LoanRaja Blog- Personal Finance Guide

The decision to go in for a home loan has to be taken with utmost care and planning. Since it has long-term implications on the family budget thorough planning is a must. A false step can land the borrower in unexpected financial strait. Plethora of schemes and incentives being advertised by lenders regularly can confound any prospective borrower. The market is crowded by hordes of sales agents who tend to paint exaggerated figures on eligibility and interest rates.

Never blindly go by the advertisements that promise loans at very cheap rates or the sales agents’ words. He may give a false impression about your eligibility and try to persuade you to borrow more than your requirement. The first step is to make a realistic assessment on the resources you can spare every month for repayment of the loan. Then try to find out your eligibility. Not all banks calculate eligibility norms alike. Some go by the net salary while others go by gross salary. Some HFCs take into account the income of close relatives of the borrower while others include only the spouse’s income. Gullible borrowers may blindly opt for loans on the basis of false assumptions and end up taking more than they can afford.

Explore your options

Many borrowers just go to a single HFC and accept the deal they are offered there without making enquiries elsewhere. In a competitive market there is always room for a better bargain. All rates including processing charges are negotiable. Get a thorough understanding of interest rates and service charges prevailing in different banks. Try to get in writing from the lender the prevailing interest rates and other fees. Better to opt for the bank that offers the lowest EMI. Hiding details about your liabilities and assets may have disastrous consequences, as the lender will invariably scrutinize them closely. If you can prove to the lender that you have a good track record in repaying loans it will be advantageous. If you can get a pre-approval letter from the bank it will help you to negotiate better with other lenders.

Customarily, a loan agreement is weighted in favour of the lender. Some financial institutions may have hidden clauses and conditions, which may not be conveyed to the prospective borrower initially. But all these unfavourable clauses will surface in the final agreement, which may be different from what was promised. Some borrowers tend to sign on the dotted line. Never sign a loan agreement without thoroughly understanding the implications of all clauses like foreclosure charges, reset etc. Lenders generally reserve the right to revise the rate of interest at their discretion. Even if you have opted for a fixed rate loan it is not really fixed. It is vital to know what action the lender will take in the event of default. Customer should know whether any penal interest would be levied. Lenders have also a right to recall the loan at any time.

Interest rates

Loan rates are not uniform. Customers usually are in a fix on choosing between fixed rates or floating rates. They often don’t have a clear idea about the exact difference between fixed rates and floating rates. The two basic types of home loans based on the interest rate are fixed rates and floating rates. Market conditions determine the floating rate. Floating rate loans are subject to periodic review, normally every quarter. Some HFCs review rates annually. Check whether the fixed rate loan you have chosen has a reset clause that allows the bank to review interest rates. In the case of floating rate it has to be ascertained whether the interest is being calculated on daily, monthly or annual rest. Consequently you end up paying more as interest over the years in case of annual rests as compared to monthly rests, even if the interest rate is the same.

Choosing the right tenure for your home loan is as important as choosing the interest rate. In the backdrop of recent interest rate hike propelled by galloping inflation choice of a favourable home loan tenure becomes al the more important. You have to consider several factors when you decide to take a home loan for a specific period. Age is a major factor. The younger you are, the higher is the tenure available for your home loan. If one decides to take a loan in his 30s, he can get a loan for 20 years — the maximum loan tenure offered by most Indian banks. For older people the choice is limited, as banks don’t stretch loan tenure beyond retirement age.

Go For The Right EMI

Striking the right balance between the loan tenure and EMI, a fixed payment made by a borrower to the lender every month, is crucial. EMI has an unequal component of principal and interest so that over a specified number of years, the loan is paid off in full. Initially, a major part of the EMI goes in paying the interest only. The interest component could be as high as 80 per cent of the EMI. Later, the principal component of the loan increases. The value of the EMI depends upon the loan amount, interest rate and the duration in which the loan is to be repaid.

It is not advisable to take the shortest possible tenure. You may end up with a heavy EMI that may overstretch your resources. Even when you are repaying the loan, you must save. EMI must not pose too much of a financial burden. A borrower has to calculate the EMIs for various terms. Decide on the tenure with an EMI that you are comfortable with. You should find out whether you can meet all your monthly expenses and also make some saving after paying the EMI. If so, you can settle for an EMI around this figure. Pre-pay if possible. While doing so look out for any penalty clause for prepayment in the loan agreement. There is no penalty for part-prepayment. If interest rates fall later then you will benefit by part-payment. When interest rates are on an upswing prolonging the loan period is not prudent.

Tax Benefits on Home Loans

Higher EMI may be a better option if you can afford it. You may also be able to get tax rebates on your increased interest outgo. The amount paid towards the principal, up to Rs 20,000 per year could be treated as investment under section 88 of Income Tax Act. The amount paid towards interest, up to Rs 1.5 lakh per annum, is deducted from the Total Income U/s 24, of Income Tax Act. When you are taking a home loan, check out the EMI and take the right decision. Normally, the EMI stays constant through the period of the loan. If you opt for a prepayment of part of your loan, you will be paying lower EMIs’ for the remaining period of the loan tenure or pay the same amount and finish payments sooner.

A loan-seeker has to check whether interest is being calculated on daily, monthly or annual rest. You pay more as interest over the years in case of annual rests compared to monthly rests, even if the interest rate is the same. When the interest rates go up the financial institutions either raise the EMI amount or extend the tenure of the loan. Some HFCs ask the borrowers to pay the differential interest at the end of every financial year.

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.