Anxiety, cheer, joy, worry, nerves, confusion, clarity, lack of clarity — these are the range of emotions that engulf us the moment we start thinking of buying our first home. Irrespective of our financial standing, a first home has a very special emotional place in our heart. Then, why should it be a cause for anxiety? The reason is obviously the housing loan that we need to apply for buying the house. Questions that arise: how much will I get as a loan? What will be the paperwork? Could my application be rejected? What if I get a raw deal on the interest rate?
A little homework can go a long way in not only alleviating your anxiety, but also in ensuring you get a good loan. Here are a few fundamentals that will help you move into your new home.
The Down Payment dilemma
Most banks and housing finance companies fund only up to 80 per cent of the cost of the house. It means that you have to arrange for the balance 20 per cent. The best way to do this is to have accumulated sizeable savings, which can be used for paying the down payment. In fact, if you have cash, it is better to make as big a down payment as possible. You straightaway save on interest.
Ideally, you should not take a home loan if you have not yet saved enough for the down payment. Nevertheless, in situations where it is not possible, any of the following ways can help you:
Bridge Loans: Many employers offer bridge loans at minimal interest to help employees buy assets. Enquire if your employer can give you a bridge loan.
Request the builder: Some promoters/builders can be magnanimous enough to let you pay a minimal down payment and pay the balance later. The key is to ask.
Gold Loans: If you have gold jewellery, you could encash it as a loan to tide over the immediate need. Simultaneously we need to be aware that interest will be an extra burden.
Check your investments: If you have investments, which are giving returns at least 2 per cent lower than the interest rate being charged on the loan, it is better to withdraw the same and use it for the down payment.
Credit rating and eligibility dilemma
Knowing how a bank calculates your loan eligibility will help you put things in place before you apply for the loan.
Principally every lender looks at a borrower in terms of two perspectives:
Ability to repay: This is decided by looking at your current income, other income sources, monthly cash flow (to decide whether you can service your EMI and still live a good life style), age to retirement, job profile, employer profile etc.
Intention to repay: This is decided based on your history of loans/ credit cards with the same lender or other lenders. Your CIBIL score will be a big indicator of the same.
Getting a good rank for the “Ability to repay” criteria
Good income is the main criteria. This is checked based on your salary statements or income tax filings. In case you are expecting a hike or bigger profits, apply for the loan after you get a hike or after having shown higher profits on your returns.
Try to reduce major regular cash out flows from your main account. Examples could be, the EMI on a car loan (close the loan), rent payments to your landlord (use another account/pay in cash).
Another way to shore up the income criteria is to have a co-applicant. Father-son, unmarried daughter-father, brother-brother, husband-wife are possible combinations of co-applicants.
Always ensure that you maintain a bank account, which has good cash flows into it, minimal out flows and is devoid of cheque bounces or bank charges. Use this account when applying for the loan.
Getting a good rank for the “Intention to repay” criteria
If you have had a good record of a past loan or good repayments on your credit card, it will give you a higher rating. Also, be sure to get a copy of your CIBIL rating to know what your credit rating is. In case it is on the lower spectrum, try to wait for a few months and rectify it by streamlining payments and clearing any outstanding payments with other lenders.
At times, you might have closed a loan just a few months ago and the EMI might reflect on the bank account. This could reduce your funding eligibility. Attach a copy of the closure statement of that loan while applying for the new loan. It also works as an affirmation of your intention to repay. Another way to increase your loan eligibility on this front is to have a guarantor whose credit profile will provide you with a better loan option.
What if I get a raw deal on the loan especially interest rates and charges?
Keep the following pointers in mind to get the right deal on your home loan.
The “best deal” or the “cheapest deal” might not necessarily mean it’s the “right deal”.
Avoid lesser known lenders while applying for loans.
Compare at least 4-5 different lenders and rate them on final cost of loan, service, ease of applying, ease of repayment and references from past borrowers.
Use some of the online portals to compare parameters like interest rates, charges etc.
Study and understand the various clauses applicable for each lender. For example – reset, foreclosure etc.
Choose lenders who have lenient regulations for prepayments.
With the kind of competition and the base rate rule in place, the maximum you can get by bargaining could be 0.25 to 0.5 per cent, but there is always a chance that this might be negated in the next rate revision. Remember rate reset is applicable for floating as well as fixed interest loans.
With some banks slashing rates and NHB removing the last hurdle to home loan portability, it has become feasible for borrowers to switch banks for lower interest rates. Here’s how to reduce your loan burden.
There’s good news on the home loan front. Last week, the country’s largest bank, State Bank of India (SBI), cut interest rates on its home loans, unleashing what appears to be a rate war. Indian Overseas Bank has followed suit. The catch here is that instead of bringing down the base rate, to which all home loans are linked and which would benefit both new and existing borrowers, banks are choosing to bring down just the spread, which means that only new borrowers stand to benefit. The interest rate on home loans has two main components—base rate and spread. Base rate is the rate below which the bank cannot lend, and spread is the margin based on customer- and productspecific factors. In the case of SBI, for instance, while the existing borrowers will pay 10.5% interest, of which 10% is the base rate and 0.5% is the spread, new borrowers will end up paying only 0.25% as spread, or 10.25% as interest rate.
So what can the existing borrowers do? Those who were lured by teaser loans at 8-8.5% in the past two years are in a quandary because their interest burden has increased to over 11.5% as the rates automatically switch to floating rate. To be sure, all loan takers are in the same boat given that the RBI raised its key rates 13 times between 2010 and 2011.
The best option available is to shop for the best loan rate. The National Housing Bank, the housing regulator, removed the last hurdle in complete home loan portability last week by revising its earlier decision, where it had said that dual rate loans (fixed for initial years) would be classified as fixed rate loans, if at the time of signing the contract the loan was subject to a fixed rate. A big chunk of home loans taken during 2009-11 comprised dual rate loans and the move is likely to benefit many borrowers as they are now switching to floating rate, which does not incur any prepayment penalty.
With the SBI signaling a rate war, home loan borrowers may finally be able to shift without paying a penalty. Of course, shopping for cheaper interest rates has been possible for a while now, but it wasn’t feasible because of the similar rates that most banks offered. This seems set to change now.
The first step to benefit from portability is to get over the inertia. Switching a home loan is not as Herculean a task as many think it to be. Just because a home loan is the biggest debt you have does not mean that the effort involved in moving it to another bank will be as great. The process is more detailed than small-ticket loans, but representatives from the new bank will help you through the process. The effort on your part would be limited to negotiating the best rate. However, keep in mind the remaining term of your loan before rushing headlong to switch. If your loan has less than 10 years to go, the benefit may not be as spectacular (see table). Also, when the interest rate is lowered, don’t reduce the EMI as this will mean a longer tenure and higher interest cost. Instead, bring down the tenure. If you don’t care to go rate shopping, try negotiating with your existing bank. You could also convert to the new rate being offered by your bank. Between two banks who offer you the same effective rate, choose the lender that offers you a lower spread above the base rate. Now, for the bad news.
Switching home loans, be it with a new bank or opting for a lower rate with your existing bank, involves costs and it’s best to decide after factoring them in. Most lenders charge a processing fee, which can range from 1-1.5% of the outstanding loan. The SBI’s existing borrowers can take advantage of the new rates only after paying a conversion fee of 1% of the outstanding loan. Some banks also levy a fixed processing fee of 5,000-10,000. Then there are hidden charges like legal fees which you need to watch out for.
With the approaching festive season, more and more banks are expected to start rolling out ‘special rates’, so keep an eye out for the best deal.
Manoja, excellent information for the first timers.
I have experienced my self both the above posts wherein I have made sure my CIBL is excellent and i changed the bank to enjoy reduced intrests rates.
Normally bank don't accept post paid bill of private operators , but surely accept BSNL land Line bill. They also accept Bank statement as address proof in addition to other standard ones like Driving license/Passport/Electricity bills etc.
The Reserve Bank of India (RBI) has come down heavily on banks for charging pre-payment penalty on dual-rate home loans, and has issued a circular banning such a penalty.
Earlier, RBI had barred banks from charging pre-payment penalty on floating-rate loans, which gave customers the incentive to shift their loans from one bank to another, to take advantage of the interest rate differential. The central bank said customers will be given the option to switch banks, and as banks are in abetter position to hedge interest rate as instruments are available to them, the interest risk should be borne by banks.
However, the previous RBI guidelines had not clarified if such alevy can be applicable on dual rate home loans.
According to central banking sources, some of the large banks were taking advantage of the lack of clarity and levying pre-payment penalty on dual rate home loan schemes — which are also known as teaser loan schemes. Interest rate on such loans is fixed during the initial years, after which the rate became floating as it gets linked to the base rate — the benchmark lending rate of banks.
Following a number of customer complaints that banks are charging the penalty on dual rate home loans, the regulator issued fresh guidelines to banks asking these to refrain from such activities.
The National Housing Bank, the regulator for housing finance companies, had also banned prepayment penalties on the dual rate loans.
Teaser loans were pioneered and popularised by State Bank of India in early 2009 to deploy excess liquidity. The scheme — a brainwave of former chairman O P Bhatt — helped the lender increase its market share in home and auto loans.
Other lenders had no option but to follow suit.
But the product had drawn flak from the RBI, which constantly asked the banks to withdraw the product. Finally, in order to discourage the product, the central bank increased standard asset provisioning requirement for teaser loans by five times to two per cent.