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Homeloans

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    Homeloans Homeloans Document Transcript

    • EXECUTIVE SUMMARY INTRODUCTION Home is where the heart is - owning a home is a lifelong dream for most of the people. Home is more or less a lifetime investment and hence home loans are an integral part of every person who dreams and wants to have a living space of his own. Buying a home is probably the biggest purchase most of us will ever make in our lifetimes. Owning our own home is a watershed event in our life. You are the master (or mistress) of your own space, your little corner in the universe. But the process of finding your little nest is a stressful one. A once in a lifetime investment needs a loan and that is how a home loan comes into the scheme of things in your life. Almost all public and private sector banks are offering home loans at attractive rates for purchasing their dream home. Home loan usually cover a variety of types. All Banks have come out with home loan products studded with features and value additions that make the schemes not only attractive but also serve as a substantial source to the borrowers for owning their dream home. RATIONALE OF THE STUDY The rationale of the study can be considered as follows: • It helps to improve research ability. • The study enables to enhance the knowledge base regarding home loans and its various other aspects. • It enables to think logically and practically. • The study helps in development of skills of getting primary data. • It leads to overall knowledge development 1
    • HYPOTHESIS The hypothesis being put forth for this study about home loans is that the awareness of home loans is 100% but after the survey the conclusion can be put that there are still many people who do not know about home loans. Banks are coming up with new innovative home loans schemes for increasing their customer base. RESEARCH METHODOLOGY The research methodology is data collection through • Primary Sources • Secondary Sources Primary Sources: Survey by distributing questionnaire to the people taking sample size of 100. Interviews conducted with bankers. Secondary Sources: Data collection through books, magazines, websites, journals, etc. EXPECTED CONTRIBUTION Expectations from the study are that it may contribute to the real scenario of home loans demand and accordingly the banks can go for new innovative schemes. It will also specify some recommendations and based on that banks can make suitable arrangements in a particular sector. It will also make people aware about the various home loan schemes and its various procedures and formalities. 2
    • INTRODUCTION Banking system in the world has emerged many centuries ago and in India it rooted its seed with the existence of the General Bank of India in the year 1786. In earlier days banks were the Financial Institutions dealing in day to day services i.e. accepting deposits and lending money. But now it has spread its wings to various others sectors like it first started lending to big business entities and has also entered into the retail banking sector i.e. it started lending for purchasing car, for education, marriage and most importantly for purchasing a house. To own a house is every man’s desire. But more than that, shelter is a basic human need next only to food and clothing in importance. Yet every year more and more people continue to be added to the category of homeless. Though a basic need of all a significant section of the society is severely handicapped in getting shelter at affordable cost. This need for housing finance for individuals was only fulfilled with the advent of National Housing Bank (NHB), Housing and Urban Development Corporation (HUDCO), Housing Development Finance Corporation, etc and most particularly with the entry of commercial banks in the housing finance sector. In Tune with the conservative traditions in lending, commercial banks played a very limited role in providing housing finance till the early seventies. However, now as per Reserve Bank guidelines, housing finance is part of priority sector lending schemes for banks. There has been progressive increase in housing finance disbursed by commercial banks since 1979. The housing finance industry is getting increasingly commoditised. Competition within the sector is ensuring that players offer consumers flexibility and features to choose from. Features such as adjustable rate plans, lower processing fees/monthly rest/interest rates/EMI/margin money, no pre- payment penalty have become common across the industry. There is a growing trend among Banks and FIs to include the cost of registration, stamp duty, society charges and other associated costs while sanctioning loans to differentiate and make the home loans products more attractive. This has resulted in further lowering the threshold limit for buying a house. 3
    • TYPES OF LOANS Loan refers to a sum of money borrowed at a particular interest rate. More generally, it refers to anything given on condition of its return or repayment of its equivalent. A loan may be acknowledged by a bond, a promissory note, or a mere oral promise to repay. Banks grants 3 types of loans which are as follows: Commercial loans or Industrial loans, Consumer loans and Mortgage loans 1) Commercial loans: Commercial loans are mainly provided to the business and industrial firms. These can be divided into: • Short term loans: Short term loans are mainly given for a period up to 1 year and usually granted to the business and industrial firms to meet the working capital requirements. For e.g.: Cash credit, Bank overdraft etc. (loans to finance the purchase of material or labour) • Long term loans: Long term loans are granted for a period above 5 years and are granted to meet capital expenditure. For e.g. project finance, Education loan etc. (loans to purchase machinery and equipments). Most commercial bank offers a variable interest rate on these loans, which means that the interest rate can change over the course of loan. Sanction of loan depends upon the credit and loan history of the borrower, the borrower ability to make scheduled loan payment, the amount of capital the borrower has invested in the business, the condition of the economy and the value of the collateral the borrower pledges to give the bank if the loan payments are not made. 2) Consumer Loans: One of the important areas of bank financing in recent years is towards purchase of consumer durables like TV sets, Washing Machines etc. Banks also provide liberal car finance. These days banks are competing with one another to lend money for these purposes as default of payment is not high in these areas as the borrowers are usually salaried persons as default of payment is not high in these areas as the borrowers are usually salaried persons having regular income. Further, bank’s interest rate is also higher. For e.g. Housing Loan, Medical Loan, Car Loan, Education Loan. 4
    • There are two types of consumer loans: • Closed ended credit: Closed ended loan are for fixed period of time, fixed amount of loan, but not for a fixed purpose. The items purchased by the consumer serve as collateral for the loan. • Open ended credit: Open ended loan are for variable amount of money and it does not require the borrower to specify the purpose of the loan. For e.g. Credit cards. Most open ended loans carry fixed interest rate and it requires no collateral but interest or other penalties or fees may be charged. Open end credit interest rates usually exceed close end rate because open end loans are not backed by collateral. 3) Mortgage loans: These are usually long term loans and the interest rates charged can be either a variable or a fixed rate for the term of the loan which often ranges from 15- 30 years. These loans are used to purchase land or building such as household and factories which serves as the collateral for the loan. Classification of Loans: Loans given by bankers can also be classified broadly into the following categories on the basis of security: 1. Clean Loans: Advances for which are given on the personal security of the debtor, for which no tangible or collateral security is taken; this type of given either when the amount of the advance is very small, or when the borrower is known to the banker and banker has complete confidence in him. 2. Secured Loans: Loans which are covered by tangible or collateral security. Bank provides such loan against different types of securities which a banker may accept for such advances. 5
    • INTRODUCTION TO HOME LOAN The sun at home warms better than sun elsewhere. True isn’t it, where else do you find that comfort that makes you feel so special everyday. Undoubtedly owning a house is the most important phase in ones life. Not long ago, turning this dream into a reality was a daunting task for the common man with property rates going north all the time. But now, thanks to the proliferation of home loans and housing finance companies, one can aspire to own a roof over one's head. Many think it is an expensive affair and beyond reach. Well, that’s not always true. It takes a little planning and awareness to get to that home you want to call your own. Buying a home for the first time can be daunting to any person but in today’s time various banks are lending a helping hand to the people to purchase their dream house. Thus people look forward towards choosing a home loan. The primary concern of a housing finance company is to determine the loan amount that the borrower is comfortably able to repay. The most popular method of financing a home purchase is with a mortgage. This is a loan that is secured over the home. There are a number of different mortgage suppliers and people will have to shop around in order to get the best deal. Home Loan is one of the fastest growing retail and mass banking area. It forms an important part of the country’s priority in 5 year plans. Almost all public and private sector banks are offering home loans at attractive rates for purchasing their dream home. Home loan usually cover a variety of types. All Banks have come out with home loan products studded with features and value additions that make the schemes not only attractive but also serve as a substantial source to the borrowers for owning their dream home. Banks as financial service providers aims at providing financial support from the banking system to the needy for purchasing a home to the resident Indians as well as non-resident Indians. The main emphasis is that every needy person is provided with an opportunity to pursue home loan with the financial support from the banking system with affordable terms and conditions. 6
    • CHARACTERISTICS OF HOME LOAN • Home Loans are the consumer loans. • Home loans are long term loans provided by various banks. • These are large amount loans which provide financial support to the people who want to purchase their dream home. • Home loans are secured loans. • The borrowers get to own their dream home and pay for it in easy and affordable installments. • Banks and Financial Institutions offers home loans at cost-effective rates. • Tax concessions make home loans more attractive than other loan products. • The borrowers can get tax deduction on repayment of the principal amount of a loan taken to buy or construct a house. • The interest paid on a loan is deductible from 'income from property', even if it has not been paid during the year. • Interest paid on a new loan taken to repay the original housing loan is also allowed as deduction. 7
    • TYPES OF HOME LOANS Lending institutions like banks offer different types of home loans for a wide gamut of housing activities. Some of the popular home loans are: Home Purchase Loans: There are the basic home loans for the purchase of a new home. Home Improvement Loans: These loans are given for implementing repair works and renovations in a home that has already been purchased by the borrower. Home Construction Loans: These loans are available for the construction of a new home. Home Extension Loans: These are given for expanding or extending an existing home. For example addition of an extra room, etc. Land Purchase Loans: These loans are available for purchase of land for both home construction or investment purposes. Bridge Loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home. Balance Transfer: Balance Transfer loans help the borrower to pay off an existing home loan and avail the option of a loan with a lower rate of interest. Refinance Loans: These loans helps to pay off the debt the borrower have incurred from private sources such as relatives and friends, for the purchase of your present home. Home Conversion Loans: These loans are for those people who have financed the present home with a home loan and wishes to purchase/move to another home for which some extra finances are required. In Home Conversion Loan, the existing loan is transferred to new home including the extra amount required, eliminating need for pre-payment of the previous loan. Stamp Duty Loans: These loans are sanctioned to pay the stamp duty amount that needs to be paid on the purchase of property. 8
    • Loans to NRIs: These loans are given to the NRI’s to build/buy a home in India. EMI is payable till the loan is paid back in full. It consists of a portion of the interest as well as the principal. BENEFITS OF HOME LOANS TO BORROWERS Food, clothing, shelter -- these are the basic needs of every individual. But to most, owning a home is just a dream. The real estate boom and steadily rising capital values are now making it next to impossible for most people to fund their own homes. Banks and financial institutions are offering aggressively competitive rates on home loans, making it possible for more people to own the home of their dreams. Many builders have tie-ups with banks or financial institutions so that prospective buyers are assured of housing loans without any hassles. Taking a home loan serves two purposes. One, of course, is that the borrower gets to buy his/her own home and pay for it in easy installments. The other is that the borrowers get several benefits under the Income Tax Act. TAX BENEFITS 1) For Resident Indians There are certain tax benefits for the resident Indians based on the principal and interest component of a loan under the Income Tax Act, 1961. It may help one get tax benefit up to Rs. 50,490 p.a. (approx) if interest repayment of Rs. 1, 50,000 p.a. is paid. In addition to this, one also is eligible for getting tax benefits under section 80C on repayment of Rs. 1, 00,000 p.a. that further reduces the tax liability by Rs.33.660 p.a. These deductions are available to assesses, who have taken a loan to either buy or build a house, under Section 24(b). However, interest on borrowed capital is deductible up to Rs. 150,000 if the following conditions are fulfilled: • Capital is borrowed for acquiring or constructing a property on or after April 1, 1999. • The acquisition and construction should be completed within 3 years from the end of the financial year in which capital was borrowed. • The person, extending the loan, certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house. 9
    • • A loan for refinance of the principle amount outstanding under an earlier loan taken for such acquisition or construction. If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs 30,000 though the following conditions have to be satisfied: • Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or renewal of a house property. • Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a house property. • If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years from the end of the year, in which capital is borrowed. In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up to Rs 100,000 under Section 80C from assessment year 2006-07. Terms and conditions for availing Tax benefits on Home Loans 1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs 150,000 for a financial year. 2. An additional loan for extension/improvement to the same house and the individual's deductions on the existing loan are less than Rs 150,000; he can claim further benefits from the additional loan taken, subject to the upper limit of Rs 150,000 for a financial year. 3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be claimed only when the payment is made. If an individual fails to make EMI payments, he cannot claim tax benefits for the same. 4. According to the Income Tax Act, tax rebates can only be claimed by the loan applicant. 5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 150,000. 6. A husband and wife, both of whom are tax-payers with independent income sources, get tax deduction benefits, with respect to the same housing loan; to the extent of the amount of loan taken in their own respective name. 7. If an individual buys a house and sells it within the same year or after 3 years, and if any profit is made, then a capital gains tax liability arises on the same for which the individual is liable to pay short-term capital gains tax since the sale took place in the same year. But in 10
    • case, if the sale had taken place after 3 years, then a long-term capital gains tax liability would have arisen. 8. On being proved that the home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly. Tax benefits on interest on housing loans are allowable only for the original loan and according to Section 24 (1), tax benefits can also be availed for a second loan taken to repay the first loan but not for subsequent loans. This means that if the borrower have already availed of one loan to refinance the original loan and want to now avail a third loan to refinance the second loan, tax rebate on interest payments will not be permissible. 2) For Non- Resident Indians NRIs cannot claim tax benefits on home loans in India as they have to pay tax in the nation where they work and earn. Moreover, the borrowers need to file tax returns to become eligible for home loans. However, if they pay tax in India for income earned in India, they can claim tax rebate for the home loan. 11
    • STEPS IN PLANNING FOR A HOME LOAN A) PURPOSE The first step in planning for a home loan is to find out the purpose for which one is planning to take the loan. Depending on the borrowers requirements, home loans can be taken for a variety of purposes such as to purchase a new home, to implement repair works and renovations in a home that has already been purchased by the borrower, to construct a new home, for expanding or extending an existing home, to purchase land for both home construction or investment purposes, etc. Hence finding out the purpose of the loan is the first and foremost step in planning for a home loan. B) SELECTION OF A PARTICULAR HOME LOAN The selection of a particular home loan depends on the affordability position of the borrower. What kind of home one can afford is, more often than not, a function of how much/the maximum one can borrow? How much one can afford/ the maximum one can borrow: Banks follow a thumb rule while deciding the maximum a person can borrow: the monthly repayment on the loan should not be more than 40 per cent of the net monthly income. This ratio is called the Income to Installment ratio or IIR. Some lenders may even be more conservative. One could expect to be allowed to borrow an even lower figure if they consider an IIR of as low as 30 per cent of the net monthly income. They finance a certain portion of the property value, typically 75-85 per cent. The rest is the borrowers’ contribution, usually called the down payment or the margin, and has to come out of his (borrower’s) own resources. Down payment: Another important determinant of the value of the house one can afford is how much the borrower has saved up. Since banks only finance between 75 and 85 per cent of the property value, effectively the down payment can determine the value of the home that one can go for. Of course, this is subject to the limit on how much one can repay every month, as determined by the IIR. C) FINDING OUT COST OF THE HOUSE 12
    • Buying a home involves many financial considerations. Some home buying expenses are one- time costs and others are ongoing commitments. In addition, there are other costs that the borrowers should take into consideration in calculating the cost of the house. Below is a checklist of additional expenses that the borrowers need to keep in mind when purchasing a home. Home buying costs The Down Payment: A minimum down payment of 15% is required for a Normal Housing loan. The government offers Tax incentives for homebuyers. The Payment: A Home Loan Security is security for a loan on the property the borrower own. It is repaid in regular monthly payments which are combined payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). Checklist of Additional Expenses: Additional expenses need to be incurred after one has moved in. Maintenance costs: These costs are incurred to cover the costs of anticipated or unexpected repairs or replacement of such things as the painting or household appliances. Renovation and repairs costs: These costs are incurred in cases where the need arises to repair the house. A home inspection may indicate that the home needs major structural repairs. Property taxes: Property taxes are always a certainty and needs to be taken into account when one plans to purchase a home. Property insurance: It is imperative for the borrowers to take insurance of the house they plan to purchase. Additional expenses go into insuring the house like premium expenses, legal expenses, etc. Service charges: This includes the service charges levied by the banks and financial institutions for processing the loan application. Lawyer (notary) fees: Even a straightforward home purchase requires a lawyer to review the Offer to Purchase, search the title, draw up mortgage documents and tend to the closing details. 13
    • Lawyers fees for a Housing loan and purchase range widely depending on the complexity of the deal but will probably be at least Rs.500. Moving costs: This refers to the expenses incurred when one moves from one home to another for example expenses incurred for hiring a truck.. Other Costs: This is a list of possible extra costs involved in buying a home. Some of them are one-time costs and others, such as maintenance fees and property insurance, will be ongoing monthly expenses. D) SELECTION OF THE MOST SUITABLE BANK Choosing the most suitable bank is a crucial stage in the home loan process. It is imperative to choose the financer with utmost care and proper consideration of its past track record since the customer is entering in a long-term relationship with the bank when he takes a home loan. After finding out the cost of the house, one must compare banks on the basis of cost to see which loan is the cheapest. Besides cost factors, though, there are some other factors that one need to consider. Evaluation of the lenders can be done on the basis of the following factors: Rate of interest: This is where it all begins. Although the rate of interest offered by most banks is more or less the same on paper, some degree of bargaining in most cases, leads to a lowering of rates by as much as 0.25 to 0.50 percentage points and more so if the borrowers profile happens to match the requirements of the bank. The lowering of interest rate has a significant impact over the long term although the difference is not so noticeable over the near term. Care needs to be taken to ensure that the difference is not being offset elsewhere by the bank under the guise of other `charges'. Total financing cost: This measure quantifies what the loan really costs. It not only incorporates interest cost but also combines the other costs such as processing fees and other administrative charges collected by lenders upfront. Looking for a bank not just with the lowest interest rate but the lowest total financing cost can help one in opting for the best deals. National presence: The bank should be present across the country or at least have branches in all major metros and towns. This assumes importance if the current job of an individual is of a 14
    • transferable nature (e.g. bank jobs, defence personnel) or if he needs to make long and frequent outstation visits (e.g. consultants, businessmen). The individual shouldn't be put through the hassle of couriering his cheques to the resident branch every time or contacting the resident branch each time he has a difficulty or a query. So it helps if the bank is well networked across the country. Prepayment/Foreclosure benefits: For many individuals, this plays a significant role in their decision to go in for a particular bank. For example, many salaried individuals know for a fact that their salaries would be revised every year. This means that they can pay a higher EMI going forward. Some of these individuals also know that they would be getting a bonus, which they can utilise to pay off their home loan (either fully or partly). Some banks do not charge individuals for making a prepayment/foreclosing his account. Obviously such bank should get preference over other banks that do levy a prepayment charge. Calculation of the exact home loan amount: Here the banks differ in their calculation of the loan amount to be disbursed. Some banks calculate the amount to be disbursed on the basis of, say, the gross salary while some banks calculate it on the net salary. This might make a difference to individuals as the loan amount and the EMI will vary across banks. One needs to look into this and get a comparative analysis done across banks to understand which bank offers the best deal to the borrower. Extent of funding: Some banks fund only 60 to 75 per cent of the property value, while others fund higher amounts. If the amount of down payment one have saved up is not enough, this factor may tilt one lender's loan in ones’ favour. Flexibility of repayment plans. Some banks offers flexibility in terms of repayment. They could have either have 'Step-up' plans in which the EMI is stepped up as the tenure increases (suitable for young borrowers just starting their careers) or repayment plans that allow the borrower to load payments upfront (suitable for borrowers who are close to retirement). Also, some banks allow borrowers to fix the monthly payment themselves, especially when they take a loan far lower than what they are eligible for and where repayments are very comfortable. In such a case, the borrower himself can fix the loan tenure. If the profile fits one of these cases, one can consider a bank who allows such flexibility. 15
    • Property characteristics: Some banks are wary about financing flats that are old (more than 30 years). So it is important to check whether the bank will finance such a property. Also, very few banks lend against properties that are sold by holders of power of attorney on a property, rather than owners. Collateral: Housing loans are already backed by collateral - the house being financed. In addition to this, some banks ask for collateral such as life insurance policies and fixed deposits. Since there are banks who will not ask for such collateral and it is not particularly necessary to cough up extra collateral, especially if the credit is good, one can look for a bank that does not ask for such collateral. Service: Some banks offer some extra services that make the loan process a whole lot easier. They come to the applicant’s home and get the application form filled by him; they drop the disbursed check to the home or office of the borrower. When there is a tie-up with the employer of the borrower, the process becomes a whole lot easier. Other factors: Other factors like documentation, processing fees, document storage facilities and several other factors can be considered. It is also important to consider the time taken to process the loan as well as special deals that a particular bank may have with a real-estate developer. For example, individuals do not like it if the documentation is an irksome process or if the processing fees are exorbitant. E) FOLLOW UP WITH BANK’S PROCEEDS After the application is submitted along with all supporting documents, the loan officer conducts a formal interview where he assesses the creditworthiness of the applicant and his repayment capability, based on the information provided in the form and the applicant’s explanations during the interview. The lender then conducts a credit evaluation of the applicant, which also factors in the property valuation report from an independent valuer appointed by the lender himself. If the loan officer has some queries, more documents and more explanations may be needed. Based on the finding of the credit evaluation, a loan amount is determined and sanctioned. A sanction letter is then sent to the applicant who generally contains a disbursal plan. 16
    • POINTS TO REMEMBER ABOUT A HOME LOAN 1) The monthly installment or the EMI. The housing loan is normally repaid by a monthly installment. Usually the monthly installment is an EMI (equated monthly installment), an equal amount that, if paid every month over the tenure of the loan, results in fully paying off the loan taken. Part of the monthly installment is interest (calculated at the loan interest rate on the principal outstanding for that month) and the remaining part is accounted for as principal repaid. Principal repaid in the previous month is reduced from outstanding principal amount every month. Interest is calculated in the above fashion on reducing principal. At the end of the loan tenure, the principal reduces to zero. 2) The loan tenure: Longer repayment tenure would mean more interest payments on the loan. Before one sets out to complete the paperwork for a loan, the calculation of the Equated Monthly Installments (EMI) is important to know how much one is expected to pay and whether the borrower have the capacity to pay that in time. 3) How is the net monthly income calculated: For a salaried individual, the net monthly income is calculated as salary minus all the statutory deductions. Statutory deductions are items like insurance premiums, tax deductions, PF contributions, which have to be deducted from the salary of an individual. In case of self-employed person lenders look for cash earnings. Therefore, they add a portion of the depreciation claimed by the applicant to the applicant’s annual net profit. This, divided by 12, gives the net monthly income for a self-employed person. Not all lenders consider depreciation, though. So the loan amount may be less than what one thought it would be if the lender does not consider depreciation in the computation of net annual income. 4) Monthly/Annual repayments: It is important to know whether interest is being calculated on monthly rests or annual rests. The reason is that the borrower pays more as interest over the years in case of annual rests as compared to monthly rests, even if the interest rate is the same. How does this happen? The answer lies in a small but important difference in the manner in 17
    • which principal repaid by the borrower as part of the monthly installment is accounted for by the bank. In case of monthly rests, principal repaid in the previous month is reduced from the outstanding principal amount every month. Interest is calculated in the above fashion on reducing principal. On the other hand, in case of annual rests of principal, principal repayment every month is not accounted for at the end of every month but only credited at the end of the year. This results in more payment of interest by the borrower. If one bank quotes interest on annual rests basis and another quotes on monthly rests basis, even if the interest rate is the same, effectively, the annual rests rate in monthly reducing terms would be higher. So when banks give a rate of interest asking them the method of computation would be helpful. 5) Fixed or floating rate of interest: The borrowers are often faced with a choice between whether the loan should be at a fixed rate or a floating rate. There are advantages to both. A fixed rate loan means that one will have certainty of payments and even if interest rates rise in the future the borrower will still be paying the older, lower rate. The right time to pick a fixed rate loan is at the bottom of the interest rate cycle form where it looks like the rates have only one way to go. And that is up. On the other hand, the right time to pick a floating rate is when interest rates are at their highest and the interest rates look like they are on their way down. 6) Total financing costs: Apart from knowing how the interest rate is calculated, it is important to understand the impact of processing and administrative costs on the loan cost. They add to the costs as they have to be paid upfront. The total financing cost determines what the loan really costs the borrower. Hence, a thorough study of the total costs is important. 7) Co-applicant: Sometimes the income of the borrower may not be enough to secure the loan amount required by him. In that case, one can consider applying for the loan with a co-applicant. Clubbing a co-applicant’s income and applying jointly can help get one a higher loan amount. When property is jointly owned, most banks insist that joint owners have to be co-applicants for a loan against such a property. Also sometimes, the loan officer might have a view that the borrower doesn’t have much of a chance of getting the desired loan on his own strength and also is not convinced of the regularity and sustainability of the applicant’s income. In that case, clubbing a co-applicant’s income might just put that loan within one’s reach. 18
    • 8) Tax advantages: A housing loan comes with some tax benefits. These benefits further reduce the cost of the borrowing. There are two heads under which a borrower can claim tax benefits. One is an exemption for interest paid on a housing loan. This exemption is available up to an interest paid of Rs 1 lakh per year. And the other is a 20 per cent rebate on principal repaid in the year subject to a maximum rebate of Rs 4,000. That is, a 20 per cent rebate is available on a maximum principal repaid of Rs 20,000. 9) Identification of the property: It is not always necessary for the property to be identified the application process for the loan starts. In fact, both the processes can be conducted simultaneously. When the borrower is clear about the value of the property to be financed and have zeroed in on the bank, he can get a pre-approval on the loan. The loan pre-approval is a process where the bank conducts the credit evaluation and sanctions a loan amount for which the borrower is eligible. The sanction is generally valid for six months, during which period the borrower has to identify the property and execute the property documents; the payment will be released after this. Pre-approval saves time and improves the bargaining position with the seller. 10) Pre-payment dilemma: If the borrower decides to repay the loan before the stipulated period, he will be pre-paying the loan. Few banks charge a 0.5-2% of the amount the borrower is pre-paying as pre-payment penalty. Some banks don't have a pre-payment penalty provided the borrower is not paying off the entire loan amount. That means when the loan is pre paid partly; there may not be any penalty or charges. Therefore it is advisable to borrow from a bank wherever the pre-payment clause or Loan Redemption charge is not harsh. 19
    • TIPS WHILE BUYING A HOME Buying a home is a dream of a lifetime for most of the people. Before applying for a home loan, here are some tips that will be helpful when the borrowers are looking for a house of their own. 1) While buying a flat from a promoter or builder a) With respect to the location i. A proper check should be done for proper approach roads. ii. One should ensure secured electricity and water connections iii. Ensuring that well laid out drainage, sewerage and garbage disposal arrangements have been made. iv. Checking out whether there is any pollution due to industries etc. in the area v. finding out the level of developmental activities of the area - adequate public transport facilities and other vital amenities like educational institutions, hospitals and shopping avenues b) With respect to approvals i. One should check if the builder/promoter has been granted documented approvals from Municipal Corporation, Area Development Authorities, Electricity Boards, Water Supply & Sewerage Boards, Airport Area Authorities, etc ii. Checking out if the builder/promoter has secured approvals from Pollution Control Boards, Agriculture & Forest Authorities c) With respect to the property 20
    • i. Checking out for proper Development Agreements and the authority for conveyance of title in favour of builder/promoter ii. Obtaining a clear and marketable title of the property iii. Ensuring execution of proper sale agreements on the initial payments iv. Having a look at the sanctioned plan v. Registration of the property vi. Verification of the plinth and carpet area of the property d) With respect to amenities i. Verification of the specifications given by the builder regarding including quality of construction and availability of drinking and potable water have been delivered ii. Assessment of the natural lighting, ventilation, water connection & sanitary connection status of the prospective property iii. Checking up the common service area charged and their reasonability 2) While buying a flat from a second owner a) With respect to the location i. Checking for proper approach roads ii. Checking for electricity and municipal water connections iii. Finding out whether well laid out drainage, sewerage and garbage disposal arrangements are made iv. Finding out whether there is pollution due to industries etc in the area v. Checking for the developmental activities of the area vi. Public transport facilities in the area 21
    • vii. Checking for educational institutions, hospitals, shopping avenues nearby, green belts & rainwater drainage b) With respect to approvals Documented approvals from City Corporation, Area Development Authorities, Electricity Boards, and Water Supply & Sewerage Boards c) With respect to the property i. Title deeds of the vendor of the property ii. Previous title deeds covering a period of 13 years iii. Sanctioned plan iv. Encumbrance certificate for the past 13 years v. Upto-date tax paid receipts vi. Valuation of the property from a registered valuer vii. Checking out if the flat/apartment is free from tenancy viii. Registration of the property d) With respect to amenities i. Checking for the condition of the building and the future life expectancy ii. Finding out whether drinking water is available iii. Checking for natural lighting, ventilation, water connection & sanitary connection 3) While buying an independent house from a promoter/ builder a) With respect to the location 22
    • i. Checking for proper approach roads ii. Checking for electricity connections iii. Finding out whether municipal water connections are present iv. Finding out whether there is well laid out drainage, sewerage and garbage disposal arrangement made v. Finding out whether there is pollution due to industries etc in the area vi. Checking for the developmental activities of the area vii. Finding out the availability of public transport facilities in the area viii. Check for educational institutions, hospitals, shopping avenues nearby, green belts & rainwater drainage b) With respect to approvals Checking out if necessary approvals from City Corporation, Area Development Authorities, Electricity Boards, Water Supply & Sewerage Boards, and Airport Area Authorities have been obtained c) With respect to the property i. Sale deed of the vendor of the property ii. Clear & marketable title of the property iii. Sanctioned plan iv. Encumbrance certificate for the past 13 years v. Upto-date tax paid receipts vi. Valuation of the property from a registered valuer vii. Registration of the property 23
    • viii. Checking out the plinth area and the carpet area of the apartment ix. Ensuring that the price being paid for the flat, including the common service area is reasonable d) With respect to amenities i. Checking for the condition of the building and the future life expectancy ii. Finding out whether drinking water is available iii. Checking for natural lighting, ventilation, water connection & sanitary connection 24
    • FAIR PRACTICES CODE TO BE FOLLOWED BY BANKERS WHILE GIVING HOME LOANS With a view to setting out fair lending practices in a transparent manner, the RBI has advised Banks and Financial Institutions (FIs) to adopt the following as Lenders’ Fair Practices Code. The Fair Practices code applies to the following areas: A) Applications for loans and their processing 1) Standard schedule of fee/ charges relating to the loan application depending on the segment to which the accounts belong should be made available to all the prospective borrowers in a transparent manner, along with the loan application, irrespective of the loan amount. Likewise, amount of fee refundable in the event of non-acceptance of the application, prepayment options and any other matter which affects the interest of the borrower should also be made known to the borrower at the time of application. 2) Receipt of completed application should be duly acknowledged. 3) The acknowledgement should also include the approximate date by which the applicant should call on the Bank for preliminary discussions, if deemed necessary. 4) All loan applications will be disposed of within a stipulated period from the date of receipt of duly completed loan applications i.e. with all the requisite information/papers. 5) In case of rejection of loan application, irrespective of category of loans or threshold limits, the same should be conveyed in writing along with the main reason(s), which led to rejection of the loan application. The time frame for conveying the reason/s of rejection should be as per the Schedules. B) Loan appraisal and terms/conditions 25
    • 1) In accordance with Bank’s prescribed risk based assessment procedures, each loan application should be assessed and suitable margin/securities should be stipulated based on such risk assessment and Bank’s extant guidelines, however without compromising on due diligence. 2) The sanction of credit limit along with the terms and conditions thereof is to be conveyed to the loan applicant in writing and applicant’s acceptance of such terms and conditions should be obtained in writing. Such terms and conditions as have been mutually agreed upon between the bank and borrower prior to the sanction will only be stipulated. 3) Copy of loan documents, along with a copy of all relevant enclosures should be made available to the loan applicant on specific request. Standard sanction letter would include instances of approval, disallowance, etc. The bank is under no legal obligation to consider increase/additional limits/facilities without proper review/assessment. 4) In case of lending under consortium arrangement, the participating banks would decide the timeframe to complete appraisal of the proposal and communication of the decision. The Bank will abide by the decision of the consortium. C) Disbursement of loans including changes in terms and conditions 1) Disbursement of loans sanctioned is to be made immediately on total compliance of terms and conditions including execution of loan documents governing such sanction. 2) Any change in terms and conditions, including interest rate and service charges, should be informed individually to the borrowers in case of account specific changes and in case of others by Public Notice/display on Notice Board at the branches/on the Bank’s website/through Print and or other Media from time to time. 3) Changes in interest rates and service charges should be effected prospectively. 4) Consequent upon such changes any supplemental deeds, documents or writings are required to be executed, the same shall also be advised. Further, availability of facility will be subject to execution of such deeds, documents or writings. D) Post disbursement supervision 26
    • 1) Post disbursement supervision by Banks/ FIs, particularly in respect of loans upto Rs. 2 lacs, should be constructive with a view to taking care of any genuine difficulties that the borrower may face. 2) Before taking a decision to recall/accelerate payment or performance under the agreement or seeking additional securities the Lenders should give reasonable notice to the borrower. 3) All securities pertaining to the loan should be released by Banks/ FIs on receipt of full and final payment of the loans subject to any legitimate right or lien and set off for any other claim that the Bank/ Financial Institution may have against the borrowers. If such right is to be exercised, borrowers should be given due and proper notice with requisite details. E) Other general guidelines 1) The Banks/ FIs should refrain from interference in the affairs of the borrower except for what is provided in the terms and conditions of loan sanction documents (unless new information, not earlier disclosed by the borrower, has come to the notice of the Bank as lender). However this does not imply that Bank’s right of recovery and enforcement of security under Law as well as appointment of nominee directors, where required, is affected by this commitment. 2) While lending Banks/ FIs should not discriminate on the grounds of gender, caste or religion in its lending policy and activity. 3) In the case of recovery, Banks/ FIs should resort to the usual measures as per laid down guidelines and extant provisions and should operate within the legal framework. 4) For the purpose of recovering loans, Banks/ FIs should have a Model Policy on Code for Collection of Dues and Repossession of Security. They should not resort to undue harassment viz. persistently bothering the borrowers at odd hours, use of muscle power, etc. 5) In case of request for transfer of borrowal accounts, either from the borrower or from a Bank/FI, the Bank’s consent or otherwise should be conveyed within a stipulated period from the date of receipt of request. 6) The Branch Officials should immediately take up the matter for redressal in case of any complaint/grievance from the applicant/borrowers. 27
    • 7) In case of complaints received, the branch should take into consideration the matter with full details within a stipulated period from date of receipt and take all necessary steps to redress and resolve the grievance/dispute within a proper time frame. COMMITMENTS AND RESPONSIBILITIES ON THE PART OF THE BANKERS 1. The banks/ FIs should assure that they shall act fairly and reasonably in all their dealings with the customers on ethical principles of integrity and transparency in respect of services they offer, and in the procedures and practices their staff follow and make sure the products and services meet relevant laws and regulations. 2. The banks/ FIs shall help the borrowers to understand how the financial products and services work by giving information about them. They shall also provide the operational guidelines for Govt. accounts like PPF / pension etc. The salient features of the products / services including the financial implications should be highlighted in the product profile. 3. Before people becomes a customer, the banks/ FIs shall give clear information explaining the key features of the services and products which the people are interested in and give the information on any type of account facility which they have to offer. 4. The banks/ FIs shall tell the customers what information they need from the borrowers, before opening any deposit a/c, to prove their identity and address and to comply with legal and regulatory requirements, and request for additional information about them, their business/ profession and their family. The Bank before opening any deposit account shall carry out due diligence as required under "Know Your Customer" (KYC) guidelines issued by RBI and or such other norms or procedures adopted by the Bank. This will involve satisfying about the identity of the person, verification of address, satisfying about his occupation and source of income, obtaining introduction of the prospective depositor from a person acceptable to the Bank and obtaining recent photograph of the person/s opening / operating the account. In addition to the due diligence requirements, under KYC norms the Bank is required by law to obtain Permanent Account Number (PAN) or General Index Register (GIR) Number or alternatively declaration in Form No. 60 or 61 as specified under the Income Tax Act / Rules. 28
    • If the decision to open an account of a prospective depositor requires clearance at a higher level, reasons for any delay in opening of the account shall be informed and the final decision of the Bank shall be conveyed at the earliest. 5. The banks/ FIs shall give upfront details of any interest and/ or charges applicable to the products chosen by the borrowers. 6. The banks/ FIs shall seek specific consent of the borrowers for giving details of their names, addressess etc. to any third party including other entities in their group, for marketing purposes. 7. The banks/ FIs shall make sure that all advertising and promotional material is clear, fair, reasonable and not misleading. 8. To help manage their account and check entries on it, the banks/ FIs shall give the borrowers their account statements at regular intervals or Pass Book for the type of account they have. 9. The banks/ FIs shall tell the borrowers about the clearing cycle, including when they can withdraw their money after lodging collection instruments and when they will start earning interest. 10. The banks/ FIs shall keep original cheques paid from the customer’s account or copies, for such periods as required by law. If, within a reasonable period after the entry has been made on their statement, there is a dispute about a cheque paid from their account, the lenders/ financial institutions shall provide the customers with the necessary information for evidence -subject to a possible charge for the same. 11. In the event the cheque book, passbook or ATM/Debit card has been lost or stolen, or that someone else knows the customer’s PIN (Personal Identification Number) or other security information, the banks/ FIs shall, on notification, take immediate steps to try to prevent these from being misused. 12. The customer information collected from the customers shall not be used for cross selling of services or products among the banks, their subsidiaries or affiliates. The banks/ FIs shall treat all the personal information of their customers as private and confidential (even when they are no longer their customer), including entities in their group, other than in the following four exceptional circumstances for which the banks/ FIs are permitted to do so :- a. If they (i.e. the banks/ FIs) have to give the information by law. b. If there is a duty to the public to reveal the information in the interest of the public at large. 29
    • c. If their interests require them to give the information (for example, to prevent fraud) but the banks/ FIs shall not use this as a reason for giving information about its customers or their accounts (including their name and address) to anyone else, including other companies in their group, for marketing purposes. d. If the customers asks the banks/ FIs to reveal the information, or if the banks/ FIs have the customers’ permission to provide such information to their group/ associate/ entities or companies when the lenders/ financial institutions have tie-up arrangements for providing other financial service products. PROCEDURE OF HOME LOAN 30
    • Home loan procedure caters to processes right from the time the customer walks into the bank with a request for home loan till the time the loan is finally repaid by the customer. The three major phases in the home loan procedure are the information acquisition, credit appraisal and sanction, and disbursement. Tracking the performance of the process is an underlying phase that runs across the application processing cycle and is critical for monitoring and profitability for the Bank/ Financial Institution. The procedure for availing a home loan can be explained with the help of the following flow chart: A. Submission of application form: The application is submitted along with photographs, credit documents and a cheque for processing, documentation and administration fees by the Submission of application form Personal Discussion with customer Field Investigation by the bank/FI Credit Appraisal and loan sanction Issue of offer letter to the customer Submission of property / legal documents Legal check on the property by the bank Technical check on the property by the bank Disbursement Repayment Interest tax certificate Prepayment by the customer 31
    • customer. The credit documents comprise documents to establish income, age, residence, employment, investments, etc. During this stage, the bank/financial institution checks the repayment capacity of the customer. The repayment capacity is determined by taking into consideration factors such as income, age, qualifications, number of dependants, spouse's income, assets, liabilities, stability and continuity of occupation and savings history. B. Personal Discussion with customer: Some banks/FIs require the customer be present at the time of the credit appraisal. Some banks/FIs may insist on a personal interview with the customer and perform a reference check on the references provided by the customer on the application form. For the personal discussion the customer needs to take with him all documents pertaining to the information provided by him on the application form. C. Field Investigation by the bank/FI: The bank/FI validates information provided by the customer on the application form. This stage revolves around two key aspects. Critically appraising the credit worthiness of the customer and analyzing the risk in lending. It is necessary to capture all the information required to cater to these aspects. It is important to verify that the information supplied by the customer is correct and authentic. Banks achieve this mostly through external agencies. Also the validity and authenticity of information can be done through conducting checks on the residential address of the customer, the place of employment of the customer, and credentials of the employer, verification of documentary proofs of income, age and other information. To minimize the risk, it is necessary to check that the customer is not a fraud or black listed within the bank or other institutions. D. Credit Appraisal and loan sanction: The next phase in the home loan process is the credit appraisal and loan sanction. After checking the customer's repayment capacity, the bank/FI sets norms that define the customer's eligibility for a loan amount. The loan then gets sanctioned along with certain terms and conditions. When evaluating the measurable aspects of home loan requests, an analyst addresses the following issues: the character of the borrower, the use of loan proceeds, the amount needed, and the primary and secondary sources of repayment. Therefore, the bank has to base its decisions more on qualitative parameters rather than quantitative aspects. Credit analysis therefore is distinct for each type of home loan scheme. Credit analysis is the most popular methods of evaluating home loans. 32
    • D. Issue of offer letter to the customer: The bank/FI sends an offer letter to the customer with the loan sanction details which mention: • Loan amount • Rate of interest and whether it is fixed / variable rate of interest. If variable, period after which the rate of interest would be reset - annual / monthly reducing balance • Loan duration • Mode of loan repayment • Scheme of the loan, if a special scheme has been offered to the customer • General terms and conditions of the loan • Special conditions, if any, which the customer needs to adhere to prior to disbursement • Submission of the acceptance copy of the offer letter and a cheque for administrative fees by the customer F. Submission of property / legal documents by the customer to the bank/FI: After the selection of the property, the customer is required to submit the original documents pertaining to the property being purchased or mortgaged (if the property purchased is different from the property mortgaged). The bank/FI keeps the property documents as security for the loan amount given to the customer till the time the loan is fully repaid. G. Legal check on the property by the bank: The bank/FI sends all the documents to their empanelled lawyer for a thorough scrutiny. On receiving the lawyer's report that the documents are clear, the bank/FI decides to disburse the loan to the customer. If the documents sent to the lawyer are not enough to arrive at a judgment, the bank/FI requests the customer to furnish additional documents. H. Technical check on the property by the bank/financial institution: Prior to disbursement, the bank/FI conduct a site visit to the customer's property to verify the following: In case of under construction property: • Quality of construction • Stage of construction: Whether it is the same as mentioned in the payment notice given to the customer by the builder 33
    • • Progress of work • Layout of flats and area of property is within permission granted by the governing authority • Requisite certificates have been received by the builder to start construction at the site In case of ready construction/ resale: • Age of the structure • Quality of construction • Whether the structure will last the tenure of the loan • External maintenance of the property • Internal maintenance of the property • Surrounding area (development) • Required certificates from the governing authority have been received by the builder for handing over possession of the flat • There is no existing lien or mortgage on the property I. Disbursement: After verifying that the property is legally and technically clear, the bank/FI disburses the loan amount on the basis of the stage of construction of the property. The customer needs to pay the margin money from his own contribution prior to the disbursement. J. Repayment: The repayment of the loan by the customer starts only after the full disbursement of the loan amount has been made by the bank/FI. The loan is always repaid by way of EMIs. The mode of repayment, however, differs from case to case. In case of a loan repayment done through Deduction Against Salary (DAS), Post Dated Cheques (PDCs), Standing Instructions (SI) and cash / Demand Draft (accepted only by some banks/FIs). The customer can deposit the amount of his EMI every month at the bank/FI’s office. K. Interest tax certificate: This certificate is given by the bank/FI to the customer to avail of tax benefits that accrue through a home loan. The customer can submit this to his employer or Chartered Accountant to account it while calculating the customer's tax liability. L. Prepayment by the customer: The customer can either partly or fully prepay his loan at any given point of time. The loan could be partly or fully disbursed when the customer wishes to 34
    • prepay his loan. Most banks/FIs, however, have a limit on the number of times that a person can prepay his loan. There is, normally, also a minimum amount that a customer has to prepay each time he wishes to do so. Whenever a customer makes a prepayment, the customer has an option of reducing his EMI by keeping his tenure constant or to reduce his tenure by keeping the EMI constant. 35
    • PARAMETERS IN RELATION TO HOME LOANS Home loans are an important means of social mobility. Under home loans, the eligibility criteria, documentation, interest rates, quantum of loan, margin requirement, security, repayment etc and such other important parameters are put into consideration by banks and financial institutions while giving loans to the borrowers. The parameters put down by banks and financial institutions vary from institution to institution. However, the overall guidelines followed by them are given as below:  ELIGIBILITY CRITERIA 1) For Resident Indians Home loan eligibility for Resident Indians depends upon the repayment capacity of the loan applicant. The maximum loan that can be sanctioned varies with the banks and other housing finance companies (HFC) and generally, the maximum loan amount granted is 80 to 85% of the cost of the home. Home loan eligibility corresponding to repayment option is based on the following factors. Even though, the eligibility criteria may vary according to the HFCs regulations: Age (Minimum) 21 Years Age (Maximum) 58(salaried), 60(Public limited/Government Employees), 65 (self employed) Qualification Graduation Income Stable source of income and saving history Dependents Number of dependents, assets, liabilities Other income sources Spouse's income As home loan rates increase, the loan eligibility for a borrower becomes stiffer. In such a scenario, some home loan borrowers might have to re-evaluate their options (in terms of loan amount) on account of the new eligibility criteria. Home loan eligibility can be enhanced by: 36
    • i) Increasing the Home loan tenure: One of the basic process of enhancing the home loan eligibility is by opting for a higher tenure. This is so because the EMI, which an individual has to pay, starts to decline as the tenure increases while the interest rate as well as the principal amount remains the same. What changes though, is the net interest outgo, which rises with a rise in tenure. And since the individual is paying a lower EMI now, his 'ability to pay' and therefore his loan eligibility automatically increase. ii) Repaying other outstanding loans: There might be adverse effect on home loan eligibility for individuals with outstanding loans like car loans or personal loans. Industry standards suggest that existing loans with over 12 unpaid installments are taken into account while computing the home loan borrower's eligibility. In such a scenario, individuals have the option of prepaying in part/full their existing loans. This will ensure that their eligibility for the home loan purpose is unaffected. iii) Clubbing of incomes: Home loan eligibility can also be enhanced by clubbing incomes of spouse, children (son or daughter) staying with the applicant and having regular income and even earning parents (father or mother) living with the applicant. The eligibility in such cases will be calculated on the clubbed income of both the applicants enhancing the individual's eligibility to the extent of the co-applicant's income. iv) Step-Up loan: Individuals can also enhance their loan eligibility by opting for step-up loans. A step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced during the rest of the loan tenure. HFCs usually consider the lower EMI of the initial years to calculate his loan eligibility while the initial lower EMI helps increase the individual's 'capacity to borrow'. v) Perks: Salaried individuals must ensure that variable sources of income like performance- linked pay among others are taken into consideration while computing their income. This in turn will imply that the loan amounts they are eligible for stand enhanced as well. However, potential investors and borrowers must work out solutions best suited for their profile after speaking to their home loan consultant and only then consider acting on the options discussed. Because, increasing loan eligibility can have an impact on other aspects of their financial planning. 37
    • 2) For Non- Resident Indians The eligibility criteria of NRIs differ from Resident Indians based on a few parameters. The parameters include: Age: The loan applicant has to be 21 years of age. Qualification: The NRI loan seeker has to be a graduate. Income: The loan applicant has to have a minimum monthly income of $ 2,000 (although, this criterion may differ across HFCs).The eligibility is also determined by the stability and continuity of your employment or business. Payment options: The NRI also has to route his EMI (Equated Monthly Installments) cheques through his NRE/ NRO account. He cannot make payments from another source say, his savings account in India. Number of dependants: The eligibility of the applicant is also determined by the number of dependents, assets and liabilities. An NRI applicant is eligible to get a home loan ranging from a minimum of Rs 5 lakhs to a maximum of Rs 1 crore, based on the repayment capacity and the cost of the property, which although is variable by the priorities of the home loan provider. Also Home Loan Tenure for NRIs is different from Resident Indians. An applicant will be eligible for a maximum of 85% of the cost of the property or the cost of construction as applicable and 75% of the cost of land in case of purchase of land, based on the repayment capacity of the borrower. However, a NRI can enhance his loan eligibility by applying for home loans with a co-applicant who has a separate source of income. Also, the rate of interest for home loans to NRIs is higher than those offered to Resident Indians. The difference is to the income. Also, the rate of interest for home loans to NRIs is higher than those offered to Resident Indians. The difference is to the extent of 0.25%-0.50%. Some HFCs also have an internally earmarked 'negative criterion' for NRI home loans. As such, the NRIs who hail from locations that are marked as being 'negative' in the books of HFCs, find it difficult to get a home loan. 38
    •  QUANTUM OF LOAN The quantum of loan is assessed based on the net monthly/ net annual income with a direct bearing on age factor of the borrower. A person of age in the range of 21 to 45 years is eligible for a maximum amount of 60 times of his Net Monthly Income (NMI)/ five times of Net Annual Income. In case the age is above 45 years the quantum will be restricted to 48 times of NMI/ four times of Net Annual Income. Many banks have put a ceiling on the maximum amount of home loan at Rs.50 lakhs. In order to assess the quantum of finance income of spouse or close relative can also be reckoned, provided that person becomes a co applicant.  DOCUMENTATION “Loan Documentation” refers to the documents needed to legally enforce the loan agreement and properly analyze the borrower’s financial capacity. Documentation is an essential component from the point of view of the safety of an advance. The ability to control arises from the documentation of provisions, which confirm understanding on the basis of which a credit facility has been sanctioned. Documents should be properly drafted, stamped and executed with necessary legal formalities, if any. An effective loan approval process establishes minimum requirements for the information and analysis upon which a credit decision is based. There are certain sets of documents that need to be submitted at the time of application for a home loan. The document sets will vary according to the individual status - either resident or non resident in India, as also the type of loan that the borrower may want to avail of. Resident Indians Non – Resident Indians • Income documents • Property documents • Personal documents • Income documents • Property documents • Personal documents 39
    • 1) For Resident Indians Documentation refers to the specific documents to be submitted by Resident Indians as they apply for home loan. These documents are very much necessary for the banks to avoid any dispute and uncertainty. The documents to be provided by the resident Indians include income proof, property documents and personal identification documents, etc. which of course varies based on the borrowers financial status and the type of loan he want to avail. And of course every resident Indian should follow some eligibility criteria before applying for Home Loans in India. However, there are some standard documents made mandatory for a loan applicant to produce such as the loan applicant's profile, earning life of the applicant and present financial status proof etc. • The Applicant's Profile refers to the bio-data of the applicant, mentioning his address, age, family background and detail information. • The Earning Life of the Applicants' proof clarifies the capability of the loan payment. • The Present Financial status gives the present capability of handling the own contribution and other expenditures. This includes the mortgage to be deposited against the loan amount. 1) Income documents  If you are employed • Verification of Employment form • Latest salary slip/salary certificate showing all deductions for at least the past 6 months • Form 16 from your employer for the past 3 years. • If your job is transferable, permanent address where correspondence relating to the application can be mailed. • If you have been in your present employment / business or profession for less than a year, mention details of occupation for previous 5 years, giving position held reasons for change and period of the same. 40
    •  If you are self employed • Balance sheet and profit and loss account of the business/profession along with copies of individual income tax returns for the past 3 years as certified by a chartered accountant. • A note giving information on the nature of the business/profession, year of establishment, present bankers, form of organisation, clients, suppliers etc. • Your net worth as an applicant/co-applicant. 2) Property documents  Purchase of a flat or apartment from a builder/promoter • Title deeds of the builder/land owner for a period of at least 13 years. • Development agreement between the builder and land owner if applicable. • Power of Attorney executed in favour of the builder, if applicable. • An encumbrance certificate for the past 13 years. • The khata certificate. (Basic document indicating ownership of property as entered in the register of the government authorities.) • Up-to-date tax paid receipts of the property. • A sanctioned plan and license. • An agreement for sale and a construction agreement with the borrower.  In case purchase of house from second owner • Title deeds of land owner for a period of at least 13 years. • Encumberance certificate for the past 13 years. • Khata certificate (Basic document indicating ownership of property as entered in the register of the government authorities). • Up to date tax paid receipts of the property. • Sanctioned plan and license. • Agreement for sale in favour of the applicant/applicants. 41
    • • Valuation report from qualified valuers.  In case of repairs / renovation / extension of house/ flat • Title deeds of land owner for a period of at least 13 years • Encumberance certificate for the past 13 years. • Khata certificate (Basic document indicating ownership of property as entered in the register of the government authorities). • Up to date tax paid receipts of the property. • Sanctioned plan and license for the extension. • Agreement for sale in favour of the applicant/applicants. • Estimates of costs from a qualified engineer. 3) Personal documents • 1 passport size photograph, • 1 copy of your passport/PAN card/Driving License//School Leaving Certificate/Birth Certificate/LIC Policy/Bankers sign verification, • 1 copy of last month's telephone bill/electricity bill/ ration card (first and last page)/Title deed of property/rental agreement/driving license) 2) For Non- Resident Indians The documentation required to be submitted by the NRIs are different from the Resident Indians as they are required to submit additional documents, like copy of the passport and a copy of the works contract, etc. And of course NRIs have to follow certain eligibility criteria in order to get Home Loans in India. Another vital document required while processing an NRI home loan is the power of attorney (POA). The POA is important because, since the borrower is not based in India; the bank would need a 'representative' 'in lieu of' the NRI to deal with and if needed. Although not obligatory, the POA is usually drawn on the NRI's parents/wife/children. 1) Income documents for NRIs 42
    • • Employment contract (if the contract is in any language other than English, the same has to be translated into English and attested by the employer/Indian Embassy. • Certified copy of the latest salary slips for the past 6 months • Identity card issued from the current employer • Continuous discharge certificate, if applicable • Latest work permit • Visa stamped on passport • NRE bank account passbook sheets • Overseas bank account statement for the past 6 months • Bio data covering educational qualifications, age job experience, nature of profession/business with necessary proof • Power of attorney in favour of local representative in India, if required • Guarantor forms along with net worth proof/income proof. Number of guarantors as per the norms of the company. The guarantors should be related to the applicant/applicants. 2) Property documents for NRI’s  Purchase of a flat or apartment from a builder/promoter • Title deeds of the builder/land owner for a period of at least 13 years. • Development agreement between the builder and land owner if applicable. • Power of Attorney executed in favour of the builder, if applicable. • An encumbrance certificate for the past 13 years. • The khata certificate. (Basic document indicating ownership of property as entered in the register of the government authorities.) • Up-to-date tax paid receipts of the property. • A sanctioned plan and license. • An agreement for sale and a construction agreement with the borrower.  In case purchase of house from second owner • Title deeds of land owner for a period of at least 13 years • Encumberance certificate for the past 13 years. • Khata certificate (Basic document indicating ownership of property as entered in the register of the government authorities). 43
    • • Up to date tax paid receipts of the property. • Sanctioned plan and license. • Agreement for sale in favour of the applicant/applicants. • Valuation report from qualified valuers.  In case of repairs / renovation / extension of house/ flat • Title deeds of land owner for a period of at least 13 years. • Encumberance certificate for the past 13 years. • Khata certificate (Basic document indicating ownership of property as entered in the register of the government authorities). • Up to date tax paid receipts of the property. • Sanctioned plan and license for the extension. • Agreement for sale in favour of the applicant/applicants. • Estimates of costs from a qualified engineer 3) Personal documents for NRI’s • 1 passport size photograph, • 1 copy of your passport/PAN card/Driving License//School Leaving Certificate/Birth Certificate/LIC Policy/Bankers sign verification, • 1 copy of last month's telephone bill/electricity bill/ ration card (first and last page)/Title deed of property/rental agreement/driving license)  FEES & CHARGES The interest rates and EMIs are not the only cost factor that the banks and financial institutions take into account while giving Home Loans. The certain other fees and charges that the banks levy on the borrowers can be as follows: 1) Processing Charge: It's a fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount. The loan amount received by the borrower can be less than the processing fee. 44
    • 2) Interest Tax: This is the tax payable on the interest paid on a home loan and not the principal. This tax is some times included in the interest rate of the loan, or may be charged separately as interest tax. 3) Documentation Fees: Banks collect fees for documentation, administration, consultant charge, valuation fees and legal fees from the customers as part of the application processing. 4) Commitment Fees: Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned. 5) Prepayment Penalties: When a loan is paid back before the end of the agreed duration a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre paid. 6) Registration of mortgage deed  AGE CONSIDERATION FOR HOME LOANS The minimum age requirement for availing any type of Housing Loan is 18 years, and the maximum is 60 years. The maximum age can be relaxed in deserving cases up to 65 to 70 years.  PENALTY FOR PRE-PAYMENT When a loan is paid back before the end of the agreed duration a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre paid.  EMI (EQUATED MONTHLY INSTALMENT) This is the installment amount the borrower has to make towards repayment of his loan. The EMI comprises of both the principal and interest. Banks/FIs charge an Equated Monthly Installment from the borrower that is calculated on the basis of loan amount and the interest rate charged for the same. Repayment by way of EMI generally commences from the month following the month in which one takes disbursement. It can be calculated either on the basis of annual reducing rest, monthly rest or daily rest. In an annual rest the EMIs (equated monthly installments) are calculated on an annual basis. The interest is calculated on the outstanding principal at the beginning of every year. Once the interest is calculated at the rate charged to the 45
    • customer for the entire year it is deducted from the EMIs received during the year. The balance EMI is taken as principal repaid during the year and this is deducted from the opening balance of principal of the current year to arrive at the opening balance of principal for the next year. Under this method, typically the component of interest in the EMI is higher for the first few years and later on the component of principal increases and the interest keeps reducing year after year. In other words, the interest in the EMI will keep reducing year after year and the principal component in the EMI keeps increasing. This is commonly known as Annual Reducing Balance of the principal amount lent. In this case EMI becomes 1/12th the Equated annual installment. In the monthly rest, principal repayments are credited at the end of every month and interest is calculated on the outstanding principal at the end of every month. In the daily reducing principal repayments are credited at the end of the day an installment is paid. The EMI for the loan will begin after the loan has been disbursed in full. Till such time the borrower has to pay the interest for the loan. The amount of interest payable every month is called pre-EMI. In short the following four factors go into the determination of EMI. • The principal amount - This is the actual loan amount taken. Obviously the larger the amount, the greater the EMI. • The rate of interest - Another obvious one, the higher the interest rate, the higher the EMI. • The tenure - The longer one take the loan for, the lesser the EMI. The faster one want to repay it, the higher the EMI. • How the interest rate is calculated - It could be calculated either on a daily reducing or monthly reducing or on an annual reducing basis.  INTEREST RATES FOR HOME LOANS & THEIR CALCULATION Interest rates charged by housing finance companies vary depending upon your individual status - either resident or non resident in India, the loan amount, scheme type, and are sometimes even based on the tenure of the loan. The way banks / FIs charge interest to arrive at the value of EMI can be broadly classified into ‘Flat rate system’ and ‘Reducing balance rate system’. In the flat rate system, the rate of interest on the loan amount is calculated over the entire duration of the loan and the principal plus the 46
    • interest is divided over the number of installments and the value arrived is the EMI. But in case of 'Reducing Balance system’, the interest is charged on the outstanding balance of the loan, which goes on reducing. The reducing balance can be further classified into monthly reducing, quarterly reducing and annual reducing methods based on the number of times the principal is reduced/credited in a year. Suppose the principal is reduced 12 times a year, it is termed as monthly reducing balance method, if the principal is reduced 4 time a year, it termed as quarterly reducing balance method and if the principal is reduced 1 time a year, it known as annual reducing balance method. Annual reducing balance method is very common with Indian banks and monthly reducing balance method is popular among the foreign banks and nationalized banks, engaged in the activity of housing finance. Resident Indians Non-Resident Indians • Buying a new house • Buying an existing house • House improvement • Buying a new house • Buying an existing house • House improvement 1) Interest rates for Resident Indians • Buying a new house from a builder/promoter Banks and FIs offer resident Indians loans upto Rs 10,000,000 for upto 30 years for buying a new flat from a builder. The flat may be under construction at the time of application. The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 47
    • SBI For all loan amounts 11.25 12.75 • Buying a house from a second owner Banks and FIs offer resident Indians loans upto Rs 10,000,000 for upto 30 years under this scheme. The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 SBI For all loan amounts 11.25 12.75 • Home Improvement Banks and financial institutions offer non resident Indians loans upto Rs 1,000,000 for periods ranging from 1 to 10 years under this scheme. Home improvement schemes allow the borrower to finance internal and external repairs and other structural improvements in your home. Some of the home improvements one can finance under this scheme are: • External repairs • Waterproofing and roofing • Internal and external painting • Plumbing and electrical works • Tiling and flooring • Grills and aluminium windows 48
    • The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 SBI For all loan amounts 11.25 12.75 2) Interest Rates for Non-Resident Indians • Buying a new house from a builder/promoter Banks/ FIs offer non resident Indians loans upto Rs 10,000,000 for upto 10 years for buying a new flat from a builder. The flat may be under construction at the time of application. The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 SBI For all loan amounts 11.25 12.75 • Buying a house from a second owner 49
    • Bankls/ FIs offer non resident Indians loans upto Rs 10,000,000 for upto 10 years under this scheme. The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 SBI For all loan amounts 11.25 12.75 • Home Improvement Banks and FIs offer non resident Indians loans upto Rs 1,000,000 for periods ranging from 1 to 10 years under this scheme. Home improvement schemes allow the borrower to finance internal and external repairs and other structural improvements in the home. Some of the home improvements one can finance under this scheme are: • External repairs • Waterproofing and roofing • Internal and external painting • Plumbing and electrical works • tiling and flooring • Grills and aluminium windows The table below offers a comparison of loan ranges and corresponding interest rates applicable under this scheme. 50
    • Company Loan amount (Rs.) Floating rate (%) Fixed rate (%) HDFC (Monthly) For all loan amounts 11.25 13.25 HSBC For all loan amounts 12.00 13.50 ICICI For all loan amounts 13.75 14.00 SBI For all loan amounts 11.25 12.75  MARGIN AMOUNT FOR HOME LOANS The difference in the total cost of the property and the loan amount sanctioned is the margin amount. This money has to be invested by the borrower of the property prior to the release of the loan amount in case of construction of a house. In case it is for purchase of a ready house, the loan amount is released on the day of registration of the property and the margin money has to be invested by the borrower prior to the release. In case of purchase of flats also, the release will be made only on investment of the margin money by the borrower. A margin amount is the amount that the applicant pays through his/her pocket. As far as home loans are concerned a bank usually pays 85% of the total cost of the house to be purchased by the borrower. The margin is usually the amount not covered by the bank for the payment of the essential and necessary fees for the purchase of the house. In most of the cases, the margin amount of 25% of the purchase consideration has to be borne by the borrower in the case of purchase of old houses/approved plots and 15% of the project cost in the case of loans for construction/purchase of new house/flat.  SECURITY FOR HOME LOANS In most cases, the property to be purchased itself becomes the security and is mortgaged to the lending institution till the entire loan is repaid. Interim security may be additionally required, if the property is under construction Some companies may also require additional securities which are called collateral securities like the assignment of life insurance policies, pledge of shares, NSCs, units of mutual funds, bank deposits or other investments.  GUARANTOR FOR HOME LOANS 51
    • Guarantors are essential for sanctioning of loans. Usually, a guarantor is required so that if the applicant fails or becomes incapable of repaying, the guarantor will be responsible for clearing the debt. Generally most banks do not insist on a guarantor when giving home loans but some might insist for 1 or 2 guarantors in certain cases. A guarantor is equally liable to pay up the loan in case the borrower misses out on repayments. By seeking a guarantor, the lender tries to enforce a moral check that prevents the borrower from defaulting. If the borrower is a salaried individual with a good employment record and laudable debt repayment history, banks are assured of his/her financial stability and credibility. In case one runs a small business with low profits, the banks are taking a risk. To safeguard their interests in such circumstances, banks seek a guarantor who is legally bound to make repayments in case of default. The bank seeks a guarantor in case the loan applicant does not live in the same city in which he is purchasing the property. If the nature of his job is such that he will be constantly transferred or could go abroad, the banks need a guarantor. The same is the case for self-employed individuals who lack required professional qualifications. Absence of a co-applicant for a loan sometimes calls for a guarantor. In most other cases, there is no personal guarantor required as home is an investment to which people have emotional bonding. And they are sure to go to any extent to keep it. Any friend or family member can be a guarantor and can guarantee the loan. A guarantor has to fulfill the criteria relating to age and income of a normal customer. The minimum income criteria vary from one housing finance company to another. This is to ensure that since he is equally liable to pay the loan in case of default, he has to be financially sound too like the loan applicant himself.  DISBURSEMENT When the entire essential work of selecting the land/ home is done and after all the legal documentation (such as handing over of the original agreement for sale / lodging receipt to the lender), etc is completed, the borrower starts getting the disbursement of the loan. On an average it takes around fifteen days for processing of one's application if the documents are in order. It takes another week for the bank/FI to check out the property papers and make the disbursement. 52
    • The bank /FI also ask for a proof stating that the borrowers own contribution of the cost of the property has been paid upfront to the seller/vendor / builder / developer of the property. In case of property under construction, the disbursement of the loan is made in installments according to the stage of construction.  REPAYMENT OPTIONS 1) For Resident Indians Every bank/ FI have customized repayment options to suit every individual's requirement and also repaying capacity with some tax benefits. They have thereby come up with more flexible and Multiple Repayment Option. A few among them are: Step-up Repayment Facility: The objective of step-up repayment is to provide the borrower with a repayment schedule, which is linked to expected growth in income. It not only helps a customer get a larger amount of loan as compared to the loan under the normal housing loan; but the customer can avail of a higher amount of loan and pay lower EMIs in the initial years, which is subsequently accelerated proportionately with the assumed increase in his income. Flexible Loan Installments Plan: This repayment option offers a customized solution to suit the needs of customers whose repayment capacity is likely to alter during the term of the loan. In cases when a borrower is nearing retirement, the loan is structured in such a way that the EMI is higher during the initial years and subsequently decreases in the latter part proportionate to the reduced income of the customer. This option helps such customers combine the incomes and take a long term home loan where in the installment reduces upon retirement of the borrower. Tranche Based EMI: Customers purchasing an under construction property, need to pay interest (on the loan amount drawn based on level of construction) till the property is ready. Tranche Based EMI is a special facility offered by some banks to help customer save this interest. Customers can fix the installments they wish to pay till the property is ready. The 53
    • minimum amount payable is the interest on the loan amount drawn. Anything over and above the interest paid by the customer goes towards principal repayment. The customer benefits by starting EMI and hence repays the loan faster. Accelerated Repayment Scheme: Accelerated Repayment Scheme offers the borrower a great opportunity to repay the loan faster by increasing the EMI. Whenever the borrower get an increment, increase in the disposable income or have lump sum funds for loan prepayment, he can benefit by: • Increase in EMI means faster loan repayment • Saving of interest because of faster loan repayment • Or invest lump sum funds rather than use it for loan prepayment. The return from the investments also gives the borrower the comfort of paying the increased EMI. Balloon Payment: Balloon Payment is an augmentation tool offered by the banks/FIs, which helps in increasing the loan eligibility of the customer without increasing the EMI by assigning securities like National Savings Certificate (NSC), LIC policies etc. The present value of the maturity amount of assigned securities is combined with the loan amount to arrive at the enhanced loan eligibility. Under this facility, the EMI is calculated on the net loan amount (i.e. total loan less the present value of the maturity value of the securities). 2) For Non- Resident Indians The repayment option for Non-Resident Indians (NRIs) is done in EMIs, and includes interest and principal amount calculated on monthly rests. The borrower can pay EMIs by issuing post- dated cheques from the Non Resident External (NRE)/Non-Resident Ordinary (NRO) or Non Resident (Special) Rupee Account (NRSR) in India; or any other account approved by the Reserve Bank of India (RBI). In the case of part-disbursement of the loan, the monthly interest is payable only on the disbursed amount. EMI is payable every month, by the end of the month from the date of each disbursement up to the date of commencement of EMI. Pre-EMI is calculated at the same rate at which EMI is calculated. Step-Up Repayment Facility: By the step-up repayment option, a borrower can apply for a higher range loan based on the prospects of growth in income for years to come. In this 54
    • repayment option the loanee has to pay less EMI in the initial years which increase as the income grows with the coming years. Flexible Loan Installments Plan: In this mode of repayment, the borrower has flexible loan installment facility where a borrower nearing retirement age can opt for paying higher EMI in the initial years and gradually move to paying lower installments after reaching retirement age. Tranche Based EMI: Tranche Based EMI is a special facility offered to the customers so as to save their interest, in cases when customers purchasing an under construction property need to pay interest (on the loan amount drawn based on level of construction) till the property is ready. In such cases, customers can fix the installments they wish to pay till the property is ready. The minimum amount payable is the interest on the loan amount drawn. Anything over and above the interest paid by the customer goes towards principal repayment. The customer benefits by starting EMI and hence repays the loan faster. Accelerated Repayment Scheme: Accelerated Repayment Scheme for NRIs offers a great opportunity to repay the loan faster by increasing the EMI. Whenever the NRI get an increment, increase in the disposable income or have lump sum funds for loan prepayment, the loanee can benefit by: • Increase in EMI, which means faster loan repayment • Saving of interest because of faster loan repayment and can invest lump sum funds rather than use it for loan prepayment. A NRI loanee can opt for repayment ahead of schedule, by remittances in abroad through normal banking channels, the NRO / NRSR in India. However, by regulations in many states in India, the Agreement of Sale between the builder and purchaser is required to be registered by law. It is therefore advisable to record the agreement for registration within four months of the date of the Agreement at the office of the Sub Registrar appointed by the State Government, under the Indian Registration Act, 1908.  REPAYMENT TENURE 1) For Resident Indians 55
    • Home loan tenures fixed by RBI are available up to a term of 15 years. Some financial institutions have home loan tenures in the range extending up to 20, 25 and 30 years if the applicant fulfills certain criteria. However, one cannot opt for a term that extends beyond attaining retirement age or 60 years of age (whichever is earlier). Home loan Tenure: Type of Property Salaried Self-Employed Residential 15 years 10 years Plot of Land 10 years 10 years Against Existing Plot of Land 15 years 10 years 2) For Non- Resident Indians The home loan tenure for Non-resident Indians differs from the Resident Indians on a few points, which may of course vary from one bank to another. For most banks the home loan tenure exceeds maximum from 25 to 30 years. However, for NRIs the maximum tenure is from 7 years up to 15 years, the number of years fixed by RBI. However, one cannot opt for a term that extends beyond attaining retirement age or 60 years of age (whichever is earlier). 56
    • HOME LOAN WITH INSURANCE COVER There are many individuals who worry about the adverse impact of the home loans if something happened to them. This is where a home loan insurance product comes to the rescue. Many banks and financial institutions insist on getting the home insured to safeguard their interest. The borrower needs to ensure that the property is duly and properly insured for fire and other appropriate hazards, as required by the bank and financial institution during the period of the loan and will have to produce evidence each year and/or whenever required by the lenders. The bank/financial institution will be the beneficiary of the insurance policy. There are various kinds of insurance covers available for a homeowner. The various options may be insurance against fire, against other disasters, etc. Home loan insurance plans, also known as mortgage redemption plans are policies that cover the home loan liability. Though there are some minor variants, most plans offer a sum assured that reduces as the outstanding home loan comes down every year. In such plans, it is not the home but the loan that is covered should something happen to the borrower. For instance, if a person have taken a home loan of Rs 40 lakh and covered this through a home loan insurance. If after a year, the outstanding loan comes down to Rs 39 lakh, then the sum assured also comes down to Rs 39 lakh. In short the sum assured is adjusted against the home loan liability. This insurance is much like the term plan or pure risk cover plan that is available from various insurance companies. There are exceptions like ICICI Bank (through their tie-ups with ICICI 57
    • Lombard) home insurance loan where the sum insured remains constant. And in the event of death of the life assured, the outstanding home loan is cleared off and the rest is paid to the family. Some characteristics of such plans include: • Low premiums, high cover • No maturity amount on survival of the term • Choice of one time premium or regular premiums However, the cover in term plans available in India are level term plans where the cover remains the same whereas in the case of home loan covers, the amount keeps falling as the home loan liability decreases. Also it is important to know that while most term plans can be bought till the age of 55, home loan insurance plans can be bought till the age of 60. However, the medical underwriting is stringent and it is only after adequate tests that these policies are issued at the higher age band. If one opts for a joint application then the premium is double. And if any of the joint applicants die, the loan is paid off by the insurance company. The premiums are calculated based on the medical underwriting, based on the age and medical record. The conditions are: Age of the life insured: The premium increases with age. Medical tests increase with age and are mandatory above 40 years. Below this age, a simple declaration is good enough though this depends on each insurance company. Medical record: If the borrower of the loan is in a good health, the premiums will be regular but if the insurance company's prognosis about the life assured is at higher risk, then the premiums will be higher. A past family history of early death or critical illness will also increase the premiums. Loan tenure: The premium will increase with the duration of the loan. A cover of Rs 50 lakh for five years and a cover of Rs 50 lakh for 20 years will attract different premiums, with the latter being more expensive. Since this is a life insurance plan issued by an insurance company, the premiums paid towards life insurance schemes are eligible for deductions under Section 80C. However, if the premium is clubbed within the equated monthly installment of the home loan, then the borrower will not 58
    • get the Section 80C benefit. Most banks have tie-ups with insurance companies for the issuance of such policies. There is always the question that whether it is better to take a term plan and insure the life that is going to repay the home loan or go for home loan insurance. A factor that tilts the argument in favour of term plans is the cost, which is much less and remains constant as well. However, a majority of the people should get thorough needs analysis done and not just cover their home liability but other liabilities as well, dependent goals (financial needs of children) and dependent income goals (monthly needs of family if the borrower were to die) as well. After this, taking a term plan for the requisite cover needed is considered. For those who cannot undergo this exercise, opting for the home loan insurance cover may prove helpful. The policies that one may consider other than a home insurance are as follows: 1) Fire policy for a householder Suitability A householder can cover his movable and immovable properties against fire and allied perils. Apart from persons owning a house, people staying in a Rented/Leased house can take this policy, if they are responsible for its safety by any covenant. An individual can also insure household contents not belonging to him, but held in trust or belonging to relatives permanently staying with him. Salient Features The Fire Policy can be taken to cover any property within the country. The policy offers cover on loss and/or damage on account of: • Accidental fires • Lightning • Explosion & implosion 'due' to pressure vessels (used for domestic purposes) • By rioting mob, striking workers, malicious acts by third parties and damage by terrorists • Impact damage by rail/road vehicles, carts & animals • By aircraft or any arial devices or articles dropped there from 59
    • • Landslide & rockslide • Storm, cyclone, flood & inundation and similar vagaries of nature • Bursting and over flowing of water tanks and pipes etc. • Missile Testing • Leakage from sprinklers • Bush Fire Benefits • Claims are payable at the market value of the property damaged at the time of loss. • If the individual value if assets is not furnished then the value of each property is considered as not more than 5% of the total sum insured. • Long term policy may be taken. 2) All risk Insurance Suitability This policy is suitable for people owning things, which are prone to accidental loss or damages. Salient Features It covers valuables like jewelry, work of art and similar artifacts of sentimental values. The scope of the cover is limited to loss or damage due to fire, riot & strike, terrorist act, burglary, larceny or theft and accidental loss or damages. Benefits The policy pays for any loss to the property insured against by insured perils. The amount of claim payable is limited to the sum insured or the market value at the time of loss, whichever is lower. 3) Burglary Insurance 60
    • Suitability This policy is more suitable for people who have movable property like clothes, appliances etc. prone to burglary, theft and larceny. Salient Features This insurance policy covers burglary, theft and larceny. Benefits This policy pays for any loss of property due to burglary, theft or larceny occurring during the policy period. The amount of claim payable is limited to the sum insured or the market value at the time of loss, whichever is lower. This policy also covers damage to the premises like walls, windows etc. 4) Householder’s Package Policy Suitability This is a single package policy offered at economical rates of premium through which all of the householder's needs are addressed. Salient Features The package includes the following policies: • Fire Insurance • Burglary • All Risks Insurance • Plate Glass Insurance • Break down of Domestic Appliances (Electrical and mechanical failures) 61
    • • Television including VCR & VCP and music systems • Pedal cycle Insurance • Personal baggage insurance • Personal accident • Public liability • Employers Liability Benefits This being a package policy, only one proposal form is to be completed instead of separate proposal forms for individual policies. As regards fire risks, while covers like explosion/implosion (other domestic gas cylinders or pressure cookers) and impact of rail/road vehicles are withdrawn as inconsequential, special risks like damage due to bursting and overflowing of water tanks, apparatus, or pipes are included in the policy. RECOMMENDATIONS FOR BANKERS The entire housing finance sector thrives on a simple logic that the house is the single largest investment made by a common man in his entire lifetime. There is an emotional and sentimental attachment towards his house property wherein lots of personal money is involved. Hence, the risk is very low to a lender since it would be a great loss to the borrower if he looses the possession of the house. This safest mode of business has spurred many new entrants to join the fray. According to the details given by the National Housing Board (NHB) pertaining to the housing loan disbursements of banks and housing finance companies as on June 29, 2006, the housing finance sector has shown an exponential growth as compared to the other areas of credit. 62
    • The housing finance sector even if it is showing an exponential growth is not devoid of risks. The problem of bad loans has always been a matter of concern for the entire industry. Since the competition among the players in the housing finance sector is too high, all the housing finance companies maintain the interest rates in unison except for public sector banks which operate on relatively low rates of interest as they concentrate more on retail business. Despite the low risk attached to this sector and legal support to the lenders, problem loans are creeping into the system overwhelmingly. In order to avoid the problem of bad loans the banks and financial institutions may undertake the following remedial measures for mitigation of risks: 1) PROPER SCRUTINY IN SANCTIONS AND DISBURSEMENTS Home loans are made available by banks and financial institutions to both Indian and Non Resident Indian customers at floating and fixed rates of interest and also with attractive EMI options. The loans are offered for construction of or buying a new house, home repairs and renovations, purchase of plots, against mortgage of property, etc. Hence the banks and financial institutions should conduct a proper scrutiny while sanctioning and disbursements of loans. 2) PROPER STUDY OF FINANCIAL STATEMENTS Many a times the banks and financial institutions in order to cope with and to outsmart the competitors, they go to the extent of luring the customers of their competitors by providing attractve schemes. Some companies even go to the extent of sanctioning the home loan without identifying the property and improper title deeds which is the prerequisite for eligibility. Waiving the processing fee, providing free accident insurance and property insurance, waiving penalties, etc,. are some of the factors causing reduction in the profit margin. Hence proper study of financial statements and analysis should be undertaken in order to increase the profitability. 3) END USE OF THE MONEY LENT Banks and other housing finance companies have high rate of interests for non- residential use of the loan. A study of the NPAs of these banks/FIs shows that individuals who avail themselves of loans for residential properties, divert them for commercial or any other purposes. Any fluctuations in the business operations or mindset of the borrowers lead to non-payment of interest. At times, it is very difficult for the lender to recover the loan amount if the borrower has 63
    • left the country. Hence, it is very important for banks and financial institutions to verify that the loan given is utilized for the purpose for which it is sanctioned. 4) MARKETABILITY OF THE MORTGAGED ASSETS Improper valuation and scrutiny of the documents tend to lead the financier to invest more than 100% of the value of the property. In case, the loan is not serviced, he may not realize the claim amount. When the borrower constantly defaults in servicing the loan, the lender has five types of rights. Possession, lease, manage, reconstruct or sell. In practice the possessed assets are in such a condition that they can be neither sold nor managed nor given for lease. To market them the lender of the loan has to incur further expenses adding to his risk of getting back his further investment. 5) CONSTANT MONITORING Once the loan is sanctioned, the job of the lender is not over. He has to exercise vigilance and monitor the payments of installments by the borrowers. It is advisable to make periodical review of the borrower’s financial position to ensure his capabilities of prompt payment of installments. A close monitoring has to be done by the lender about the performance of various industrial units, changes in the socio-economic conditions in his areas of operations, which will have a bearing on the repayment capacity if the individuals. 6) TAKE OVER OF BAD LOANS Most of the institutions play safe by handing over their doubtful and risky loans to the other institutions. These are taken over just to add a feather to their asset portfolio in the balance sheet. As far as possible, taking over of loans should be done only after a thorough study of the case and the reasons of handing over the loan. Verification of repayment track and reasons for takeover are very important. 7) FAIR ASSESSMENT OF PROPERTY While scrutinizing the valuations, it is very important for the lender to go by his own assessment instead of being carried over by real estate boom. The banks and financial institutions should 64
    • keep in mind the resale value of the asset rather than the market value. Most of the cases suffer form the drawback of poor collateral. Condition of the underlying asset also must be taken care of. Care should be taken to see that the asset is sold very soon after seizing it. Or else, the resale value may come down. Therefore, finding out the buyers to dispose of the asset is a challenging task for the banks and financial institutions. 8) INCREASING EMPLOYEE MORALE The banks and financial institutions should protect the employee morale by providing performance-based incentives as there is a tendency in any finance department to become corrupt. The sanctioning official must be made directly responsible for the bad loans to a certain extent. TABULATED COMPARISON BETWEEN HOME LOAN SCHEMES PROVIDED BY SBI BANK & ICICI BANK 1) ELIGIBILITY Scheme Min Age (years) Max Age (years) Min Income (Rs/mth) Max Income (Rs/mth) SBI Optima Additional Home Loans/SBI Housing Loan-RI/SBI Freedom Home Loans(NRI) 21 45 1 _ ICICI Home Loans (for Resident Indians) 21 65 1 _ ICICI Home Loans (for NRIs) 21 65 _ _ 65
    • 2) FEES Scheme Processing Fees (%) Administrative Fees (%) SBI Freedom Home Loans(NRI)/SBI Housing Loan- RI/SBI Optima Additional Home Loans 0.50 _ ICICI Home Loans (for NRIs) _ _ ICICI Home Loans (for Resident Indians) 0.50 5.00 3) INTEREST Scheme From (years) To (years) From (Rs) To (Rs) Interest Rate (%) SBI Optima Additional Home Loans 1 5 _ 500,00,000 9.50 SBI Optima Additional Home Loans 6 10 _ 500,00,000 9.75 SBI Housing Loan-RI/ SBI Freedom Home Loans 1 5 _ 500,00,000 9.50 SBI Housing Loan-RI 6 10 _ 500,00,000 9.75 SBI Freedom Home Loans (NRI) 6 10 _ 500,00,000 9.25 SBI Maxgain Home Loan- RI 1 5 500,000 0 8.75 SBI Flexi Home Loan-RI 0 5 500,000 0 8.75 ICICI Home Loans (for RI) _ 20 2,00,00 0 _ 11.00 ICICI Home Loans (for RI) _ 20 2,00,00 0 _ 9.50 ICICI Home Loans (for NRIs) _ _ 5,00,00 0 100,00,000 11.00 4) MAXIMUM LIMIT Scheme Min Amt (Rs) Max Amt (Rs) Max Limit Min Term (years) Max Term (years) SBI Freedom Home Loans (NRI) _ 5,00,00,000 _ _ 20 SBI Housing _ 5,00,00,000 The maximum amount=60 NMI/ 5 times 0 5 66
    • Loan-RI NAI, subject to aggregate repayment obligations not exceeding 57.50% of NMI/ NAI for those less than 45 years of age. If the borrower is above 45 years of age it is 48 times NMI or 4 times NAI. SBI Optima Additional Home Loans _ 5,00,00,000 The eligibility is 18 times NMI (for salaried borrowers)/ 1 times NAI (for others) or (i) 25% of the original project cost of house/flat (ii) 85% of the cost of repairs etc. or (iii) gap between 85% of the current market price of flat/house and actual outstanding loan dues, whichever is lower (EMI/NMI ratio of all loans should not exceed 60%) _ _ ICICI Home Loans (for Resident Indians) 2,00,000 _ Maximum of 85% of the cost of the property _ 20 ICICI Home Loans (for NRIs) 5,00,000 1,00,00,000 Maximum of 85% of the cost of the property _ 15 5) UNIQUE FEATURES Scheme Unique Features SBI Freedom Home Loans(NRI) This product is for those individuals who are on the lookout for a source of finance for a property they want to invest in without mortgaging the same. All they have to do is pledge any financial security that they have and will get a Home Loan for their dream home. SBI Housing Loan- RI This loan is for Purchase/Construction of new House/ Flat, Purchase of an existing House/ Flat, purchase of a plot of land for construction of House, Extension/ repair/ renovation/ alteration of an existing House/ Flat, takeover of an existing loan from other Banks/ FIs. Free personal accident insurance cover. Optional Group Insurance from SBI Life at concessional premium. SBI Optima Additional Home Loans This loan is aimed at enabling the customer meet expenditure towards major repair, renovation, addition to their house/flat, purchase of furniture, fixtures and consumer durables. ICICI Home Loans (for Resident Indians) Door-step service from enquiry stage till final disbursement. Free personal accidental insurance, Special 100% funding for select properties. The borrowers can transfer the existing high-interest rate loan. ICICI Home Loans (for NRIs) The borrowers can take loans for purchase, construction, extension or renovation of a new house or flat. ANALYSIS 67
    • ICICI and SBI are the pioneers in the home loan sector in private and public sector respectively in India. These banks offer home loans with attractive and unique features for the benefits of their customers. As per the eligibility criteria ICICI bank holds a better position as compared to SBI bank because it provides home loan to maximum age limit of 65 years as compared to the maximum age limit of 45 years offered by SBI bank. With respect to the fees SBI stands ahead of ICCI because it has less processing fees and administrative charges. Interest rates offered by ICICI are up to 11% whereas in case of SBI the loans are offered below 10%. SBI has an upper hand over ICICI because the maximum limit is Rs. 5, 00, 00,000. By analyzing the home loan schemes offered by both the banks SBI can be placed at a better position as compared to ICICI because of the advantages stated above. SURVEY I had conducted a survey taking the sample size of 100 people including all groups of people. I had done the survey at different places like Andheri station, Kandivli, Bhayander, Ghatkopar, Lokhandwala, Borivali, Santacruz, Bandra, Dadar and other places considering all income groups of people. The questionnaire of the survey in enclosed in the annexure. It was a very good experience while conducting this survey. It developed a sense of confidence and augmented the data collection skills within me. It enabled me to develop a skill of getting primary data from the common people and then analyzing it and presenting it in a systemic manner. Most importantly it made me think logically and practically and thereby improved my research ability. The information collected is analyzed and represented below with all possible diagrams. ANAYLSIS AWARENESS OF HOME LOAN 68
    • 95% 5% Aware Not aware The survey indicates that nearly 95% of the people are aware about the Home loan facilities offered by different banks. But there are still 5% of people who are not much educated and are unaware about the different types of home loan facility. For this banks should also target their lower income group while making the publicity of their home loan products and their should also be a direct selling concept of marketing their product and by this banks can increase their customer base by providing loan to this particular section of people by making them aware of it. Security and comfort in life is a top priority for everyone. So everyone should be made aware of this facility and enable them to take advantage of it for which banks and financial institutions should take care of. DEMAND FOR HOME LOANS 30% 70% Want to Pursue Don’t want to Pursue The survey conducted by me shows that 70% of the people want to pursue home loan facility in the future if required. This shows there is an increase in the demand for home loans. The reason behind this could be the boom in the home loan sector in India. The real estate boom has added new dimensions to the housing finance sector. The new class of young buyers, whose affordability are high, is spending a little more on paying Equated Monthly Installments (EMIs) rather than spending huge amounts on the rents, thereby, owns a house. Hence the reasons for the growth of the home loans market has been mainly fuelled by certain fiscal, social and regulatory drivers such as: 69
    • • Changes in demographic profile including increase in the rate of household formation due to structural shift from joint family system to nuclear family • Ever increasing middle class, migration of population and increasing urbanization resulting in acute shortage of housing units • Increase in disposable income levels due to decrease in marginal tax rates and increase in total income levels • Tax benefits and other fiscal incentives announced in the Union Budgets thereby encouraging the sector • Increasing affordability of housing property purchase due to declining interest rates and stable property prices • Decline in the average house cost to annual income ratio to around 4-5 from 11-14 during the last decade resulting in an affordable EMI as a percentage of monthly income • Aggressive lending by banks to the housing sector due to lower credit off take by the corporate sector, attractive spread and lower non performing assets PREFERENCE FOR TYPE OF HOME LOAN 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% No. of people Home purchase Land Purchase Home Extension Others Type of loan preferred According to the survey 42% of the people would prefer to take loan for home purchase, 33% for purchasing land, 14% for home extension/improvement/renovation, while only 11% for other type of loan. Due to the hike in the property rates the demand for loan for home purchase is increasing and the same is so for the purchase of land property. Due to affordability factor and less amount of money required for home extension or improvement or renovation people prefer 70
    • less to opt for loan for these purposes.The other type of loans such as Bridge Loans, Balance Transfer, Refinance Loans, Home Conversion Loans, Stamp Duty Loans and Loans to NRIs, are not much in demand. PREFERENCE TO PRIVATE, PUBLIC SECTOR OR FOREIGN BANKS 30% 10% 60% Public Sector Banks Private Sector Banks Foreign Banks As per the survey, 60% of the people preferred to go for public sector banks, 30% for private sector banks while the remaining for foreign banks. In the booming home loan segment, it is the public sector banks (PSBs) which are now having a clear-cut advantage over their private and foreign counterparts. Some of the big PSBs, including State Bank of India, Bank of Baroda and Canara Bank, are offering both fixed and floating home loan products almost 75-100 basis points cheaper than private and foreign banks. After the recent rate hike by the Reserve Bank of India (RBI), the private sector and foreign banks like ICICI Bank and Standard Chartered have also raised rates to manage the rising cost of funds. However, their public sector counterparts are yet to join the bandwagon and are unlikely to react before the quarterly review of the RBI Annual Policy. As a result, public sector banks, now following the same marketing model like the private sector and foreign banks, are now offering competitive rates in home loan segments. To make life further tough for the private and foreign banks, PSBs have beefed up their marketing campaign to sell home loan products. For example, BoB has launched a pilot project in Mumbai, named Project Parivartan, in which BoB officers are going door-to-door to sell home loans. This move is probably for the first time that a public sector bank is going door-to-door to sell their products, initiatives normally associated with private banks. Foreign Banks have recently started 71
    • concentrating on retailing sector particular in home loan sector in India so there is still a lot of scope for them to catch the interest of the Indian borrowers. In case of public sector banks the rise in home loan rate is not as steep as in the private sector. PREFERENCE FOR FIXED OR FLOATING INTEREST RATES Going by the trend, it should surprise no one if interest rates on home loans rise as a consequence of the rising interest rate scenario. This being the case, home loan seekers considers opting for a fixed rate loan (i.e. fixed for 3-5 years). This protects them from a potential interest rate hike in the near term. At the end of the said 3-5 year term, they have the option of considering either to continue with the 'fixed' rate (if interest rates continue to rise) or migrate to a floating rate loan However, in case an individual does not have the risk appetite to take the interest rate fluctuations in his stride, he may consider selecting the 'truly' fixed rate loans. Such loans have a fixed rate throughout the tenure of the loan. However, if interest rates were to decline going forward, the truly fixed rate loan will not reflect the fall in interest rates and the consumer will forfeit any chance of benefiting from a decline in interest rates. EFFECTS OF PROPERTY RATES HIKE ON HOME LOANS The home loan sector has been drastically affected by the hike in the property rates. The property prices have been rising and touching unprecedented heights. In fact so much so, that property are again becoming out of reach of common man. Whether the price rise is justified or is it just a manipulated bubble remains to be seen. Reserve Bank of India, in its policy statements has time and again cautioned the banks to be extra cautious before taking exposure. In fact RBI went to the extent of increasing the risk weight age of the housing loans. Reserve Bank of India increased the risk weight on real estate exposure and hiked the risk weight for lending to the real estate sector. The RBI has cautioned the banks to be extra careful while going all out to fund and finance the real estate sector. According to reports, the property prices have come to their saturation and there is little scope for further increases. The price hike has been quite fast and unrealistic. The growth in infrastructure has not been able to keep pace with the increase in property prices. Hence property rates hike have led to an increasing importance to home loans but bankers have to be extra cautious on their part. 72
    • HOME LOAN PROCESS According to the survey 25% of the people feel that home loan process is convenient. Maximum number of people i.e. 75% says that the process is lengthy as banks requires time for processing the loan application, verification of various documents, appraising the credit and other formalities takes a longer time in sanctioning of the loan. CONCLUSION In view of its backward and forward linkages with other sectors of the economy, housing finance in developing countries is seen as a social good. In India, growth of housing finance segment has accelerated in recent years. Several supporting policy measures (like tax benefits) and the supervisory incentives instituted had played a major role in this market. The housing finance industry is getting increasingly commoditised. Competition within the sector is ensuring that players offer consumers flexibility and features to choose from. Features such as adjustable rate plans, lower processing fees/monthly rest/interest rates/EMI/margin money, no pre- payment penalty have become common across the industry. There is a growing trend among Banks and FIs to include the cost of registration, stamp duty, society charges and other associated costs while sanctioning loans to differentiate and make the home loans products more attractive. This has resulted in further lowering the threshold limit for buying a house. For differentiation of their home loan products, banks are also resorting to 73
    • offering of free add-ons such as life insurance, credit cards and consumer loans at reduced rates for furnishing the house. Some of the major players in the housing finance industry have started organizing property fairs, wherein the projects of different construction companies are brought together and bundled with a lower than normal interest rate loan product. Such initiatives are expected to result in a more organized housing market and more value for the customer. On the services front the banks/ FIs have begun addressing concerns of borrowers through counseling and legal advisory services on matters pertaining to property’s title, its technical evaluation, and its pricing etc. Banks/ FIs have been upgrading their technology and investing in sophisticated systems for sourcing, processing and managing information pertaining to home loan customers. Housing credit has increased substantially over last few years, but from a very low base. Thus, from miniscule amounts, the exposure of the banking sector to housing loans has gone up. However, with growing competition in the housing finance market, there has been a growing concern over its likely impact on the asset quality. While no immediate financial stability concerns exist, there is a need to put in place appropriate risk management systems, strengthen internal control procedures and also improve regulatory oversight in this area. Banks also need to monitor their exposure and the credit quality. In a fiercely competitive market, there may be some temptation to slacken the loan scrutiny procedures and this need to be severely checked. ANNEXURE 74
    • I had visited ICICI Bank, Andheri (West) Branch on 28th August, 2007. There I interviewed Miss. Shubhangi Gaekwad, Assistant Manager of the bank. It was a very good experience interviewing her. Also she entertained me to the full extent and rendered full support by providing me with the relevant information in regards to the completion of this project. BIBLIOGRAPHY MAGAZINES • Professional Banker (The ICFAI University Press Release, June 2007 Publication) BOOKS FOR REFERENCE • Merchant Banker by H. R. Suneja OTHER SOURCES • Interview with Miss. Shubhangi Gaekwad (Assistant Manager), ICICI Bank, Andheri (West) Branch and Mrs. Mithila Jadhav (Chief Manager) SBI Bank, Andheri (East) Branch. • Brochures of ICICI Bank and SBI Bank. WEBSITES 75
    • • www.economictimes.com • www.indiainfoline.com • www.icicibank.com • www.surfindia.com • www.hindustanlinks.com • www.myiris.com • www.moneycontrol.com • www.bankofindia.com • www.hdfc.com • www.sbi.co.in • www.bankof baroda.com • www.sundaramfinance.com • www.harmonyindia.org • www.obc.com • www. sify.com SEARCH ENGINES • www.google.com • www.yahoo.com • www.rediff.com 76