Thinking of buying your own house or a flat and looking for money, home loan could be the ideal solution. It works even for renovation or repair of an old house or extension to your existing house. Home loan acts as the easiest and readily available source for money being offered by most of the banks. Few question that comes to our mind while are Am I eligible, what will be the EMI, what documents will bank ask for and so on. Let us see these questions.
Eligibility
Bank will treat you as eligible to buy any home only if you have the repayment capacity to pay back the loan. The assessment of repayment is based upon monthly disposable / surplus income.
Disposable Income = Total monthly Income – monthly expenses
Here, the monthly income is considered as total carry home salary or monthly income of the applicant. In case spouse is becoming a co-applicant in a loan, then the income of spouse will also be considered. Not only the income, even the stability of income is also considered. Also an assessment is also done for assets and liabilities which Applicant and co-applicant is having. Where applicant is already paying an EMI of another loan like car loan, then that EMI amount will be deducted from the income. From this income, bank will deduct monthly expenses to the extent of 40-50% of the monthly income. As such a bank typically assumes that about 55-60 % of your monthly disposable / surplus income only, is available for repayment of loan and you will be in a comfortable position to repay the loan on time.
So , higher the monthly income, higher amount you may borrow as home loan. Important to say that EMI reduces with increase in the tenure of loan and thus increase your loan amount eligibility. However, on the other side it also increases the interest burden in the overall repayment amount. The maximum tenure of a loan is generally 25 years subject to you age, as banks also fix an upper age limit for home loan applicants.
Documents required
Banks generally asks for documents in two phases – One at the time of sanction and other at the time of disbursal. Both these sets comprise of documents pertaining to applicant and the property. So, in addition to the ownership documents of the property, banks will also for submission of Identity and Address Proof, self attested latest salary slip ( few bank may ask for authentication by the employer) and Form 16, Income tax returns for last 2-3 years and bank statement of last 6 months. And not to forget the completed and signed application form along with your photograph.
In case of property documents, bank will ask for plan, sanctioned map, allotment letter, Sale deed, chain of document /agreement since beginning of the property. Do not give any document in original at the sanctioning stage. Bank will ask for original documents pertaining to property only at the time of disbursal of loan. In case of buying a new property, the disbursal cheque is written by the bank in the name of Seller. These cheques are handed over to seller by the bank’s representative at the time of registration.
Interest rate
While Banks theoretically offers two options i.e Floating rate home Loans and Fixed rate home Loans, but practically only floating rate option is available in the market. In case of a fixed loan, the interest rates are fixed and thus EMI due to the bank remains constant. Few banks offers fixed rate loan for initial few years and then convert the same into floating. Here, apart from interest rates, even the period for which the loan will remain at fixed rate may be negotiated. However, it is very important to know in this case, that how the rates will be determined after the initial fixed rate period.
Well the most commonly available loans are at float rates where interest rate changes with the change in market interest rates. As such, if market rates increase, your repayment increases. And when rates fall, your repayment also fall. (Well in few banks, it may not fall to that extent or may not fall etal.) The floating interest rate is determined by two factors: the base rate and the spread. The Base rate is a measure of interest rates of banks’s portfolio generally and the spread is an additional amount that the bank takes as revenue in order to cover credit risk and make profits. This spread may differ from one lender to another, but it is usually constant over the life of the loan. There is a enough of a scope of negotiation in this spread. Remember, it can even be negative thus with base rate at 11% and spread of -1%, the interest charged on your loan could be 10%.
In case of increase in interest rate, few banks also resort to increase in tenure to your loan rather than increasing EMI. This increases you interest burden in present times. You may take a conscious call depending on your financial situation to choose between increasing tenure or increasing EMI.
It is important to discuss the base rate calculation mechanism, as that will impact your EMI payments and hence to control your finances for next many years (till you repay your entire loan).
There are schemes offered by few lenders like step-up loans, in which the EMI is low initially and increases as years roll by (balloon repayment). Similarly, in step-down loans, EMI is high initially and decreases as years roll by. These schemes may be chosen only if your are very sure of your financial situation in the times to come. Generally, Step-up option is convenient for young borrowers who are in the beginning of their careers and drawing lesser salaries Step-down loan option is chosen by the borrowers who are close to their retirement years and are expecting a fall in income in the times to come.
Charges
Banks charges initial processing charge. The range of these charge is very wide with 0.75% on the higher side and and NIL on the lower side. So it is important for you to negotiate thoroughly on this. As per new guidelines from RBI, banks are not allowed to collect prepayment penalty from the home loan borrowers with floating interest rates. Thus it enables you to easily switch your loan from one bank to another along with the transfer of balance amount.
Monthly reducing or Daily reducing
The amount of interest that you pay is dependent on two things, your interest rate and compounding effect. So, when you pay money, the impact on the interest rate will only come once you reaches a day of compounding. The daily reducing compounds your interest payments on daily basis the last day balance. Thus increase the interest payout. However, monthly compounding consider balance on the fixed day of the month, generally 1st, 5th, 10th or 15th, and levy interest on that balance. A daily reducing is better option if you wish to pay EMI in between month and is not sure of you payment schedule, whereas for a salaried person, it is better to have monthly reducing. It is important to choose your date of EMI payment. Payment of EMI, even one day after the due date will let you lose your interest saving on an EMI amount for one month.
Worst are the annual resets, where principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.
Pre-EMI interest
In case where loan is disbursed in instalments, basis the stages of completion of the housing project, you may be asked to pay interest only on the portion of the loan disbursed. This interest called pre-EMI interest. Pre-EMI interest is payable every month, just like an EMI payment, from the date of each disbursement up to the date of commencement of EMI.
However, many banks offer a special facility whereby customers can choose the instalments they wish to pay for under construction properties till the time the property is ready for possession. Anything paid over and above the interest by the customer goes towards Principal repayment. The customer benefits by starting EMI payment earlier and hence repays the loan faster. Please check with your banker whether this facility is available before availing of the loan.
Security
The prime security for a home loan is typically a first mortgage of the property where bank asks for deposit of title deeds. However, banks may also seek other collateral security as may be necessary. Most banks will insist on margin / down payment (borrowers contribution to the creation of an asset) to the extent of 20-30%. Other collateral security assigned to the bank could be life insurance policies, guarantees from other individuals, pledge of shares/ securities and investments like KVP/ NSC etc. Banks most of the time hire surveyors, legal experts to cross verify your title to the property and whether it is free from any encumbrance. (i.e., there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely).
Tax Benefits
As per Income tax Act, 1961, Resident Indians are eligible for certain tax benefits on both principal as well as interest components of a home loan. As such, you are entitled to an income tax rebate upto an interest repayment of Rs. 1,50,000 /- per annum. Not only this, you can also get added tax benefits under Section 80 C on repayment of principal amount up to Rs. 1,00,000 /- per annum.
The best strategy to deal with banks starts with giving yourself a comfortable time. Do not hurry your purchase or loan in any case. This time comfort will help seek the required clarification but also adds to your negotiation power and thus gets you the best of the deal.
