What is the process of securing a home loan in India? What are the things I should check before opting for a home loan provider? And what are the various kinds of home loan schemes available in the Indian market?

Author: Sachin Gupta | Find me on Twitter  Follow @sach_gupta

In the previous post, we discussed about the dilemma of renting versus owning. However, after an in depth analysis of various elements described in the post, Sumit Sharma decided to go ahead with the purchase of the apartment. Now, the next step for him was to arrange for the mortgage loan to finance his purchase. Without a doubt, there are numerous lenders (mostly banks) in the market willing to lend money at competitive prices. Which lender (bank) to choose? What type of home loan to avail? And what are the things to remember during the loan process? These are some of the serious questions Sumit Sharma was confronted with. Lets Break It Down to smaller elements (L BID) and hope Sumit Sharma makes an informed decision based on the understanding of following elements:

Things to check during a mortgage loan process:
Interest Rates:
As per the RBI guidelines, home loan interest rates are linked to bank's base rate. Base rate tends to move up and down depending upon the interest rate movement in the economy. As a buyer, check the interest rates from various banks that are offering the similar mortgage loans. Usually premium charged by banks can be negotiated with the chosen bank; however, it depends on your credit history. Since, banks are in the business of lending money, therefore being a customer one must exercise the customer power and negotiate a best possible interest rate with the bank.

Processing fee:
Normally processing fees include statutory costs, third party charges, and additional finance charges. Because of problems involving loan fees and the potential abuse by some lenders of charging high fees to borrowers, a legislation requires lenders to show annual percentage rate (APR) being charged on the loan to the borrower. For example, if the fixed interest rate charged by a bank is 12% and processing fee is 2%, then normally APR would be 12.25%. Processing fee charges can also be negotiated with the bank.

Prepayment penalties:
Many borrowers mistakenly take for granted that a loan can be prepaid in part or in full anytime before the maturity date. This is not the case; if the mortgage note is silent on this matter, the borrower may have to negotiate the privilege of early repayment with the lender. However, many mortgages provide explicitly that the borrower can pay a prepayment penalty should the borrower desire to prepay the loan. Prepayment penalties are not included in APR.

Types of mortgage loan:
Fixed Rate Mortgages - Constant Amortization Mortgage Loan (CAM):
In this type of loan, the interest rate remains fixed during the tenure of the loan. Here, constant principal amount is amortized (reduced) in each installment. The user has to pay the sum of constant principal amount and interest that is charged on the principal. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the constant principal amount that will be reduced every month is 12000 rupees (12lacs/120). In addition, for the first month, interest will be 12000 rupees. However, the interest charge will keep on reducing as the principal is amortized every month by constant amount. Therefore, in constant amortized mortgage loan (CAM), the monthly installment keeps on reducing.

Fixed Rate Mortgages - Constant Payment Mortgage Loan (CPM):
In this type of loan, the interest rate remains fixed during the tenure of loan. In this type of loan, monthly installments are constant. Here, principal amount reduced (amortized) in the starting months is less as compared to the principal amount in later months. However, the interest payment is more during the starting months and then reduces in later months. For example, on a loan of say 12 lacs rupees for 10 years at an interest rate of 12% per year, the monthly constant installment will be 17216.51 rupees.

Fixed Rate Mortgages – Graduated Payment Mortgages (GPM):
Some individuals have less income in starting years of their careers; those individuals are not considered for loan. To overcome this effect, lenders have designed a mortgage loan that retains a fixed rate of interest but includes a series of stepped up payments that are lower in earlier years, thereby better matching borrower’s incomes, and then rising over time. These loans are known as graduated payment mortgages (GPMs)

Adjustable (Floating) Rate Mortgages (ARM):
These mortgages provide an alternative method of financing through which lenders and borrowers share the risk of interest rate changes. In this type of loan, since interest rates are adjustable, they are indexed to say wholesale price index (WPI) or other market interest rates. For example, someone who applied for ARM indexed to WPI in year 1 at 5% interest rate might be paying 12% interest rate in 2nd year because inflation has increased by 7%.

Hybrid Adjustable Rate Mortgages:
This is the most common type of mortgage loan used these days. Hybrid ARMs combines elements of fixed rate mortgages for periods of 3, 5, or 7 years, after which interest rates are reset and the loan becomes an ARM. Subsequent payments are usually reset every year for the remaining maturity period. For example, a 3/1 hybrid would mean a three year fixed rate after which the interest rate would become adjustable, tied to an index, and would be reset each year thereafter.

So friends, before going to a bank for home loan, take a look at this blog or even take a print because even if one saves or negotiates .25% on interest rates, processing fee, or prepayment penalties, then it’s worth the effort. Don’t overlook that :)

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Home Loan Prepayment: The Whys and Hows

A few years ago, Misha took a large home loan, at a monthly EMI of almost Rs.37,000 and interest rate of 11.75%. She still has to pay close to Rs.26 lakhs of the principal amount with just a little over 10 years remaining. She is looking for options that can help her diminish the loan burden. As home loans are some of the biggest debts we take on during our financial lives, repaying them often becomes a substantial burden on middle-income earners with a fixed salary. However, there are four ways in which you can reduce your home-loan debt—or at least minimize its effects:

1. Transfer your home-loan to a low interest provider: If Misha transfers her home loan to a lender who levies 10.5% interest instead of 11.75%, her loan tenure comes down drastically. If she maintains the same monthly EMI, the reduced interest brings the tenure down to 113 months from 124. The longer you spend repaying your loan, the more interest you have to pay—therefore, Misha will save approx. Rs.4 lakhs in interest.

2. Increase your EMI and reduce the tenure: This can be availed only if your financial situation changes substantially. For example, you had been saving for your child’s education, but she has already left for college. Or your salary has been hiked by 30% or more. Suppose Misha pays Rs.42,000 a month instead of Rs.36,407 a month— her interest tenure comes down to 96 months from 124, as a result of which she pays Rs.476000 less in interest.

3. Make prepayments: Prepayments are payments made towards your loans in large chunks, and at irregular intervals. Here are the basic ways in which they differ from EMI payments:

• EMIs are compulsory and regular. You pay them every months, and you pay a fixed amount. While this amount can be changed, there is not much flexibility. Prepayment, on the other hand, depends entirely on the loan taker
• Prepayments are much larger than EMIs, for example the average home loan EMI can be anywhere between 10,000 and 50,000, while prepayments are numbered in lakhs.
• The most crucial difference between EMI and prepayment is that a large portion of your EMI goes towards payment of interest, at least towards the beginning of the loan tenure. Prepayments, however, go directly towards your principal, thereby bringing down not only the loan tenure, but also the outstanding loan amount.

If Misha makes prepayment of Rs.2 lakhs for 5 years, alongside her regular EMI of Rs.36,407, her total interest will drop by a staggering Rs.8.5 lakhs and her loan tenure will be almost halved— from 124 months to 73 months. Obviously, out of the three options for reducing the home-loan burden, making prepayments is the most profitable one. But while going down the prepayment route, there are a few things you must note:

1. You will have to pay interest when you are making a prepayment, i.e. the day you make the payment, your principal will decrease and from that point on you will be paying interest on the reduced principal. But suppose you make a prepayment on the 10 of the month— the interest on the original amount for those 10 days will have to be paid as well.
2. Some loan providers insist on validating your proof of income before accepting prepayment, as these are usually big ticket payments. Therefore it is advisable you carry bank statements for the account from which you are making the payment, dating back to at least three months.
3. The longer you take to repay a loan, the more your loan provider will earn. Therefore, accepting prepayment is often not in the best interest of the bank, so there might be measures like prepayment charges and limitations in payment mode. There may be a specific period after loan disbursement during which prepayment is not permitted. Also, the borrower may have to be present personally to make prepayment. Acquaint yourself with these rules and regulations before you take the leap.
4. Once your principal loan amount decreases, your CIBIL score (which reflects your credit worthiness) will improve. Follow up on your credit score within a few months of making the prepayment, to ensure that the reduction in outstanding balance is reflected.
5. Make sure to preserve the acknowledgement of payment. This document contains important details such as outstanding principal, home loan tenure, and change in EMI (if any).

The catch is, prepayment is possible only in case of a sudden financial windfall, such as yearly bonus or inheritance or gift. Then you would have the dilemma of whether to invest it and increase savings, or whether to prepay your loan and reduce your debt. Our advice is, if the rate of interest from investment is less that the interest you pay on your loan, it is better to make a prepayment. For example, investing in a provident fund would fetch Misha interest at 8.8 currently, while her loan interest rate is 11.75. Therefore, making a prepayment makes better financial sense.



This is a guest post by Team Paisabazaar

Understanding interest rates and its impact on home buying decision!

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

Buying a home has always been a cherished dream for an individual. The very thought of staying within the four walls that belong to you is very enthralling. The home that one owns provides not only the physical comfort but also emotional and psychological security which, in turn facilitate peace in life.

The dream of purchasing a home has remained intact; what has changed over the years though is age profile of buyers. Not long ago, purchasing a home would be a reality when a middle class man is on the verge of retirement. His life- long saving could be barely enough to finance the coveted asset. The balance could be pooled in by relatives and friends.  However, the time has changed now. Thanks to the wave of financial reforms and robust banking sector today. A young man out from the college and grabbing a promising job will soon be found to survey the real estate market to book a house.

The relationship between the financial sector and real estate today is complementary in nature even though the banks may be viewed as having upper hand in terms of being fund providers. It would not be an exaggeration to assume that majority of the transactions in the real estate market in India is being financed by bank loans. In such situations where bank loans have gained so much of importance in our lives, it becomes a necessity to understand the nuances attached with them.

Interest Rate:

A home loan seeker is confronted with a myriad of jargon. The most common and yet the most critical among them all is interest rate. Understanding interest rate and impact of its movement on the loan amount is crucial in making an informed decision.

Interest, to put it simply, is a kind of fee charged by lender of funds from the borrower. This fee or the interest may be computed at a “fixed” or “variable/floating” rate. So, if Rahul takes a loan of Rs. One Lac from a bank for period of one year at a rate of interest of 10%, it means he needs to refund Rs.1, 10,000/- at the expiry of one year (Rs. One Lac is the principal amount and Rs.10, 000/- is the interest).

Eligibility to avail home loans:

Banks and Housing Finance Companies are cautious when they lend. There are certain prudential norms which they follow while sanctioning a home loan. One of them is that the bank would restrict its exposure up to 80% of the value of the asset in respect of residential house property subject to the eligibility of the buyer. How the eligibility is determined and what role level of interest rate plays are interesting aspects to discuss.

In a typical home loan application, a bank would consider the following while determining the maximum amount of loan that can be sanctioned:

1. Gross Salary/month
2. Net Salary/month
3. Value of property 

An example:

Let’s take an illustration. Amit, a young software engineer in his mid twenties wishes to buy a house in Delhi NCR. He zeroes in on a property in Noida. The description of property is as follows:

• Builder: Sky Builder
• Area of Flat: 1000 Sq. Feet
• Rate/Sq. Feet (All inclusive): Rs.5000/-
• Payment Plan: Construction linked 
• Construction Period: 2 years 

Equipped with such information, the bank would put a threshold limit of Rs.40 Lac (Rs.50 Lac X 80%) on the loan amount that can be sanctioned against the property. Now it needs to evaluate eligibility of Amit based on his income profile. Banks make such evaluation on the basis of their own criteria which may differ from bank to bank. However, as a general rule, banks consider around 40-45% of net salary of an individual to be needed to service EMI.

The following example shows eligibility of Amit in three interest rates scenarios.  It has been assumed that in all three situations, Amit’s salary remains same and there is no change in any variable except in interest rate. In situation-I, where the interest rate is 10.50%p.a., Amit’s loan eligibility works out to be Rs.40 Lac. This is a perfect situation for him as he needs Rs.40 lac only and the maximum amount that the bank is ready to disburse is also Rs.40 lac. However, the situation is not so comfortable when there is a spike in the interest rate from 10.50% to 11.50% p.a. (situation-III).  Keeping the EMI amount almost at same level, there is a decline in the loan eligibility amount to the extent of Rs.2.55 Lac. The reason is simple. Given the hike in the interest rates and no corresponding increase in the income level of the individual, the banks would like to maintain their risk exposure at existing level. Hence, there is a reduction in the loan amount. A decline in the interest rates would be a spurt for the banks to increase the loan eligibility. This however is subject to overall ceiling with respect to asset value.

EMI:

Interest rate movements also cause substantial variability in the EMI that we pay. The table below is quite self-explanatory:

Hope this time when news channels flash the story of how RBI Governor is contemplating to tinker with the interest rates in its monetary policy review, you would not be so clueless about its probable impact on your home loan.  So watch out for it with the analyst in you.

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What shall I do if interest rates go up?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Sumit booked his apartment in a builder project in 2010 in Noida Extension. He booked a 4BHK unit measuring 2250 Square Feet at a base selling price point of Rs. 1950 per Square Feet. Prices were affordable and he was able to book the apartment within his budget:

Area of the Apartment (SqFt)	2250
Base Selling Price (Rs/SqFt)	1950
Development Charges (Rs/SqFt)	225
Car Parking (Rs)	150000
Club Charges (Rs)	100000
Interest free Maintenance Charges (IFMS) in (Rs/SqFt)	85
Final cost of the apartment (Rs)	5335000

Out of the required 53.35 Lacs, he arranged for 13.35 Lacs from his own sources such as cash, provident fund, and fixed deposits. Balance amount of Rs. 40 Lacs was availed from a leading bank in form of home loan. Home loan rates in 2010 were hovering at around 8 to 8.25%. Which meant his monthly payment in form of EMI was Rs 33458 for a period of 20 years. His home loan interest rates were of floating type. This meant whenever, RBI revises repo rates, home loan interest rates would go up or down depending upon RBI monetary policy.

Everything was going as per plan; however, as the inflation started to go up because of various macro economic factors, RBI started revising its monetary policy. The focus of RBI moved towards bringing inflation under control. And therefore, interest rates started moving up. From about 8% in 2010, the interest rates jumped to about 11% in 2014.

What it meant for Sumit was that his EMI outlays increased over a period of time. At one point of time, he was paying monthly payment of Rs 41288 in form of EMI. That’s an increase of Rs 7830 per month.

What can Sumit do to maintain his EMI under control?

1. Stretch the loan tenure: Sumit had availed home loan for a period of 20 years. However, since, interest rates had moved up, he could sit with bank officials and seek to extend the loan tenure to 25-30 years. Thereby, he can bring his EMI under control.
2. Move to another lender: Sumit can also move to another lender offering lower interest rates. In this case, he has to study and analyze the offers by various banks. And if there is a difference of about 0.5%, then, Sumit can switch to another lender to bring his EMI under control. However, he should check if there are any pre-payment charges with existing lender. As per RBI rule, customer can move from one lender to another without paying any pre-payment charges.
3. Prepay portion of the Loan amount: Sumit can also prepay some portion of his loan amount to the existing lender. This way, his EMI would come within manageable limits.
4. Avoid shifting to fixed loan rates: When interest rates are fluctuating, many people believe fixed rates are way to go about. However, fixed interest rates are more expensive and at the same time, one cannot take benefits of lower interest rates as and when RBI brings interest rates down. Therefore, Sumit should stick to points 1, 2, or 3 and should completely avoid point 4.

Thanks. Please share!

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Why Home Loan Interest Is Too High for Indian Buyers?

A recent survey carried out by the Indian Mortgage Guarantee Corporation IMGC-Kantar IMRB showed that high housing loan interests and lack of savings are factors that discourage Indians to own a house. According to the survey, borrowing money is another constraint for people that prevents them from investing in a new property. The survey also revealed that the younger generation (25-44 years) is keen on buying affordable houses in smaller towns than metropolitan or mini-metros.

Conducted in two phases, this survey had a sample size of about 4,100 respondents from towns, mini metros, and metros. These respondents were people who had opted for a home loan. The age group was segregated into 25-34, 35-44, and 45-55.

At the launch of the report the MD & CEO of National Housing Bank, Sriram Kalyanraman said, "Housing sector is poised for higher growth, especially in affordable housing segment by the Housing-for-all by 2022 Mission and infrastructure status accorded by government, apart from various other measures,"

As high as 38% participants of the survey had the same opinion that the home loan interests are too high. An equal number of people gave the reason that their savings aren't enough to meet the expenses of buying a new home. Other factors listed in the report were higher property rates and insufficient loan availability.

The report also pointed out that home ownership delays are being caused due to high dependence on personal savings to pay for down payment.

When questioned about the progress on Housing-for-all, Mr. Sriram Kalyanraman addressed by saying that apart from the government lending and loan subsidies, many other private developers launched projects under affordable housing. He added, "The full data has to come from private sector. Once we take it, I think we will surely be in line with Housing-for-all by 2022." Furthermore, he shared that presently small-sized houses of about 500 square feet are in great demand.

It is also believed that demonetization has led to a fall in the property prices. This fall is indicative that it is the right time to invest in properties in various cities. Buying apartments in Bannerghatta Roads, Bangalore, or residential properties in OMR, Chennai, or apartments in Hyderabad will become easier for the public.

Mr. Sriram Kalyanraman also believes that prices are sure to come down and demonetization has helped a lot of clients. In addition, there is far more transparency in the buying and selling of houses in the INR 15-20 lakh segment.

The report also stated that many Indians still live with their parents, than in a rented place or self-owned house, which shows their financial dependence. Amitava Mehra, the CEO of IMGC said, "There is a gap in the market. These can be managed to a large extent by mortgage guarantee backed loans. With availability of higher loan to value (LTV), Indian home buyers can achieve their home buying dream by not relying solely on personal savings."

This is a guest post by Dinesh Dawde.

Looking to buy that elusive dream home for your family? What are the home loan rates in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

Looking to buy that elusive dream home for your family? Even after identifying the location and builder, the next big question is home financing. Which bank to approach and what are the current home loan rates that are offered by these banks? These are some of the questions that need clarification. At the same time, one might begin to wonder what, if any, are the basic differences between various home loan products offered by banks.

Here we help you in clarifying those questions:

Types of mortgage loan:

• Fixed Rate Mortgages - Constant Payment Mortgage Loan (CPM):

In this type of loan, the interest rate remains fixed during the tenure of loan. Rate of interest is normally higher in these types of Loans.

• Fixed Rate Mortgages – Graduated Payment Mortgages (GPM)

Some individuals have less income in starting years of their careers; those individuals are not considered for loan. To overcome this effect, lenders have designed a mortgage loan that retains a fixed rate of interest but includes a series of stepped up payments that are lower in earlier years, thereby better matching borrower’s incomes, and then rising over time.

• Adjustable (Floating) Rate Mortgages (ARM) also known as Floating Interest Rates:

These mortgages provide an alternative method of financing through which lenders and borrowers share the risk of interest rate changes. In this type of loan, since interest rates are adjustable, they are indexed to say wholesale price index (WPI) or other market interest rates.

• Hybrid Adjustable Rate Mortgages

This is the most common type of mortgage loan used these days. Hybrid ARMs combines elements of fixed rate mortgages for periods of 3, 5, or 7 years, after which interest rates are reset and the loan becomes an ARM.

Read here for more on Home Loan interest rates and the process of securing home loan in India.

Interest Rates in India – Dated November 28th 2014.

Loan upto Rs 75 Lakh (Floating Interest Rates)
Bank	Amount	Tenure (Years)	Interest Rate (%)
HDFC Ltd	Up to Rupees 75 Lakh	Up to 20 years	10.15
ICICI Ltd		Up to 10 years	10.15
State Bank of India (SBI)	Up to Rupees 75 Lakh	Up to 20 years	10.15
Punjab National Bank (PNB)	Up to Rupees 75 Lakh	Up to 20 years	10.25
Punjab National Bank (PNB)	Above Rupees 75 Lakh	Up to 20 years	10.5
Axis Bank	Up to Rupees 75 Lakh	10 Years	10.15
Bank of India	Up to Rupees 75 Lakh	Up to 20 years	10.2
Canara Bank	Up to Rupees 75 Lakh	Up to 20 years	10.2
Union Bank	Up to Rupees 75 Lakh	Up to 30 years	10.25
Dewan Housing Finance Corporation Limited (DHFL)	Rs 30 Lakh - 75 Lakh	Up to 20 years	11

Loan Above Rupees 75 Lakh (Floating Interest Rates)
Bank	Amount	Tenure (Years)	Interest Rate (%)
HDFC Ltd	Up to Rupees 75 Lakh	10	10.15
ICICI Bank	Rs 75 Lakh - 5 Crore	20	10.5
State Bank of India (SBI)	Up to Rupees 75 Lakh	Up to 20 years	10.15
Canara Bank	Above Rupees 75 Lakh	Up to 20 years	10.45
Union Bank	Up to Rupees 75 Lakh	Up to 30 years	10.25

Note: Floating Rates changes as and when bank changes their base rates. There are also other kinds of interest rates that bank offer such as 2 year fixed interest rates or 3 year fixed interest rates as described above. Contact your bank for those kind of home loan interest rates.

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