to pay back in advance a portion of the home loan in order to reduce the interest burden in the long run is a matter concern in all home loans. The banks stand to lose their earning in terms of interest on the borrowed capital which is why they try to discourage prepayment of any kind of loan by incorporating clauses such as the prepayment penalty.

RBI and NHB on Prepayment penalty of Home Loans

Both the Reserve Bank of India as well as the National Housing Bank is against the policy of banks charging prepayment penalties on home loans. Both the bodies have issued directive in this regard to all housing finance companies. However at present the ban on prepayment penalty charges is applicable only for home loans that floating or adjustable interest rates and not on the conventional fixed rate home loans which form the majority of home loans in the country.

Tips to avoid Prepayment Penalties

Here are a few practical points which can help avoid or even reduce to some extent the prepayment penalties that the banks levy of the customers.
 

Negotiate: This is the first step towards prepayment of a home loan whether in whole or partially. The borrower has to discuss and negotiate hard with the lending institution to waive of the prepayment penalties applicable on the home loan. Reasons such as high interest rates and affordability of the loan are justifiable and the banks will find it logical to help out the borrower by permitting partial prepayment, extension of tenure or lowering of Emi rather than ending up in default of repayment situation.

Switch to Floating Rate: Certain banks permit the switching of a home loan from fixed to floating rates in between the repayment period. This is permitted as the floating interest rates are usually a bit lower than the fixed interest rates. Thus prior to prepaying your home loan one must try to switch over first. Once the home loan is changed to a floating rate type then the bank cannot take any prepayment penalty in case the prepayment has to be made in full or partially.

Make partial Prepayments: In certain cases the home loan borrower can approach the bank to permit him to make a partial prepayment of the outstanding amount in order to reduce the net amount on which a high rate of interest is being charged. The banks may permit up to 25% prepayment of the outstanding amount in one go without any penalty being charged thereon. The customer may again attempt to make another prepayment of up to 255 of the now outstanding amount after some intervening period.

Prepayment from Own Source: Prepayment or foreclosure of an outstanding from the borrower’s own sources does not invite any prepayment penalty from the bank. But the onus of proving the source as being his own lies on the borrower. Sources such as maturity of policies or sale of other properties or assets are acceptable means to prepay a home loan without any penalty.

The home loan requires repayment over a period which may be as long as two decades. Thus the borrower must make all calculations carefully while deciding on the amount and tenure of the home loan so that there is no unnecessary EMI burden in between.

Property Prices in India and their future trends

Live chat with users hosted by Mr Aditya Verma, CEO, Makaan.com on Moneycontrol.com. Please have a look at the chat transcipt below -

Q: Sir, out of Dwarka Expressway and Greater Noida, which is better for an end-user? 
A: Both Dwarka Expressway and Greater Noida are coming up essentially as a residential hubs. But between the two, I would prefer Greater Noida for 2 reasons 1. It has a better mix of commercial & residential which is good for any area 2. The prevailing prices in Greater Noida are more attractive as compared to Dwarka Expressway Hope it helps.

Q: Sir, I purchased a 3 bhk unit in Anant Raj Madelia, Manesar for investment purpose @ 2800/- per sqft. What are the current resale rates in the area. Also, what future price appreciation can I see; and what rate is the best for exiting. Thanks. 
A: Your purchase price is extremely good. Most people who entered Manesar during 2009-10 at 2300/- to 3000/- are sitting on good appreciation. The current rates for resale are in the range of 4200/- and 5000/- psf. You can expect a price appreciation of 7-10% pa from here on. Hope this helps.

Q: is the right time to buy property in hyderabad? 
A: Property prices in Hyderabad have remained stable for over 2 years now; check Pricetrends  at Makaan.com for more detail. I feel, this is the right time to invest there due to political stability and clarity.

Q: Sir, Dwarka Expressway area has seen a sharp vertical rise over the past few years. Do you feel that there is still scope for a major appreciation in this area, or you feel the price bubble is just about to burst from here on? 
A: I agree that Dwarka Expressway has seen a vertical rise in property prices. People who invested there 4-5 years back have made good money but the same cannot be said for people who invested in last 12-20 months. There is a BIG gap in prices offered by developers and secondary market. This is not a very comfortable position so people should exercise caution.

Q: Sir, Current rates for buying a plot at Jakkur Bangalore and your comments on investment around North Bangalore?
A: North Bangalore has seen good development over the past few years. You can check the current rates there on pricetrends at Makaan.com. Among all the areas there, I would prefer hebbal, yelahanka among others.

Q: From investment angle which city will be better Noida or Lucknow I want to invest in flats If Noida then whether Noida extension or Greater Noida?
A: I am not sure if you are looking at capital appreciation or rental benefits or both. But if you want both, Noida will always give you better returns. For places to invest, you can search on Makaan.com by using "Invest" button. This will give you properties that can give you better RoA. Among areas in Noida for investment, you can look at Sec: 143, 77 and other areas on Noida Expressway. From a 6-7 years perspective you can also look at Yamuna expressway.

Q: Sir, I have purchased a 2 bhk flat in the Ramprastha Edge Towers, Sector 37d, Gurgaon (Dwarka Expressway). Original issue price was 2300/- per sqft in 2008. I have purchased it at 4125/-, 2 years back thru resale. If you visit the area, it looks like an urban jungle. What price appreciation can I expect in the near future? How would you rate this area for residential purpose? 
A: Sector : 37D, is coming up as an area with high population density. The location of the sector is good and it could have appreciated more if there was more open space. I do not foresee any major price appreciation in the next 12 months. To keep a tap on property prices you can log on to Pricetrends at Makaan.com

Q: Sir, I need your opinion regarding Aashiana Aangan project in Bhiwadi. Is it a wise investment? What price appreciation can be seen in the near future? Also, overall, what scope of appreciation do you foresee in Bhiwadi area. 
A: As a company policy, we do not comment on any specific project or developer; but on a general basis, Bhiwadi can be a good investment destination specially as it falls on the Indo-Japan industrial corridor. An investment there can fetch an appreciation of 7-10% pa. You can also try makaan.com "Invest" link to find more properties for investment in and around Delhi NCR.

Q: Keen to have your views on Jagatpura in Jaipur, purely from an investment pooint of view, with a three to four year horzon?
A: Acitvities in Jaipur real estate market have picked up after the formation of new and stable government. In fact over the past 6 months, Jaipur market has given a decent appreciation in value. In my opinion, an investment at the current rate can give a annual double digit appreciation over the next 3-4 years.

Q: Best region in Hyderabad for investment purpose budget 50 lakh should go for flat or plot of land?
A: In Hyderabad, you can look at Hi-tech City, Kondapur as potential areas for investment. 
 

Home Buyers' expectations from the new BJP led Government: Research done by Makaan.com

India has seen a decisive electoral mandate after a long gap and we have a stable government at the center. All industries are excited about the outcome of the general election. There are talks of sentiment improvement in the real estate sector too. With the intention to gauge the expectation of home buyers from the new BJP-led government, Makaan.com, India’s fastest growing property site, conducted a research in the month of May 2014 among 1400 home buyers in the cities of Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad, Pune, Kolkata, Ahmedabad, Chandigarh, Indore and more.

Key expectation of Home Buyers’ are:

1. Home buyers are excited about the positive impact on real estate & are planning a property purchase

Home buyers were sitting on the sidelines for the past 1-2 years, hesitating to put their hard earned money in the property market, waiting for the economy to revive. This mood seems to have given way to a more optimistic sentiment. When asked whether the new government arrival will have a positive impact on real estate sector, the majority, 80% of home buyers answered in affirmation. The development agenda, which was the central theme of the election campaign, seems to have created a resonance among the Indian home buyers and they counting on the new government to keep its promise. It needs to be seen whether the new government will consider the aspirations of the home buyers and give them enough reasons to smile.

To check, if this positive sentiment will lead to increase in actual transaction, we quizzed home buyers on their intention to buy a property. A sizable number percentage (38%) are extremely excited and are planning to buy a property in next 6 months. Another 34% expressed their intention to buy property in next 12 months (see chart below).

2. Homebuyers expecting drop in property prices          

Property prices have remained stable over the past few months and the mood of the market might change to a drop in property prices. 26% of home buyers feel that the residential property prices would drop of over 10% in the coming 12 months. Almost an equivalent number expect the prices to remain stable. 19% of buyers expect the prices to go up from the current level with majority of them expecting an appreciation of up to 10%. This should bring some relief to the buyers in the coming months. It is widely debated that the real estate prices can be brought down by 10-20% just by simplifying the procedural delay and by offering clarity to developers regarding approvals. The government has already indicated that they would look into the issue.

3. Budget of Home Buyers is likely to remain the same, after the announcement of new government

The budget of the Indian Home Buyers has remained the same in-spite of the economic slowdown of the past few years. 62% of buyers are willing to spend the same amount of money as they have budgeted for, around 1-2 years back (but were waiting for the right opportunity). There are 30% of buyers who have reduced their budget allocation while there are another 8% who are ready to dish out more money for property buying.

4. Property investment budget for home buyers is 0-40 lakhs

Owning a home has been a priority for Indians since ages; it is treated as a symbol of financial stability and social status. Affordable housing (budget upto 40 lakhs) will continue to be a preference for majority of home buyers with almost 60% buyers opting for this. Mid segment housing (40 to 75 lakhs) will be the preferred budget category for 27% of home buyers. High end housing (75 to 125 Lakhs) will be preferred choice for 8% of buyers whereas 5% of buyers will be looking for luxury housing (budget over 125 lakhs). There seem to be an expectation that the new government will take steps to boost affordable housing so that people can realze their property dream. It needs to be seen if this demand will be attended to or not.