Posted tagged ‘home loans’

Mortgage: Do not pre pay your home loan!

July 1, 2008

I am normally against loans for buying things – all my blogs say that. So if you think I am breaking my own rules, well let me clarify. I will give you reasons for NOT repaying the loans in a hurry. The reasons are simple:

1. We will continue to inflate, so if you have a fixed mortgage, do not panic! If you have taken a Fixed Rate Mortgage (say at 13%) recently hold on, do not be in a hurry to repay the loan.

2. Compared to all other loans, Mortgage loans will be the cheapest. So do not repay your home loan and borrow for a car, or a holiday or even for children’s education. Nothing comes as cheap as a home loan.

3. Build some cash reserves in a money market mutual fund for emergencies. There is a general tendency among many people to repay all the loan and suddenly not know from where some important expense will be paid from!

4. When you first borrowed, you were scared, were you not? Most people are very scared when they borrow for the first time. However, when they repay they are confident. Once the loan is repaid and the excess amounts are available you itch to buy a new property! So if you have taken a 25 year mortgage, and in the 7th year you are able to repay the whole loan, rest assured you will borrow again for a bigger house – maybe in 2 years time. If you have any intentions of taking a bigger loan, DO NOT repay the old loan till the date of the new loan.

5. Though I am against borrowing just for tax purposes, current tax position is that your mortgage payments are looked at more favorably than other loans and their interest payments. So let the mortgage run…especially during inflation.

6. Immaterial of whether you repay the loan or keep it, your asset will appreciate (or depreciate!): So it actually does not matter whether you keep the loan or not.

7. However having kept the mortgage (at 13.5%) do not invest in a RBI bond (which pays you 8% taxable). Put that money in a SIP in an equity fund. In 7-10 years time you will look smart, even though in the short run you may have looked bad!

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Are you in debt? Do not stop investing.

March 31, 2008

In a topsy-turvy world, you need to live by the new rules.

So, if you have some money saved or invested and want to see it grow, well, that’s the spirit, right? Well, for many, the biggest impediment is debt. Your investment strategy may be bogged down by e
ducation loans, car loans, house mortgage, personal loans, etc.

Does this mean you should not invest and keep postponing your investment program?

No!

No doubt, being in debt, could make it tough for investors to make money; because if you have some high-cost debt it may not be possible to get returns higher than the rate of interest at which you have borrowed. Hence it is thought to be counter-productive to simultaneously invest as well as borrow.

Expert say

Many financial planners would suggest that you pay out or cut down your debt. In other words, if you have a credit card loan at an interest rate of 42% per annum (pa), the money you are investing will have to make more than 42% pa to make it more profitable than simply paying down the debt. There may be investments that deliver such high returns, but you have to be able to find them, knowing you are under the burden of debt. I surely cannot find them.

The debt trap

You may be paying off the following:

1. THE most expensive loan

This is your credit card debt. High interest is relative, but anything above 30% pa fits in this category. Carrying any kind of balance on your credit card or similar high-interest vehicle makes paying it down a priority before you start to invest.

Personal loans at 30% pa are also included in this category. Despite a bull market (which may last another five years?), getting a 30% pa return on a sustained basis is a pipe dream. Also did you know that SIPs started as back as a year back are now in the RED? (31 Mar, 08 – today’s comment). You should also be keeping track of your net-worth and for this you could go to www.myirisplus.com which has a software that helps you track your net-worth.

2. Low-interest debt

This can be a car loan, a line of credit, or a personal loan from a bank. The interest rates are usually described as prime plus a certain percentage, so there is still some performance pressure from investing with this type of debt. It is, however, much less daunting to make a portfolio that returns 12% pa than one that has the pressure to return 25% pa.

3. Tax-deductible debt

If there is such a thing as good debt, this is it. Tax-deductible debts include mortgages, student loans, business loans, investing loans and all the other loans in which interest paid is returned to you in the form of tax deductions. Because this debt is generally low interest as well, you can build a portfolio while paying it down.

Note: The types of debt we will cover in this article are long-term low-interest and tax-deductible debt (like personal loans or mortgage payments). If you don’t have high-interest debt or, better yet, all your debts are tax deductible, then read on. If you do have high-interest debt, you’ll need to pay it off before you begin your investing adventure.

The time to invest is NOW
Debt elimination, particularly of something like a loan that will take long-term capital, robs you of time and hard-earned money. In the long term, the time (in terms of compounding time of your investment) what you lose is worth more to you than the money you actually pay (in terms of the money and interest that you are paying to your lender).

You want to give your money as much time as possible to compound. This is one of the reasons to start a portfolio in spite of debt (but not the only one). Your investments may be small, but they will pay off more than investments you would make later in life because these small investments will have more time to mature.

The plan
Instead of making a traditional portfolio with high and low-risk investments that are adjusted according to your tolerance and age, the idea is to make your loan payments in place of low-risk and/or fixed-interest instruments. This means that you will be seeing ‘returns’ by the lessening of your debt load and interest payments rather than the 4-8% return on a bond or similar investment.

The rest of your portfolio should focus on the higher-volatility, high-return investments like equity shares and equity mutual funds. If your ability (or willingness) to take risk is very low, the bulk of your investing money will still be going towards loan payments, but there will be a percentage that does make it into the market to produce returns for you.

Even if you have a high-risk tolerance, you may not be able to put as much as you’d like into your investment portfolio because, unlike bonds, loans require a certain amount in monthly payments. Your debt load may force you to create a conservative portfolio in which most of your money is being ‘invested’ in your loans with only a little going into your high-risk and return investments. As the debt gets smaller, you can readjust your distributions accordingly.

The big picture
It’s a one-point conclusion: you can invest in spite of being in debt. The important question is whether or not you should. The answer is very personal and can be determined on a case-to-case basis. There is no denying that there can be benefits from getting your money into the market as soon as possible, but there is no guarantee that your portfolio will perform like it needs to. Such things depend on how adept you become at investing.

The biggest benefit of investing while in debt is psychological. Paying down long-term debts can be tedious and disheartening if you are not the type of person who puts your shoulder into a task and keeps pushing until it is done. For many people who are servicing debt, it seems like they are struggling to get to the point where their normal financial life — that of saving, investing, etc — can resume.

Being in debt is pretty much a state of limbo state, when things seem to be happening in slow motion. By having even a modest portfolio to distract you from the tedium, you can keep up your enthusiasm with regards to finances. Knowing that the sun will come up and being able to see the dawn are very different experiences.

For some people, building a portfolio while in debt provides a much-needed ray of light. It is like your first day at the gym. You keep regretting all the sweets, and fried stuff that you ate. What you can now do is get on the treadmill and start the work-out!

PS: Did you know that your weight is a much larger function of what you eat and a small function of how much you burn?

Do I need to do any personal financial planning?

February 21, 2008

 Do I Need Personal Financial Planning?

Planning for a secure financial future is a must! It can be done, and is not easy.

  • Maybe you’re saving to buy your first home.
  • Perhaps starting your own business is a dream.
  • The costs of a college education have spiraled and you may wonder how you will pay for your child’s education.
  • You will probably live longer. Additional years after retirement can cost more than originally planned.
  • Your company pension plan may not be enough to maintain your standard of living after retirement.
  • Complex financial marketplace and changing tax laws make it difficult to understand your financial picture.

Everyone needs to plan for tomorrow. At every income level, there are steps you can take to make more efficient use of your assets and to ensure a secure financial future. It makes sense to develop well-defined goals and to map out appropriate strategies to turn your dreams into reality. To help you get started, below are some frequently asked questions about personal financial planning.  

What is personal financial planning?

Personal financial planning is a process, not a product. It is an organized, well-planned system of developing strategies for using your financial resources to achieve both short- and long-term goals. You may think of the process as helping you to answer three straightforward questions:

  • Where am I?
  • Where do I want to go?
  • How do I get there?

When should I start planning?

It is important to start planning as soon as you can. Time passes quickly – it is never too soon to start planning for tomorrow. Nor is it too late to start a plan. 

Who should prepare my personal financial plan?

A well-qualified financial adviser should work with you to prepare your plan. A CA financial planner combines the objectivity and trust long associated with the CA profession and the years of experience and expertise in personal financial planning. However, if he does not do this for a profession (most of them do not), look for a financial planner who is a full time professional.   

 What should it include?

A comprehensive financial plan – one that addresses your entire financial picture – should include a review of your net worth, goals and objectives, property and other assets, liabilities, cash flow, investments, retirement planning, estate planning, tax planning and insurance needs, as well as a plan for implementing your goals. 

 I don’t have a lot of money. Do I need a full-scale financial plan?

You may not. You can seek out different levels of financial planning advice, from counseling on a particular issue to comprehensive planning. Speak to the advisers you are considering and discuss with them your requirements. You should be able to find one who meets your needs.  

 What role does goal-setting play in financial planning?

It is important to list both short- and long-term financial goals on paper. You can then rank the importance of the goals. If you are saving toward something tangible, instead of just saving, it may be easier. These goals could include: available cash for emergencies, education for children, care for family members, retirement, a nest egg to permit a career change, acquiring or selling a business, estate planning, financial independence or personal objectives such as a special vacation or second home.  

How do I know how much I am worth?

One of the first things that you should do in reviewing your financial situation is to determine your net worth. Many people are surprised to find out how much they are really worth. First, estimate the value of your assets. If you have owned your home for a number of years, you may be sitting on a nice nest egg. Several different real estate appraisals will help you determine its worth. Organize bank, mutual funds, insurance policies and brokerage statements and record their value. List your liabilities such as housing loan, car loans or credit card debt. Subtract your liabilities from your assets and you will have a good estimate of net worth.  

 How can I plan for tomorrow when I can barely pay for today?

Create a budget. Determine what you actually spend each month. It is easy to keep track of large expenses such as mortgage and car payments. The variable items such as food, clothing and entertainment are often what get away from us. Write your expenses in a diary or an excel sheet – it is far more efficient than the human memory. The human memory is selective in remembering. Excel and diary are not  

 How much should I be saving?

It is hard to apply a rule of thumb toward savings, because it varies with age and income level. Ten percent of CTC is a good start. If that amount is too high for you, do not let that deter you. You can start by putting a little money aside each month and slowly increasing it.     

How does insurance fit in to the process?

Evaluating your insurance needs is part of personal financial planning. The insurance industry has changed a great deal over the past few years and there is a wide array of new products. Some of them may be better options than your current coverage.  

Do I need a will?

Everyone needs a will. Whether you are single or married, you need a will. No one but you knows how you want your estate divided after your death. It is especially important if you have children. If you do not have a will and both you and your spouse die, the court will appoint a guardian for your children. Maybe you would have chosen someone else.  

What type of advice can I expect from a financial planner?

You can expect objective financial advice that is tailored to meet your financial goals and objectives, as well as the level of risk with which you are comfortable. Depending on your unique situation and goals, your financial planner may confer with your lawyer, stockbroker, insurance agent and other investment advisers to achieve the best plan for you. 

 After a plan is developed, what happens next?

The best plan is useless unless put into action. A financial planner can advise you how to implement the plan and can put you in touch with other financial experts as needed.  

How often should I update the plan?

It is good to review the plan when there is a significant life event such as marriage, birth, death or divorce. Any change in financial position should be evaluated as well. Many people have an annual update that reviews how the plan is being implemented. The review also considers changing goals and circumstances.

  

housing loans cheaper by 33%

January 19, 2008

“Never a borrower nor a lender be” because a loan normally loses itself and the friend. This is an old adage right?

Surely Nehru, Gandhi, Rajaji did not have a credit card but their great grand children would all be carrying a credit card, maybe a housing loan (or home mortgage as yankees say it), a car loan, and perhaps even a personal loan.

Though I am a lil ol’ fashioned in saying that borrowing is bad, I guess today everybody has a loan. So if you must borrow, you should take a home loan – which is about 33% cheaper because it is tax deductible.

Do not be in a hurry to repay your home loan, and then take a car loan – it makes no sense. Keep the home loan for the fullest possible term and the surpluses (which tempt you to repay the housing loan) should be invested aggressively or used to repay the more expensive loans like car loans, personal loans, credit card loans.