When Do You Replace Your Current Loan With a New One?

Technically called refinancing, paying off an existing loan and replacing it with a new one is done when you have another one available to you at better terms. Timing this refinancing properly makes a big difference to your loan payments.

Here are the situations which make sense to refinance:-
  1. When significant residual loan tenure is left – Refinancing makes sense only when a significant loan tenure is left to be continued via EMI which is generally in the initial years of loans as EMIs mostly focus on interest payments. The restructured loan at a lower rate leads to considerable savings on interest component.
  2. When lower Interest rate is available – Most home loans are floating rate loans, which means they are linked to overall macro interest rate movements. Not all lenders reduce the interest they charge on their loans when the general interest rates in the economy fall. Some lenders reduce their rates after a lag and some do not reduce the rates as much as the base rate declines. Thus, if your existing lender does not reduces the rates as aligned to the benchmark or still continues at higher rates, you can definitely consider switching the lender.
  3. If cost of refinancing is justified and suitable – Most refinancing come with a cost. Do it only when the projected savings from refinancing exceed the costs.
  4. If credit score or income improves – An improvement in both income and credit score puts you in a privileged position to negotiate well for better terms for continuing the loan. Thus it can be exercised while analyzing the alternative.
The below example depicts both the scenarios and lays a pathway to select an ideal option after detailed cost benefit analysis.

(Contributed by Kritika Saini, Assistant Manager, Team Sukhoi, Hum Fauji Initiatives)

Factors To Consider Before Investing in Real Estate

Buying real estate could be one of the biggest financial decisions of your life and is the one which surely needs a lot of your thinking time before you plunge into it. What important points to think of before you go ahead?
  1. Your financial situation – As buying a property requires a very large amount of money, your current income should be stable enough to cater to all your upcoming requirements. You can make the financial projections for upcoming 5-6 months which will reflect your residual purchasing power for the big decision.
  2. Type of property – Properties can be segmented into four categories – Residential, Commercial, Retail, and Industrial. You have to decide the purpose for which you want to invest your money in property and whether it is really serve you and your family well in times to come.
  3. Location of Property – The medium to long-term outlook for how the area is anticipated to change over the investment period is crucial when determining the location. For instance, the quiet open area behind your house now might one day be transformed into a crowded manufacturing plant, lowering the property’s value.
  4. Cash flows – You must be expecting a higher cash benefit from the investment which can be in the form of rental income, tax deductions, increase in valuation etc. So, you should choose your options wisely which can carry all these benefits.
(Contributed by Gautam Arora, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)

My Debt Funds are Performing So Bad, What Is My Advisor Doing?

Investors who have debt mutual funds (MFs) held through us are asking us this question as to why are we still continuing with their debt funds when current new FDs are giving them 6-6.5% (current SBI rate for 1-2 years) while the debt funds return in their portfolio are languishing in the 4-5% range. They argue that we should take their money out of the debt mutual funds and suggest them to put it in bank FDs or better still, good corporate FDs and bonds.

There are two basic reasons why we still tell them to continue with their Debt MFs:-

  1. For the past two years, interest rates were kept low to support the economy during covid-induced economic downturn. If you purchased an FD at that time, say of 1-2-3 years’ tenure, it would be giving you fixed interest rates in the range of 3 to 4%. Even when the interest rates have risen now, you would still receive the same returns since the FD rates were fixed for the entire term unless you broke the FD, bore the premature breaking penalty and then reinvested in a new FD at a higher rate. Now when the interest rates have risen, your new bank FD is offering rates in the range of 6-6.5%. Same way, fresh debt MFs taken now are giving higher rates. Debt MFs always typically give higher returns than the bank FDs taken at the same time. So when we compare the past returns of Debt MFs with future returns of new bank FDs, we are typically driving Debt MF car looking at the rear windshield and Bank FD car looking at the front windshield!
  2. Second reason why we advise the investors to continue with the older debt MFs is because, unlike in bank FDs where the interest rate is fixed for the entire term, debt MF rates automatically reset to new rates with some lag as economy’s interest rates rise – it is like climbing up the ladder as the rates rise. The latter happens because debt MFs are continuously buying new interest rate papers at higher rates and hence, the average rate being given by them to their investors rises slowly and gradually.
Also remember that Debt mutual funds are extremely tax-efficient if you hold them for longer terms of 3 years and more – they would save you as much as 75% of the tax that you would otherwise pay on bank FDs – while having safety as desired by you.

So, stay invested in debt funds and get huge tax benefits while getting better returns, better liquidity and better flexibility compared to bank FDs.

(Contributed by Shaheen Akhtar, Relationship Manager, HNI Desk, Hum Fauji Initiatives)

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