Sunday, November 29, 2015

Getting Prepped to Buy Your Dream home – Part 1

Buying a home is a “Dream” for most of us and most likely involves applying for a home loan to fund the purchase – isn’t it? Buying a house is supposed to be a pleasurable experience but applying for a loan and all of the processing associated with it as well as dealing with your builder can make the experience far from pleasurable.

Once you sign-up for a home, you are only going to focus on the cost of the house (per the agreement). Similarly, from a home loan stand point, sanctioned you will be constantly thinking about the monthly EMI and how it is going to impact your monthly cash flows. Unfortunately there are a lot of additional items that you may need to keep in mind while dealing with your bank as well as your builder.

Before we Begin: As someone who recently purchased his first home home, I can vouch for the fact that deciding on the house and the bank to apply for the loan was the easy part. The rest of the negotiations with both the builder and the banks loan agent were quite exciting. As I keep myself informed on the developments on the banking & finance side, I was able to negotiate on a lot of aspects with regards to the loan but from a home owner standpoint, I was a novice and had to learn a lot of things the hard way. The purpose of this article is to help you learn what they are and be prepared for your “Dream Home Purchase”

In Part 1, we will cover the unplanned items from the Builder side and in Part 2, we will cover the unplanned item from the Banks side.

Unplanned Fees and Charges for the House – Builder Side

The below are some of the additional costs I had to incur because either these were not part of the construction & sale agreement or the same weren’t clearly mentioned in the agreement. You would need to clearly negotiate as many items as possible before the agreement is signed. Otherwise, you may have to shell out a lot of money. 

Flooring & Tiles

If you see the house specifications in the brochure as well as in the sale agreement, you would find that the builder would’ve mentioned some leading brand of Vitrified tile for the floors and the bathroom walls. What they will conveniently exclude is the fact that, the model/version of tile they offer is the most basic one and doesn't come with very many color or pattern choices. If you actually want to choose for a nicer design for the bathroom or a better quality tile/pattern for your house floor, you would have to shell-out extra money.

This is exactly what happened in my case. We did not like the basic tiles that were being selected by the builder and this being our first house, me and my wife wanted to choose better quality tiles for the floor and tiles with pleasing designs for the bathrooms.

To make matters worse, if we had chosen the tile designs ahead of time, we could’ve at least included this extra cost in the sale agreement and tried to fund 80% of it through the home loan. Since we weren’t aware of this funda, we had to shell out a ton of money from our pocket and arranging the extra cash wasn't easy considering the fact that most of our savings were depleted after making the upfront 20% payment from our side.

Tip: Negotiate on the cost/design of the tiles that would be provided and make sure to include that in the sale/construction agreement so you could have the bank pay 80% of it.

Kitchen Cabinet and Modular Kitchen

Most indian women want a spacious kitchen and no matter how many cupboards and shelves we have in there, they would feel its insufficient. My wife wanted a modular kitchen with multiple cup boards and Chimney/Exhaust provisions. The builder wasn't going to provide this as part of the standard house package and this we knew very well when we signed up for the home. So, when we set up the cabinets/cupboards as well as the modular kitchen, we were prepared for the expenses.
Some people may not be aware of this and would be surprised to see an empty kitchen with just the granite slab for us to keep the Cooker/Hob and the washbasin/sink.

Tip: Negotiate with the builder if he offers modular kitchen as well as shelves/cabinets as part of the package. If so, add it to the construction & sale agreement so that you could have the bank 80% of the cost.

TDS Payment on your Home Purchase

When the builder sells you the house, he is earning a big sum (in lakhs) and he needs to pay taxes on his income/profits. A % of this profits has to be paid to the Government of India by the Builder as Taxes and you already know this – right?

What most people don't know is the fact that, for all home purchases worth 50 lakhs or more, a 1% up front TDS has to be paid by the buyer and this can be deducted from the payment that is being made to the builder. For ex: If your house is worth 75 lakhs, while making the payment to your builder, you can actually deduct 1% of the cost (Rs. 75,000) and only pay the remaining 74.25 lakhs.

The Government has put this rule to track all high-value real estate transactions. You as buyer are expected to deduct this money and make the TDS remittance online @ or on a good-will basis ask your builder to take care of it. My builder was generous enough to handle this activity. All he asked for was the PAN Card information of the house owner.

Tip: Irrespective of whether you make the payment or you ask your builder to do it, just remember that this 1% amount is part of the cost of the property you are buying. If your builder is asking you to pay him an extra 1% just for this TDS, you can easily figure out that he is trying to take you for a ride. The builder is anyways going to factor this 1% TDS in his tax returns and if you actually pay him the extra 1% just for TDS, its obviously going into his unaccounted (read BLACK) corpus.

Car Park, Electricity/Water Line Etc…

Some builders are quite devious in underquoting the cost of the property while trying to sell the house and then shortchange you once you pay the initial token deposit. They will add things like Car Park, getting an electricity line or water line, security deposit etc etc to the overall cost of purchase and you may end up paying for all these as unplanned expenses.

Tip: Talk to your builder clearly and make sure he includes all these charges as part of the overall package before you sign the agreement or make the initial deposit. Once you sign, your leverage to negotiate goes down considerably. You are no longer a prospective customer. You are an existing customer who has no choice but to finish the payment to get possession of the house and they very well know it.

In the next article in the Getting Prepped to Buy your Dream Home series, you will find out about the unplanned charges & fees that your bank may charge you for taking a home loan from them.
Hope you found this article useful. If you did, do share this in social media (facebook/twitter/google) so your friends and contacts could benefit from this information too…

Happy Home Buying!!!

Tuesday, November 24, 2015

Is HDFC Life Click 2 Retire Pension Plan – A Worthy Investment?

In one of the previous articles, I had explained everything about the Click 2 Retire Pension Plan from HDFC Life. Now that you know all the details, it is time for me to share my views on the product. After all, you can actually find most of the info that I listed out in the previous article in the product’s brochure or pamphlet.

Just to Recap, HDFC Life Click 2 Retire is a Unit Linked Insurance Plan that is aimed at helping individuals accumulate a corpus for their Retirement Life that would guarantee a Steady Pension for their golden years. The purpose of this article is to review the plus points as well as minus points of this product. 

Plus Points of the Click 2 Retire Pension Plan

There are many good things about this product. Let’s review them one by one.

Reason 1: Easy to Use – Online Application Process

In this day and age where people want to spend more time with their families and less time at banks & insurance companies. Any product that offers an easy online application and sign-up process is always a great choice for customers…

Reason 2: A Good Choice for Regular Pension during Retirement

India is one of those countries that does not have a robust Social Security System. A Recent Study conducted by Mercer Corp, actually analysed the Pension Schemes & options available in various countries across the Globe and guess where India Ranked? Our Index score was 40.3 out of 100. The Analysis from Mercer mentioned our system as “A System that has some Desirable features, but also has Major Weaknesses and/or Omissions that need to be addressed. Without these Improvements, its efficacy and sustainability are in Doubt”

Except the Employee Provident Fund and Employee Pension Scheme that is available only for salaried employees of registered companies, we have nothing else. The National Pension Scheme hasn’t gained much traction and we still have a long way to go until our Retirement or Pension System is good enough. So, I would say this analysis by Mercer is quite accurate…

At the end of the day, it is up to the citizens of this country to set up enough financial avenues for their retirement years. This Click 2 Retire is a good product for people to save money regularly and eventually save up a Nest Egg that can generate regular pension for Retirement.

Reason 3: Guaranteed Maturity Benefits

One of the biggest complaints about ULIP Plans so far has been the fact that, agents and advisors put up fancy earnings projections with 12% or 15% rate of returns and convince investors that the product is some awesome deal. In reality, most such products were high priced and haven’t been able to generate even decent returns for its investors. One of the key highlights of this plan is the fact that, HDFC Life Guarantees the Minimum Amount you will receive when your investment matures. If your fund has performed well, obviously you will get a much higher amount but at least the downside is guaranteed which is a Good thing because – we Indians as a group are a very Risk Averse bunch and prefer Guarantees than Uncertainties…

Reason 4: Low Fee Structure

I have reviewed quite a few ULIP Products in the past few years in blog as well as my books and to be honest with you, this plan is one of the few plans where the fees are quite reasonable. If you go back to the article that explains the features of the HDFC Click 2 Retire Plan, you will see that there is a Fund Management Charge of 1.35% and an Investment Guarantee charge of either 0.1% or 0.5% which means, the overall fees you will end up paying will be between 1.5% to 2% which is quite reasonable.

Reason 5: Tax Benefits

Actually speaking, I shouldn’t be adding Tax Benefits as a plus-point here because almost all ULIP Plans available in the market these days actually offer tax benefits. But still, truth be told, by investing in this product, you are going to reduce your tax liability every year which again is a Plus Point, isn’t it?

Reason 6: Planned Equity Exposure

I have been a strong supporter of Equity Investments for long-term financial planning by considering the earning potential Equities has over a period of many years. At the same time, Equity markets can be unpredictable in the near term and if you stay with a heavy Equity Exposure towards the end of your investment tenure, you may lose out a lot due to short-term volatility. This Click 2 Retire Plan starts off with a substantial Equity allocation and years go by, the % allocation towards Equity is gradually reduced. Towards the end of your investment, the fund aims to preserve the corpus you have accumulated so far which again is a Plus Point.

Minus Points of the Click 2 Retire Pension Plan

As with any investment product, there are two sides of the coin. We just covered all the plus points of this product and it is only fair if we cover the negatives, isn’t it?

Reason 1: No Flexibility to Choose Investment Options

Though this plan has an investment philosophy where they start off with a high Equity exposure and move on towards Safer options as time goes by, the limitation that the customer doesn’t have the flexibility to choose where he wants his money. Let’s say, after 10 years, if I wanted to have a higher Equity Exposure and am willing to bear the risk, the product wouldn’t allow me.
Yes, moving towards Fixed Income options towards the end will help protect my Nest Egg but, it wouldn’t help my Egg grow much wouldn’t it?

Reason 2: No Insurance Coverage

Though the term ULIP Actually refers to a Unit Linked Insurance Plan, this product is actually a Pension Plan and has No Insurance Coverage. In case the policy holder dies during the policy duration, his family will get the higher of either the Fund Value or 105% of the Premiums paid so far. Though the value of the deceased investor’s investment or 105% of the money paid as premiums is available to his/her family the point here is that, that’s all they get. Most ULIP Products in the market actually offer Insurance Coverage and suggest a “Sum Assured” when the investment starts. This Sum Assured is paid out in the event of the unfortunate death of the policy holder.

The absence of such an option could be a Big Minus Point for this product.

Of course, to be clear, this isn’t an Insurance Product. Rather, this is more an Investment Product aimed at building a Nest Egg by means of regular investments at low cost. Providing Insurance Coverage basically means the Insurance Company bears some risk and the fees are passed on to the customers. Considering the fact that the customer isn’t being charged hefty fees just to provide Insurance Coverage, this wouldn’t be considered such a Big Minus Point.
Still, a Minus Point is a Minus Point…

Reason 3: Limited Withdrawal Options @ Maturity

Per the policy features, at maturity there are only three proper options – A customer withdraws up to 1/3rd of the maturity proceeds and buys an Annuity product for the remaining or buys an Annuity product for the entire Amount or buy a Single Premium Deferred Pension Plan.

This basically means, if for some unforeseen circumstances, I need the money when I retire, I cannot get my hands on my money and have to settle for a Monthly Pension through my Annuity or the Deferred Pension Plan.

Yes, the purpose of this plan is to provide a regular pension post retirement but, I would’ve preferred to have an option wherein as a customer, I have the option to withdraw my full corpus even if it means I pay a small fee.

So, this is one more Big Minus Point on this product.

Note: At the time of maturity, customers who are below 55 years of age can actually defer the maturity date and extend the product for a few more years. This option hasn’t been considered as a withdrawal option for this point because that is basically just an extension of the policy tenure and after the extended tenure, the withdrawal options are pretty much the same as they were before the extension.

Reason 4: Limited Annuity/Pension Options

Another important point about access to our investment at the end of the policy term or at Surrender is the fact that, the customer has No Choice but to Purchase the Annuity Product or Single Premium Pension Plan from HDFC Life. Even if other Insurance Co.’s are offering better Products, the Customer would be restricted to buying them from HDFC Life and they have No Other Choice. This could be a big drawback for a customer because, HDFC Life at its discretion could choose to reduce the yield of its Annuity or Pension Products and the customers whose policies are maturing that year would have to live it with…

So, this too is a Big Minus Point on this product.

My Review Score

If I were to Review this Product on various aspects, the scores would be as follows

6.75 out of 10 isn’t a bad score considering the fact that most ULIP Products available on the market may not even cross the 5 out of 10 if we evaluate them on these aspects. So, all in all, I would say this is good product…

Who is this Product For?

This product would be a Good Choice for you if you feel more than two of the points below are true:

1. If You Do Not have a formal Pension System that will fund your Retirement Years

2. If You Do Not wish to withdraw the Entire Corpus @ Maturity
3. If You Intend to stay Invested in the Long Run and will continue to make Premium Payments as agreed in the policy document
4. If You Intend to Sign-Up for a Term Insurance Product that will provide the Requisite Insurance Coverage for your Family
5. If You are OK to purchase the Annuity product from HDFC Life at Maturity

Who is this Product Not For?

This product would not be a Good Choice for you if you feel one or more of the points below are true:

1. If You have a Formal Pension System that will fund your Retirement Years (Ex: Company Covered Pension System)

2. If You feel Withdrawal of Maturity Proceeds is your preferred Choice
3. If You feel you Need more Investment Choices and the Ability to choose how much % of your investment each year will get invested in the Equity Markets
4. If You Feel you can invest your Maturity Proceeds into different products and can Generate a higher income than Annuity Products

Some Last Words:

A huge chunk of the working class population of our country still Do Not have access to formal Pension options for their golden years plus, most of us may not have the time or the know-how to manage our investments by ourselves. This product would be a good low-cost option for anyone who wants to generate regular income during retirement.

Happy Retirement!!!

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© 2015 by All rights reserved. No part of this article or its contents may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the Author.

Sunday, November 22, 2015

How is CIBIL Credit Score Determined?

Have you heard of the CIBIL Score? Most probably – Not…

CIBIL is a rating agency in India that is gaining popularity and most banks these days are reviewing your CIBIL score before approving your loans especially Home Loan. In fact, most people hear this CIBIL term when they actually apply for a loan and get shot down.

Just so you know, you need to have a CIBIL score of 750 and above to be eligible for a Home Loan. Now that you know, do you know what habits of yours can actually impact this CIBIL Score?
The purpose of this article is to help you understand that…

Before we begin:
    CIBIL is a third party agency that keeps track of your financial habits and assigns a numeric score determining your creditworthiness. This is basically CIBIL’s way of saying how good a customer you will be for a bank that is allowing you to borrow money. Higher the score, the better customer you are and higher will be your chance of getting a loan. 

Unfortunately, there are a lot of incorrect news being spread about this credit score. Contrary to popular opinion, your Age or the City you Live or your Bank Balance DOES NOT impact your CIBIL Score. In fact, even your Stock or Mutual Fund Portfolio doesn't impact your CIBIL score. 

So, what impacts my CIBIL Score?

CIBIL Tracks your daily/monthly spending habits and uses the same to arrive at a credit score. Below are the key parameters it uses to arrive at the score:

1. Making Timely Payments 

The best way to boost your CIBIL score is to make all your payments on time. This is applicable to all the credit you already have. This includes credit card outstandings and EMIs on loans. Also make sure you make other payments such as insurance premiums etc on time, though it does not fall under the credit bracket. Even a single late payment on a home loan or an unpaid outstanding on your credit card, will bring your CIBIL score tumbling down and be a blemish on your CIBIL report.

2. Volume of Credit you have Availed 

Credit is something that is easily available today. Almost every office in our country has a tea-stall outside it and there are a couple of guys from some Credit Card issuing Bank there, trying to sell you “Credit”. You probably have at least two or three credit cards that you are using simultaneously, along with a home or a vehicle loan.

While almost everyone tries to repay their loan EMI’s on time, many of us don't think too much about Credit Card Debt. If you are someone who carries forward unpaid balance from previous months onto the next month, there is a chance, this habit of yours may end up costing your CIBIL score.

The amount you owe to the folks who have lent you money, makes a large impact on your credit score. The closer you are to your credit limit, the worse its gets! Ideally you should not be using more than 30% of your total credit limit at any given time. If you are using more than 30% of your total credit limit, I would suggest you try to make quick repayments and bring it down as soon as possible.

3. The Duration you have been Using Credit 

Your “Credit history” has a huge impact on your CIBIL score. If you have availed of credit for a long time and have serviced it well, it certainly fetches you brownie points to increase your CIBIL score. A good credit history gives a prospective lender the confidence to lend to you. The longer you have been servicing credit in a satisfactory manner, the higher your CIBIL score…

4. Too much Credit in Too Little Time

Ok – if you are someone who just started on a job, I would recommend you cut-down on your impulse to sign-up for multiple credit cards right away. If you apply for too many credit cards or loans close to each other, it sets the alarm bell ringing for any bank.

Not just that, your CIBIL score takes a hit, every time you apply for a new Credit Facility (Loan or Credit Card). Every time you apply for a new credit card or loan, there is a “hard enquiry” made on your CIBIL score and CIBIL report, and this brings down your score a few notches lower each time.
You should start slow, apply for one card, use it and repay the dues properly and build a good credit history for at least 6 months before you think of signing up for another card.

5. The % of Good and Bad Debt You Are Repaying

No, I am not talking about borrowing money from Loan Sharks or that being an impact on your CIBIL score.

Actually from a banks perspective, home loans, vehicle loans and education loans fall under “Good Debt” because these are “Secured or Guaranteed” with some form of Asset that the bank can repossess if you fail to repay. Other types of Credit like Credit Cards or Personal Loans are “Unsecured” and the bank stands to lose a lot of money if you fail to repay.

So, if you have too many credit cards or personal loans, its going to have a sizeable impact on your credit score. Try to limit your usage of unsecured credit facilities and you will definitely be able to see your CIBIL score go up…

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