The Union Budget 2008-09 has brought in cheer for the tax payers, particularly due to increase in the tax slab. Now many more will be able to convert their dreams of owning a home into reality. Let's explore how this can be made possible along with various other facets of owning a home.
The sojourn begins!
The journey from applying for a loan to getting one is the most important part of reaching the goal, your dream house. The exercise begins with the property selection, moves on to bank selection and passing through many more procedures reaches the destination. We have made an attempt to simplify the journey so that it becomes a rewarding experience.
1. Identify the property
There is no dearth of options in the real estate market where builders are in a cut-throat competition to woo buyers. It is extremely necessary to do a check on the reputation of the builder associated with the project. Irrespective of whether you are investing in a resale property, a ready-to-move-in flat or an under-construction project, make sure that the title deeds relating to the property are in place.
Check if the property is available only on a power of attorney or pugree basis as funds for such properties may be a problem. Banks are known to reserve the best of deals for loan seekers who have already identified the property they wish to purchase. The advantage of this is that your chosen lender will not only have approved your credit but also the property. This will ensure that there are no surprises later.
2. How much loan are you entitled for?
While budget considerations always dominate your decision of buying a property, it is also good to have an idea of the extent of finance banks may offer. The loan amount sanctioned depends on three important factors:
~ Your income
~ Repayment history and
~ The cost of the property
Based on a broad and general set of calculations, you can get up to 3.5-4 times your annual gross income as home loan. Irrespective of the basis of calculation, the loan eligibility for a longer tenure loan will be much higher.
3. Never choose a lender till the property is identified
While most banks will provide finance for ready-to-move-in properties, some banks do not readily finance a property which is being self-constructed or a property under construction. Also, if the property is very old or is being developed by a relatively unknown builder, the bank might have an issue with providing a property loan.
Take a sanction for the loan only after identifying the property. Banks are known to reserve the best deals for immediate disbursement cases.
4. How the banks look at your loan eligibility
Banks have different ways to calculate your loan eligibility.
If loan eligibility based on your income is likely to be an issue, then talk to several banks to find out which bank can give you the maximum amount. It may so happen that based on your own income, as well as your spouse's, you may still not be eligible to get the amount of loan that you require. Then you must seek a bank that allows you to club the incomes of your other close relatives (parents, siblings, children etc) to increase your loan eligibility.
You can use calculators available on various sites for calculating your eligibility like home loan eligibility.
Also preliminary enquiries with a couple of banks will give you a rough idea of your loan eligibility based on your income. The lender also restricts your loan amount to around 85-90 per cent of the cost of the property (even though the loan eligibility based on your income may be higher). Of course most lenders include the stamp duty and registration charges in the cost of the property while calculating this 85-90 per cent loan eligibility.
Valuation of real estate is still in its infancy in India. In many cases, the valuer determines the value of the property at an amount that is lower than the documented cost of the property and this would result in the loan amount being lower. Your bank will only fund a certain percentage of the cost or valuation of the property, whichever is lower.
So a good idea would be to buy a property from a reputed builder where such problems normally don't arise. For other cases it might be a good idea to agree to pay a small fee to the bank to do a valuation before hand to ensure that you do not land up with a surprise later.
5. Loan eligibility calculation
The ability to repay a housing loan is based on your income and expenditure pattern. In case your monthly income is Rs 10,000 and your monthly expense is Rs 8,000, then Rs 2,000 can be considered as the sum you can pay as a home loan EMI (equated monthly installment).
A working example will give you an idea of how you can calculate your loan eligibility.
At an interest rate of 9 per cent, the monthly installment of an Rs 1 lakh loan for a 20-year loan is Rs 900. Banks calculate the loan eligibility based on a simple formula:
Home loan eligibility in lakhs is equal to the amount determined by the bank as available for loan repayment divided by loan installment per lakh for the selected tenure.
Or
Loan eligibility = Rs 2, 000/900 x 1 lakh = Rs 2.2 lakh
Larger your repayment capability, the higher will be your loan eligibility.
6. Fixed or floating interest rates
Banks offer home loans on fixed or floating interest rates. Irrespective of the option you have chosen; remember this is not a one-time decision.
Though banks claim to offer 'fixed rate loans', most of these are accompanied by a reset clause, that is, banks have the right to change the rate of interest after a specified time period. Only a few banks offer genuine fixed rates that remain fixed throughout the tenure of the loan, no matter what.
Floating rate loans are linked to banks' benchmark rate, so interest rates on these loans fluctuate with the benchmark rates. If benchmark rates increase your loating home loan interest rate also increases and vice versa. Floating rate loans are, however, at least 2.5 per cent cheaper than a comparative tenure fixed rate housing loan.
There is safety in numbers, though. Over 90 per cent of the home loan consumers opt for floating rate loans. If you go in for a floating rate home loan, you also get the benefit of reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 2.5 per cent differential; you are still a net gainer. Remember there is a gap of 2.5 per cent between floating and fixed rate home loans as mentioned earlier.
We advise you to go in for a transparent floating rate loan unless, you want to play it completely safe and are willing to pay the premium (in terms of high interest rates) for such safety. In any case, signing a fixed rate loan, that is not a genuine fixed rate loan makes no sense, whatsoever.
One thing to watch out for is the bank not reducing the floating rate applicable to you even though it is giving loans to new consumers at a lower rate. The only safeguard against this is to keep checking the market and if such a situation arises you should threaten to (and should actually) change your lender unless your lender actually gives the benefit of the reduced rates to you.
7. Keep checking around
Be a vigilant consumer even if you have opted for a fixed rate of interest. As a matter of practice, assess how the markets have moved in a six-month period and consider the costs and benefits of changing your decision.
Go window-shopping, then bargain and bargain. Bargain for some more then till you are sure that you have got the best deal.
You should shortlist four or five banks and get the short listed banks to compete for your loan. The cost of your loan depends a lot on your ability to negotiate. Interest rates offered by banks take your income and repayment profile into consideration. Apart from interest rates, also check various charges like processing fees, pre-payment charges, legal fees, valuation fees and other hidden costs.
8. Getting your sanction letter
Once your application is accepted, your interpersonal communication with your bank begins which entails your assessment regarding loan repayment capacity.
The next step is your credit appraisal and sanction of the loan. If all goes well, your loan is sanctioned. If the bank is not convinced about your credentials, your application may get rejected. The sanction letter is an important piece of document.
The bank will give you an offer letter informing you of the following; loan amount, interest rate (fixed or floating) tenure, repayment mode and the general terms and conditions. You will be asked to sign on, on a copy of this letter as your acceptance.
The moment of reckoning has finally come! You receive your home loan cheque.
9. The sojourn is not over yet
In insurance parlance, an insurance policy which covers a home loan is known as 'loan cover term assurance policy'. This policy covers the home loan amount taken in case of an unfortunate event such as untimely demise of the borrower. The cover on such a policy keeps reducing with the amount of EMIs paid. So, the loan amount covered reduces with the loan amount outstanding.
Lenders nowadays offer home loans bundled with insurance companies. Some lenders also offer insurance policies and the amount payable towards the same is a part of the loan as well as the loan EMI. Though insurance-cum-home loan tie-up offers convenience to the borrower, most insurance companies offer single premium or the 'limited premium paying term' plan to home loan seekers. This may prove to be a costly affair in the long run.
Limited premium payments (LPP) are not favourable on one more count? It has been observed that home loan borrowers pay-off the home loan well within the tenure because with time their repayment capacity also increases.
A lot of individuals are also under the illusion that if they are sufficiently covered, they don't need to insure themselves further just to cover the loan amount. But they should understand is that the current life insurance cover was actually meant to serve a different purpose like retirement or financial needs of the family in their absence.
In case of an eventuality, the survivors will find it difficult to payoff the outstanding home loan amount. And it wouldn't hurt your housing finance company to sell the property to recover the dues in case of a loan payment default. This alone makes a case for individuals to consider buying a term plan/loan cover term assurance.
As housing loan durations are long, it would be prudent to take such a cover. So go ahead and follow your dream...
Harsh Roongta is CEO, apnaloan.com, an online guide for retail loan seekers. Apnaloan also enables loan consumers get best rates by making banks compete for their loan.