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Home Loan FAQs Made Easy.

Last updated: August 14 2016
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  • Home Loan FAQs Made Easy.

    Hello there,

    Just thought to post something related to RE but not yet discussed on this forum. Hope you all find this info useful.


    What are the types of home loans available?
    There are a variety of home loans available. They are:
    1. HOME PURCHASE LOAN
      This is the common loan for purchasing a home.
    2. HOME IMPROVEMENT LOAN
      This loan is given for implementing repair works and renovations to your home.
    3. HOME CONSTRUCTION LOAN
      This loan is available for the construction of a new home.
    4. HOME EXTENSION LOAN
      Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc.
    5. HOME CONVERSION LOAN
      Available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home, including the additional amount required, eliminating the need for pre-payment of the previous loan.
    6. LAND PURCHASE LOAN
      This type of loan is sanctioned for purchase of land, for both home construction or investment purposes.
    7. BRIDGE LOAN
      The Bridge Loan is 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.
    8. BALANCE TRANSFER LOAN
      Balance Transfer loans help you pay off an existing home loan with a higher interest rate, and avail of a loan with a lower rate of interest.
    9. REFINANCE LOAN
      This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home.
    10. STAMP DUTY LOAN
      This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of a property.
    11. LOANS TO NRIs
      This loan is tailored for the requirements of NRIs wishing to build or buy a home in India
    What is an EMI?
    EMI (Equated Monthly Installment) is the amount payable to the lending institution every month, till the loan is paid back in full. It consists of a portion of the interest as well as the principal.
    How is an EMI calculated?
    EMI Formula: l x r [(1+r)n /(1+r)n-1 ] x 1/12
    l = loan amount
    r = rate of interest
    n = term of the loan
    What are the incentives offered by lending institutions?
    a) Some of the lending institutions sanction the loan without requiring you to identify property as a prerequisite for eligibility
    b) Free accident insurance
    c) Discounts
    d) Waiving of pre payment penalty
    e) Waiving of processing fee
    f) Free property insurance
    What are the eligibility conditions for a home loan?
    To qualify for a home loan, most of the lending institutions in India require you to be:
    a) An Indian resident or NRI
    b) Above 21 years of age at the commencement of the loan
    c) Below 65 when the loan matures
    d) Either salaried or self employed
    What are the interest rates offered for home loans? What are: Daily Reducing, Monthly Reducing and Yearly Reducing?
    Interest rates are different from institution to institution and generally range from about 9.25% to around 12 %. The interest on home loans in India is usually calculated either on monthly reducing or yearly reducing balance. In some cases, daily reducing basis is also adopted.
    Annual reducing:
    In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender. This means the EMI for the monthly reducing system is effectively less than the annual reducing system.
    Monthly reducing:
    In this system, the principal, for which you pay interest, reduces every month as you pay your EMI.
    Daily Reducing:
    In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.
    What is the best way to select the cheapest home loan?
    Keep the loan period constant and calculate the total amount paid for the home through the different loan options available.
    What is a fixed rate of interest?
    Some institutions have a fixed rate of interest, which means the rate of interest remains unchanged for the entire duration of the loan. This means you do not benefit, even if rates of interest drop in the market.
    What is a floating rate?
    This is the rate of interest that fluctuates according to the market lending rate. This means you stand the risk of paying more than you budgeted for in case the lending rate goes up.

    What are the other costs that usually accompany a home loan?
    Home loans are usually accompanied by the following extra costs:
    a) 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 required by you cannot be less than the processing fee.
    b) Pre-payment 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.
    c) 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.
    d) Miscellaneous Costs: It is quite possible that some lenders may levy a documentation or consultant charges.
    e) Registration of mortgage deed.

    What are the repayment period options?
    Repayment period options range generally from 5 to 15 years.
    How do HFCs decide on the loan amount?
    Usually, most companies give up to a maximum of 85% of the cost of the house. The 15%, sometimes called 'seed money', will have to be provided by the loan applicant. The amount, for which the applicant is eligible, is determined by the age, income, no. of dependents, monthly outgoing and repayment capacity. This varies from case to case.

    Are securities required 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. Some institutions may ask for additional security such as life insurance policies, FD receipts and share or savings certificates.
    Do I require a guarantor to get a home loan?
    Some institutions ask for 1 or 2 guarantors, others require no guarantor at all.
    What is the time required for loan application approval?
    About 10-15 days.
    What is the time required for loan disbursement?
    On an average, loans are disbursed within 3-15 days after satisfactory and complete documentation and completion of all relevant procedures, including proof that 15% of the cost has been paid upfront to the seller of the property.
    Can I make joint applications for home loans?
    Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount. Some institutions do not require the co-applicants to be co-owners of the property to be purchased.

    What are the tax benefits of home loans?
    Both principal as well as interest of home loans attract tax benefits. With effect from 1st April 2005 (i.e. assessment year 2005-07) under section 80C of the Income Tax Act 1965:
    Principal amount of repayment of loan along with other savings such as PF, PPF, Life Insurance premium etc up to a maximum of Rs 1,00,000/- will be eligible for deduction from gross income.
    Interest paid on loan after completion of construction will be deductible from income from property
    For self occupied - Income will be treated as nil and interest payment will be treated as minus income which will be adjusted against other income.
    For rental property - It will be adjusted against rental income.

    contd....
    If you are happy, you are successful.
  • #2

    #2

    Re : Home Loan FAQs Made Easy.

    contd...

    Factors that influence your loan rate:-


    Money lent by banks and financial institutions for various purposes come with a cost, which is known as the loan rate or the interest rate at which the loan is lent.

    In recent times there has been a spate of CRR (cash reserve ratio) and repo rate cuts following which interest rates on home loans have been slashed. This has been a welcome relief for potential, first-time home buyers who have been waiting for this to happen for a long time.

    So what do CRR, repo rate, reverse repo rate, SLR, et cetera mean in the context of your home loan interest rate? Well, all these factors have a direct impact on the PLR (prime lending rate), which correspondingly increases or decreases the interest rates of loans.

    Let's take a quick look at what all these terms mean to see how they affect the loan interest rates.

    Prime Lending Rate (PLR):-

    This is the benchmark interest rate on the basis of which financial institutions decide the interest rates on the various loan products. For example, a bank might say a loan interest rate will always be 0.5% above the PLR. This means, if the PLR increases or decreases by a certain amount, the interest rates charged on the floating rate loans offered by the bank also increase or decrease by the same amount.

    Cash Reserve Ratio (CRR):-

    It is the percentage of cash deposits that banks need to keep with the Reserve Bank of India [Get Quote] on an everyday basis. Increasing the CRR also means banks have lesser money to lend. RBI adjusts the CRR to change the amount of liquidity in the financial system, which helps to keep the inflation within reasonable limits.

    Also, when CRR is increased, the interest rates also increase as the amount of liquidity in the financial system decreases. RBI has made frequent CRR cuts in the recent past to inject liquidity into the financial system. This is expected to impact the interest rates bunched with other favourable aspects for home loan applicants.

    Repo Rate:-

    This is the interest rate at which RBI lends money to the banks whenever they need to borrow funds from RBI. When the repo rate decreases its good news for the banks as they can avail more funds at a lower interest rate and vice versa.

    Reverse Repo Rate:-

    This means just the opposite! Here, RBI borrows funds from the banks and when the Reverse Repo Rate increases banks are very happy to lend money to RBI because of the attractive interest rates RBI offers to obtain the loans.

    SLR (Statutory Liquidity Ratio) Rate:-

    Every commercial bank needs to maintain a certain amount of funds in some form -- which includes cash, gold, government bonds, etc -- before they can provide credit to its customers. This measure helps RBI have control over the bank's credit expansion, keeping it realistic.

    The collective impact of all these rates influence the liquidity in the financial system and lead to an increase or decrease in PLR, which in turn affects loan lending rates.

    Benchmark Prime Lending Rate (BPLR):-

    A while ago, those who had been subjected to steep interest hikes in the past eagerly looked forward to see the interest rate cuts from their banks. Some banks were planning to pass on the benefits to the existing customers while some others were cutting down interest rates only for their new customers.

    What were the factors that came into play here? How are banks able to give the lower rates only to new customers while keeping older customers at a higher rate? Well, banks have something called the benchmark prime lending rate, which is a reference interest rate that is used as a benchmark to determine the interest rate that is passed on to the customer.

    The interest rate that is finally passed on to the customer is X% plus or minus this benchmark prime lending rate.

    This X% is termed a 'spread', and is left to the discretion of the bank to set and depends on the other factors involved in loan eligibility like the credit profile of the loan seeker, for instance.

    According to RBI regulations, banks are required to make changes in existing loans except fixed interest rate home loans, when they change their existing BPLR.

    However, since banks are given the freedom to set the spread from the BPLR at whatever value they choose for new customers, they are able to provide attractive rates to new customers while continuing to charge a much higher interest rate for older customers.

    For example, suppose Suresh took a home loan at a floating rate of BPLR minus 2% at a time when the bank's BPLR was 9%. The floating rate of 7% that he received was attractive and it seemed to be the right decision to choose this loan.

    Over time the BPLR of the bank increased to 15% and Suresh's floating rate became13%. However, Suresh's bank is now offering a floating rate of BPLR minus 3.5% to new customers, which means that new customers are paying a rate of 11.5%, while Suresh is stuck with an interest rate of 13%.

    The irony of this situation is that Suresh signed up for a floating rate knowing that his rate would increase or decrease according to market conditions, not realising that his bank has the power to not share the benefit of a falling rate with him.

    From the bank's perspective this is profitable, as they will end up making more money off Suresh's loan if they charge him a higher interest rate.

    Banks have various clauses in the loan agreement that keep the best interests of the lender in mind as the money outflow from banks, even on an everyday basis is enormous. As shown in the example above, the clause that dictates banks can opt to choose the 'spread' from the BPLR is the catch that loan consumers need to be aware of.

    However, after what seemed like a long wait banks have started to effect changes in their BPLR in the wake of the current spate of repo and CRR rate cuts.

    Every bank has a cycle to bring the benefit of this change to the existing customers. According to bank policies, this change or floating interest can come into effect on a quarterly or yearly basis or with immediate effect.
    If you are happy, you are successful.

    Comment

    • #3

      #3

      Re : Home Loan FAQs Made Easy.

      Thanks realacres.

      I would like to add.

      i) Floating rate start as low as 8.0% (Almost 5 months back I got home-loan of #20 lacs at 8.5% from BoB).
      ii) Loan tenure can be upto 20 years.

      In incentives offered by bank:
      i) Free personal insurance. If there are two applicants (husband & wife) both can be insured with very little additional charged.
      So loan amount is insured against death of any applicant.

      Comment

      • #4

        #4

        Re : Home Loan FAQs Made Easy.

        Originally posted by realacres View Post
        What is a fixed rate of interest?
        Some institutions have a fixed rate of interest, which means the rate of interest remains unchanged for the entire duration of the loan. This means you do not benefit, even if rates of interest drop in the market.
        Very NIce info. Thanks for efforts.
        I will like to add important thing abt 'fixed rate of Interest'
        Interest rates for fixed rate loan are generally higher by 2 to 3% than floating rates. Also there is money market claw which says that banks will review rates after 3 yrs and if there are drastic changes in money market conditions then banks can increse even fixed rate of interest. So there is a risk that even fixed interest rates can go up after 3 yrs.

        Comment

        • #5

          #5

          Re : Home Loan FAQs Made Easy.

          Also fixed rates in most cases are fixed for only five years.. definitely ask for the duration of fixed part.. its like credit card.. lifetime free.. who lifetime.. cards lifetime.. 3 years..

          Comment

          • #6

            #6

            Re : Home Loan FAQs Made Easy.

            Hi Realacre,

            Could you please tell me that How " EMI in the daily reducing system is less than the monthly reducing system. " if we are paying monthly installment not daily???
            Cheers,
            -Ashish

            Comment

            • #7

              #7

              Re : Home Loan FAQs Made Easy.

              Fixed rates!

              Hi Real,

              There seems to be NO fixed rate of interest.

              Interacted with some PSU banks, according to them, there is no fixed rate

              of interest. Banks r wary to get locked at lower interest rates for loong

              periods. With the economy in downturn their confidence is low. As per

              them, even if u do fixed rate, it will be reveiwed and reset after 3/5 yrs.

              So practically there is no fixed rate, and floating is advised to avail

              cheaper rates.

              Comment

              • #8

                #8

                Re : Home Loan FAQs Made Easy.

                Originally posted by ash7979 View Post
                Hi Realacre,

                Could you please tell me that How " EMI in the daily reducing system is less than the monthly reducing system. " if we are paying monthly installment not daily???
                What you are talking about is Monthly reducing. Please don't get confused between Monthly reducing & Daily Reducing.
                The interest component in EMIs in initial years is high compared to principal amount. So, a person might have paid EMIs worth INR 5L, but the principal amount maybe just about INR 30,000/-.

                Daily Reducing:
                In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.

                Total amount (EMI) is made up of Principal amount (P) + Interest amount (I)

                Here you save some component of interest as principal amount is paid from day one, the amount is adjusted on pro-rata basis which makes EMIs less compared to other system & hence total EMIs value is less in daily reducing system.

                However, I don't think all banks follow this system. Get it checked from your bank. If yes, opt for the same.
                Last edited by realacres; June 30 2009, 12:17 PM. Reason: typo.
                If you are happy, you are successful.

                Comment

                • #9

                  #9

                  Re : Home Loan FAQs Made Easy.

                  Thanks for inputs.

                  Hello members,

                  Thanks for your inputs you shared here. I appreciate them. Why not discuss other factors like the total amount of loan in terms of %age the banks are lending, collateral, general T & C, preference between PSU Bank & Private banks etc.

                  Keep Posting.
                  If you are happy, you are successful.

                  Comment

                  • #10

                    #10

                    Re : Home Loan FAQs Made Easy.

                    I hope you are confused with daily & monthly reducing EMIs....As the day you will pay your first EMI & think most probably that date will be your EMI paying date for next subsequent months,so there is no difference in EMI in daily reducing or monthly reducing EMIs, that only difference comes when you perpay or made a part payment then principal will get reduced from the day you made part payment in daily reducing but in monthly reducing that will effective from your EMI date.


                    So I think EMI value would be same both in daily reducing & monthly reducing...As I have not seen daily reducing/monthly reducing in any of the EMI calculator on internet while calculation EMI for any principal amount...I think I am clear enough here
                    Cheers,
                    -Ashish

                    Comment

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