LoanRaja Blog- Personal Finance Guide

Low home loan interest rates which had contributed to the real estate boom during the past few years are now spiraling upwards upsetting the calculations of borrowers. Higher interest rate means a higher monthly payment to the financial institution or an extended tenure for repayment. Coupled with escalating price of properties due to higher input costs the rate hike has compounded the woes of a homebuyer. The recent RBI steps like hike in CRR and repo rates to bridle inflation have forced banks to raise interest rates on home loans.

Some banks have already asked borrowers to pay the differential interest as a single sum by the end of the financial year. Others have increased the loan tenure. When the housing loan rates were 7 to 8.5 per cent banks vied with one another to slash it down further to woo customers. Interest rate that remained as low as 7 percent five years ago has more than doubled now. Some banks have only raised their floating rates. Some have increased the processing fees on all loans. It is a tricky situation for borrowers.

Impact on EMI

For a .5 per cent hike in the home loan rates, the borrower will have to shell out anywhere between Rs 25 and Rs 35 per month extra on every Rs 1 lakh borrowed. The EMI is calculated based on the interest rate, loan amount and term. On a home loan, the EMI for a Rs. 20 lakh loan at 13 per cent for 20 years is Rs 23,432. If interest rate goes up by 1 percent EMI is Rs. 24,871. Additional monthly burden is Rs.1439 and yearly outgo Rs.17,268 more. EMI has two parts — the principal and interest. The money that goes into the interest component will be higher. When interest rates rise the interest component of the EMI too increases and the principal repayment component comes down. Borrowers who have opted for floating rate are the worst sufferers during interest rate hike.

How can borrowers beat the inflation? It is always better to pre-pay the housing loan if extra cash is available with you. A customer can liquidate fixed deposits if any to prepay the loan, as the yield will be lower than the interest on home loan. Before opting for prepayment a customer has to ascertain whether the loan agreement has any clause on pre-closure penalty. Charges vary from 2 to 3 per cent. Another disadvantage is that the income tax benefit available for repayment of interest up to 1.5 lakh per annum won’t apply in the case of foreclosure. SBI is one of the banks that charges no penalty if the loan is pre-closed from own savings or windfall gains.

Part-prepayment

Another option is part pre-payment to help reduce the loan tenure and interest rates. This can lower the EMI and thereby limit the interest cost. The problem of penalty on pre-closure of home loan can be got over by resorting to partial payment of principal amount as no bank levies penalty on part-prepayment. It is tempting to migrate from floating rate to fixed rate. But this also will invite a charge. Besides, genuinely fixed home loans for long term are not available now.

Who doesn’t dream of owning a house? The middle class families are better positioned now than ever before to realize their dreams thanks to the mushrooming of housing finance companies and a liberalized loan regime. The long process of applying for a loan beginning with the property selection and bank selection is an arduous one. But runaway inflation and rising property prices have now landed the prospective borrowers in a fix. To make matters worse the interest rates on home loans are on an upswing. How does one choose a home loan most favourable to him?

Customers need to pay more attention to the property they are planning to buy and collect all relevant information on it. Before availing oneself of a housing loan the borrower has to make a long-term financial planning as the loan tenure may stretch 10-25 years.
All financial requirements including daily expenses, cost of education and wedding etc. in the short-term and long-term must be identified. Then make a realistic assessment on the surplus you can spare every month on loan repayment. Go only for a home loan from a lender with a good reputation. By approaching two or three banks or housing finance companies it can be ascertained who offers loan with the cheapest interest rate. Explore various fees and penalties that the lender charges.

Eligibility

Three vital factors decide the loan amount sanctioned by banks – borrower’s income, repayment history and the cost of the property. Banks lend up to 3.5-4 times the annual gross income as a home loan. Repayment capacity will be considered after assessing your income, age, qualifications, work experience, number of dependents, spouse’s income, stability of income and employment, assets, liabilities, etc. Larger the repayment capability, the higher will be the loan eligibility.

Documents

The borrower must submit the following documents along with loan application:

• Proof of age
• Proof of identity and residence - passport, PAN card, ration card, voter ID card etc
• Salary slip of last three months along with salary certificate.
• Proof of continuity in job for last two years or Form 16.
• Bank statement for last six months.
• Company profile for employees of a private limited company.
• Proof of business address in respect of businessmen/ industrialists
• Khata certificate.
• Latest property tax paid receipt.
• EC for last 13 years.
• Parent documents and all linked documents for 13 years.
• Sanctioned plan.
• Receipts towards payments already made.
• Sale agreement and title documents in favour of the seller (pre-owned home).
• Sale agreement or construction agreement with builder (new home).
• Total cost break-up on builder’s letterhead (new flat).

Charges

Banks charge 0.5% to 2% of the loan amount as processing and administrative fees, they may in some cases also charge a commitment fee. You need to pay this charge to the housing finance companies if the sanctioned loan amount is not availed of within a certain span of time. In case one wants to switch over from a floating rate to fixed rate or vice versa the borrower is also assessed a penalty. Such a penalty may also be levied in case the loan is repaid before the agreed term, which is 2-3 percent of the outstanding amount of loan.

Disbursal

The lender will disburse the loan only after the borrower puts in his share which is normally about 10-15 per cent of the total estimate. Most banks disburse the loan in stages after ascertaining the progress of construction in the case of new houses or flats. In the case of ready-built houses the bank will disburse the entire amount of the home loan on sanction.

Tenure & Repayment

A borrower has the option to choose a tenure of 5 to 25 years for his home loan depending on his paying capacity and age. Borrowers are often in a fix between choosing for a fixed or floating interest rate for their loan. For floating rate home loans a bank will either raise the EMI or extend the tenure of your loan to cover the higher amount due. In the case of fixed interest loans the Equated Monthly Installment (EMI) remains same unless there is a reset clause. While taking a loan, one must consider that interest rates fluctuate during the loan tenure and this fluctuation will impact the home loan EMI, whether one takes a loan at a fixed interest rate or floating interest rate. If the borrower is younger, banks are willing to give an extension on loan tenure but if the loan borrower is in 40s, the only option given is to increase the EMI.