Topping-up on your home loan? There's a catch

If you are a home loan customer, top-up loans are for you in case you have additional requirement of loan for extension, renovation, modification, painting or even for additional features like buying a parking lot.

So all you home loan customers, you can get this topping in the form of incremental loans on top of your home loans known as top-up loans.

The top-up loans have some simple conditions to fulfill. As you pay your home loan, your loan outstanding (what you owe to the your lender) decreases, which makes you eligible for these top-up loans. Lenders find it easier to grant these loans as there is very little documentation requirement. Moreover you are adding up more loans into your home loans.

But every lender has a criteria to consider to grant you these loans like you should have serviced (begun repayment) the home loan for a particular period of time. For some lenders it is not compulsory, they exercise their own discretion. It goes without saying that you should have an excellent repayment record.

So how do lenders decide on the amount?

It is dependent on the following factors:

• Your loan outstanding (the amount your need to repay to the lender)
• Your property value (current market value of your property)
• Your repayment capacity (earning and savings)

Another advantage is that you can use this amount even for meeting other financial emergencies as these can be treated as personal loans, where interest rate is better than personal loan.

But you cannot use such loans for speculative purposes. Ideally you should utilise them for modifying, renovating or acquiring add-ons to your existing home as only then you can claim the tax benefits for the top-up loans.

Like if you have utilised the amount for buying the parking space or painting the house then you will be entitled for tax benefit but if you have utilised the funds for buying furniture, fixtures or furnishings then tax benefit will not be available.

These deduction are same as home loan deductions of Rs 100,000 for principal repayment and Rs 150,000 for the interest payment.

What's the catch, then?

Many private sector and PSU banks offer the top-up loans. However, the home loan outstanding and the top-up together cannot exceed 70 per cent of the market value of your property. Added to this, there is a maximum cap, which differs from lender to lender.

But not all is that hunky dory, there are few catches involved which you should know about.

Lenders have certain in-built conditions like that in the first year of availing the top-up, any prepayments made towards your home loan (partial or full) will be adjusted towards only your top-up loan. This way your housing loan stays put for that year.

Another factor to consider is while you may end up getting a substantial amount at a great rate with minimum documentation, you will be able to repay the loan for the same tenure as your home loan.

So till now you were thinking that these are unsecured loans at great rates but remember you lender already has the security, that is in the form of your house.

Most importantly do not forget that you are raising another debt against your home, so you should evaluate all the pros and cons before going for these.

Impact of Union Budget 2010 on our Economy and Markets

Impact on the Economy:

The Union Budget 2010-11 presented on Friday has several important implications for the

economy as well as equity and debt markets for the year ahead. Broadly speaking, the

government aims to improve its finances by reducing subsidies and normalizing indirect taxes

even as it has reduced income taxes on individuals. Over the last couple of years, because of

the macro-economic crisis and rise in subsidies due to high commodity prices, the

government’s finances weakened considerably and the government has announced a multiyear

road map to improve its finances. Specifically this budget aims to reduce the gap between

the government’s overall revenue and expenditure, called fiscal deficit, from 6.7% in FY2010 to

an estimated 5.5% in FY2011.

The most important driver of improving long-term finances, and indeed generating surpluses

necessary for investment, is growth in economic activity. The budget has either maintained the

momentum, or increased it, as far as demand drivers of the economy are concerned with more

allocations to various development and infrastructure segments. We believe that reduction in

income taxes on individuals, will put more money into the hands of consumers who in turn will

provide a boost to private sector demand. This will also partly neutralize the impact of the rise

in prices that will happen in various segments, such as petrol and diesel prices, on account of

reduction in subsidies. GDP which is on an improving trend overall, notwithstanding the impact

of weak monsoon, will maintain the momentum in FY2011 and will show a higher GDP growth

rate than FY2010. As such the budget for the overall economy is growth enabling even though it

is likely to be mildly inflationary.

Impact on Equity Markets:

What is good for economy is usually good for equity markets. We believe the budget will

provide an additional boost to the already strong domestic demand, particularly in the

consumption-oriented segments. From corporate revenue and earnings perspective, the

budget has positives for consumer sectors such as Auto, negatives for cement and realty

sectors and is neutral for banking sector. Also this budget is likely to enable a positive

environment for infrastructure and capital goods sectors, given the increased outlays and

additional tax break on infrastructure bonds. Overall the budget does not alter our view that

FY2011 will be a year of economic revival, and also a year of strong growth in corporate

earnings which is a significant improvement from the flattish trend observed over last two

years.

While growth in earnings will remain robust, however the market valuation multiple is likely to

remain capped, closer to the long-term trend line levels of 14-15 times one-year forward

earnings, given the government’s planned disinvestment target of Rs 40,000 Cr for next year.

We believe that there is a case for range bound markets in the short-term driven by factors like

current valuations and likely supply of paper on account of fresh issuances in the backdrop of

resurgent economic growth and capital flows.

Impact on Fixed Income markets:

The government has taken the first step towards fiscal consolidation by reducing the deficit to

more sustainable levels in the Union budget for FY2011. The government announced a fiscal

deficit target of 5.5% of GDP for FY2011 compared to a deficit of 6.7% of GDP registered in

FY2010. The government aims to achieve this through:

•  Improvement in tax to GDP ratio by increasing excise duty rates, Minimum Alternative Tax paid by corporates and increasing the scope of service tax
• Less than expected increase in overall expenditure
• Higher receipts through disinvestment and auction of 3G telecom licenses

As a result the net market borrowing program for the FY 2010-11 has been reduced to Rs.

345,010 cr compared to Rs. 398,411 cr for the FY 2009-10. The commitment by government to

further reduce its fiscal deficit to 4.1% of GDP by in FY 2012-13 is likely to lead to lower interest

rates in medium term.

However there may be some pressure on government security yields in the near term as the

government hits the market with next year’s borrowing program in an environment

characterized by rising inflation, possible interest rate hikes by RBI and possibly no support

from RBI in the form of Open Market Operation (OMO) purchases of government securities. As

a result yields may gradually drift higher from current levels and peak out some time in the first

half of next fiscal.

Overall this as an economy friendly budget in the medium to long term due to positive intent

shown by the government in the areas of social spending, fiscal consolidation and tax reforms.

While the view on equity markets is one of range-bound markets or on debt markets is one of

pressure on yields in the near term, no long-term savings or investment decision should be

taken based on short term outlook of the markets. India remains one of the fastest growing

economies in the world, least impacted by global crisis, and therefore Indian equity and fixed income securities remain an attractive investment opportunity in the long-term savings

portfolio.

Health insurance plans: New kind of tax benefits

With the tax planning and investment season coming to an end this month, many are running around to get the best of the plans available in the market. Most of the limit available under Section 80C would have been over by now.

Are there other ways to get tax benefits from taking up useful investments/expenses? Yes, there is always the health insurance plans.

Health Insurance Premium: Expense or Investment?

Health insurance premium is technically an expense, as it does not buy any assets. However, it does buy one something more precious than any physical or financial asset - 'Peace of Mind'. We can have the confidence that in case of a medical emergency, there is the insurance plan to take care of the expenses - to a larger extent if not to the fullest extent.

Looking at health insurance from the point of view of stress free living, it is an investment.

Tax Benefit from Health Insurance Plans

Health insurance plans get benefit under section 80D in the form of deduction from taxable income upto Rs.15,000/- for non-senior citizens and upto Rs.20,000/- if senior citizens are covered. But many a times for a normal household with parents under the age of 45 and 2 children, the premiums may not come upto the levels at which one can maximise the Section 80D benefits.

New Plans in the Market

Several companies have come up with plans to meet the needs of those who to have health insurance and also make use of the Section 80D benefit to the full. Companies like ICICI [ Get Quote ] Prudential Life Insurance, ICICI Lombard General Insurance and Star Health Insurance have come up with health insurance plans where the premium is fixed at Rs.15,000 or nearby values. The benefits from the plans in terms of medical cover and number of people covered can be determined as per the requirements of the insured.

All these plans also give cash-back facility for out-patient treatment. Normal health plans do not cover out-patient treatment except for some special surgeries. The out-patient claim per year is fixed based on the number of people covered and also the overall medical cover for the family.

These are useful plans to consider.

Higher Insurance Covers

Companies like United India [ Images ] Insurance and Star Health Insurance have come up with plans one can take very high covers for health (above Rs.5,00,000). These companies are offering such plans as extensions to existing plans from their own companies or any other company.  Supposing Ramesh has a cover for Rs.3,00,000  from a company and has had the plan for the past 2 years, he will not want to shift from that company, as he will get cover for any pre-existing disease form the 3rd year onwards, also he would have got no-claim benefits.

Supposing he wants to increase the cover to Rs.10 lakh now, his original company may not have a plan to give such high covers. This is the place that the new plans come in, they will provide cover to Ramesh for any claim above Rs 3,00,000 till Rs.10 lakh (1 million).

The premiums for these plans are relatively less compared to the base health insurance plans.

Section 80D

Till last year there was not much choice for tax savers to maximise the benefits under Section 80D. This year a number of companies are offering innovative plans specifically for this purpose. It is no doubt that these plans will be useful in the long run. Hope the tax savers find the money to spend on these plans. These are expenses to get an asset called 'Peace of Mind'!