Hous­ing Fi­nance Rates Ef­fects

When buy­ing a home many ques­tions arises in a buy­ers mind re­gard­ing the home loans, in­ter­est rates, home loan process, EMI, which bank to opt for home loan and many such. Here are the sim­ple an­swers for your queries.

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1. For what pur­poses can I seek a first time home loan?

You can gen­er­ally seek a first time home loan for buy­ing a house or a flat, ren­o­va­tion, ex­ten­sion and re­pairs to your ex­ist­ing house. Most banks have a sep­a­rate pol­icy for those who are go­ing for a sec­ond house. Please re­mem­ber to seek spe­cific clar­i­fi­ca­tions on the above-men­tioned is­sues from your com­mer­cial bank.

2. How will your bank de­cide your home loan el­i­gi­bil­ity?

Your bank will as­sess your re­pay­ment ca­pac­ity while de­cid­ing the home loan el­i­gi­bil­ity. Re­pay­ment ca­pac­ity is based on your monthly dis­pos­able / sur­plus in­come, (which in turn is based on fac­tors such as to­tal monthly in­come / sur­plus less monthly ex­penses) and other fac­tors like spouse’s in­come, as­sets, li­a­bil­i­ties, sta­bil­ity of in­come etc. The main con­cern of the bank is to make sure that you com­fort­ably re­pay the loan on time and en­sure end use. The higher the monthly dis­pos­able in­come, higher will be the amount you will be el­i­gi­ble for loan. Typ­i­cally a bank as­sumes that about 55- 60 % of your monthly dis­pos­able / sur­plus in­come is avail­able for re­pay­ment of loan. How­ever, some banks cal­cu­late the in­come avail­able for EMI pay­ments based on an in­di­vid­ual’s gross in­come and not on his dis­pos­able in­come. The amount of the loan de­pends on the ten­ure of the loan and the rate of in­ter­est also as th­ese vari- ables de­ter­mine your monthly outgo / out­flow which in turn de­pends on your dis­pos­able in­come. Banks gen­er­ally fix an up­per age limit for home loan ap­pli­cants.

3. What is an EMI?

You re­pay the loan in Equated Monthly In­stall­ments (EMIs) com­pris­ing both prin­ci­pal and in­ter­est. Re­pay­ment by way of EMI starts from the month fol­low­ing the month in which you take full dis­burse­ment. (For un­der­stand­ing how EMI is cal­cu­lated, please see an­nex).

4. What doc­u­ments are gen­er­ally sought for a loan ap­proval?

In ad­di­tion to all le­gal doc­u­ments re­lat­ing to the house be­ing bought, banks will also ask you to sub­mit Iden­tity and Res­i­dence Proof, lat­est salary slip ( au­then­ti­cated by the em­ployer and self at­tested for em­ploy­ees ) and Form 16 ( for business per­sons/ self-em­ployed ) and last 6 months bank state­ments /Bal­ance Sheet, as ap­pli­ca­ble . You also need to sub­mit the com­pleted ap­pli­ca­tion form along with your pho­to­graph. Loan ap­pli­ca­tions form would give a check­list of doc­u­ments to be at­tached with the ap­pli­ca­tion. Do not be in a hurry to seal the deal quickly. Please do dis­cuss and seek more in­for­ma­tion on any waivers in terms and con­di­tions pro­vided by the com­mer­cial bank in this re­gard. For ex­am­ple some banks in­sist on sub­mis­sion of Life In­surance Poli­cies of the bor­rower / guar­an­tor equal to the loan amount as­signed in favour of the com­mer­cial bank. There are usu­ally amount ceil­ings for this con­di­tion which can also be waived by ap­pro­pri­ate au­thor­ity. Please read the fine print of the bank’s scheme care­fully and seek clar­i­fi­ca­tions.

5. What are the dif­fer­ent in­ter­est rate op­tions of­fered by banks?

Banks gen­er­ally of­fer ei­ther of the fol­low­ing loan op­tions: Float­ing Rate Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate of in­ter­est is fixed ei­ther for the en­tire ten­ure of the loan or a cer­tain part of the ten­ure of the loan. In case of a pure fixed loan, the EMI due to the bank re­mains con­stant. If a bank of­fers a Loan which is fixed only for a cer­tain pe­riod of the ten­ure of the loan, please try to elicit in­for­ma­tion from the bank whether the rates may be raised after the pe­riod (re­set clause). You may try to ne­go­ti­ate a lock-in that should in­clude the rate that you have agreed upon ini­tially and the pe­riod the lock-in lasts. Hence, the EMI of a fixed rate loan is known in ad­vance. This is the cash out­flow that can be planned for at the out­set of the loan. If the in­fla­tion and the in- ter­est rate in the econ­omy move up over the years, a fixed EMI is at­trac­tively stag­nant and is eas­ier to plan for. How­ever, if you have fixed EMI, any re­duc­tion in in­ter­est rates in the mar­ket, will not ben­e­fit you.

How­ever, many banks of­fer a spe­cial fa­cil­ity whereby cus­tomers can choose the in­stall­ments 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.

De­ter­mi­nants of float­ing rate: The EMI of a float­ing rate loan changes with changes in mar­ket in­ter­est rates. If mar­ket rates in­crease, your re­pay­ment in­creases. When rates fall, your dues also fall. The float­ing in­ter­est rate is made up of two parts: the in­dex and the spread. The in­dex is a mea­sure of in­ter­est rates gen­er­ally (based on say, gov­ern­ment se­cu­ri­ties prices), and the spread is an ex­tra amount that the banker adds to cover credit risk, profit mark-up etc. The amount of the spread may dif­fer from one lender to another, but it is usu­ally con­stant over the life of the loan. If the in­dex rate moves up, so does your in­ter­est rate in most cir­cum­stances and you will have to pay a higher EMI. Con­versely, if the in­ter­est rate moves down, your EMI amount should be lower. Also, some­times banks make some ad­just­ments so that your EMI re­mains con­stant. In such cases, when a lender in­creases the float­ing in­ter­est rate, the ten­ure of the loan is in­creased (and EMI kept con­stant). Some lenders also base their float­ing rates on their Bench­mark Prime Lend­ing Rates (BPLR). You should ask what in­dex will be used for set­ting the float­ing rate, how it has gen­er­ally fluc­tu­ated in the past, and where it is pub­lished/dis­closed. How­ever, the past fluc­tu­a­tion of any in­dex is not a guar­an­tee for its fu­ture be­hav­ior. Flex­i­bil­ity in EMI: Some banks also of­fer their cus­tomers flex­i­ble re­pay­ment op­tions. Here the EMIs are un­equal. In step-up loans, the EMI is low ini­tially and in­creases as years roll by (bal­loon re­pay­ment). In step-down loans, EMI is high ini­tially and de­creases as years roll by. Step-up op­tion is con­ve­nient for bor­row­ers who are in the be­gin­ning of their ca­reers. Step­down loan op­tion is use­ful for bor­row­ers who are close to their re­tire­ment years and cur­rently make good money.

6. What is monthly re­duc­ing bal­ances method?

Bor­row­ers ben­e­fit more from a loan that’s cal­cu­lated on a monthly re­duc­ing ba­sis than on an an­nual ba­sis. In case of monthly re­sets, in­ter­est is cal­cu­lated on the out­stand­ing prin­ci­pal bal­ance for that month. The prin­ci­pal paid is de­ducted from the open­ing prin­ci­pal out­stand­ing bal­ance to ar­rive at the open­ing prin­ci­pal for the next month and in­ter­est is com­puted on the new, re­duced prin­ci­pal out­stand­ing. In case of an­nual re­sets, 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.

7. How does ten­ure af­fect cost of loan?

The longer the ten­ure of the loan, the lesser will be your monthly EMI out­flow. Shorter tenures mean greater EMI bur­den, but your loan is re­paid faster. If you have a short-term cash flow mis­match, your bank may in­crease the ten­ure of the loan, and your EMI bur­den comes down. But longer tenures mean pay­ment of larger in­ter­est to­wards the loan and make it more ex­pen­sive.

8. What is an amor­ti­za­tion sched­ule?

This is a ta­ble that gives de­tails of the pe­ri­odic prin­ci­pal and in­ter­est pay­ments on a loan and the amount out­stand­ing at any point of time. It also shows the grad­ual de­crease of the loan bal­ance un­til it reaches zero.

9. What is pre-EMI in­ter­est?

Some­times loan is dis­bursed in in­stall­ments, de­pend­ing on the stages of com­ple­tion of the hous­ing project. Pend­ing fi­nal dis­burse­ment, you may be re­quired to pay in­ter­est only on the por­tion of the loan dis­bursed. This in­ter­est called pre-EMI in­ter­est. Pre-EMI in­ter­est is payable ev­ery month from the date of each dis­burse­ment up to the date of com­mence­ment of EMI.

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