Home Loans Points to Ponder
Shelter, Food and Clothing are considered as the most basic needs of any individual. Housing is thus considered as a national priority and has been given a lot of focus and incentives. In my last article I had mentioned about the additional incentive proposed by the Union Budget 2013 to a person taking a loan for his first home from a bank or a housing finance corporation. The Union Budget 2013 proposes to introduce section 80EE , whereby, a person taking a loan for his first home from a bank or a housing finance corporation up to Rs 25 lakh during the period 1.4.2013 to 31.3.2014 will be entitled to an additional deduction of interest of up to Rs 1 lakh. Currently interest up to Rs 1.50 lakh paid on a loan taken for the purchase of a house for residential purpose is exempted from tax. The Rs 1 lakh benefit proposed under section 80EE is in addition to the existing benefit of Rs 1.50 lakh and thus is expected to create a lot of interest for purchase on residential properties , especially by first time buyers.
There are certain basic points to be borne in mind while you proceed to purchase or build a house. The first and foremost is your total budget for the same. While preparing the budget you have to consider the funds currently available with you and also the amount you can borrow. In addition to the liquid funds available with you, while estimating own funds, amounts that can be raised by sale or pledge of jewelry , equity shares, mutual funds, or withdrawal from PPF etc can also be considered, if you are intending to do any such activity. Alternatively , these assets can be kept as a reserve, in case of cost overrun or a personal emergency. The amount you can raise by way of loans from institutions would depend upon basically your repaying capacity. In case of a salaried person based on your current salary and deduction, you will have to first work out the maximum Equated Monthly Installment ( EMI ) that you can afford and check with any online EMI calculators for arriving at the maximum loan available. Lenders normally specify a margin and say the total deductions from salary including the EMI for the housing loan should not exceed 50 to 60% of salary. In the case of non salaried individuals income tax returns filed are the most commonly accepted proof of income. A good reason for you to be a honest tax payer. If the spouse is also earning adding the spouse as co-applicant will not only increase the loan eligibility but also help in getting the loan approved. It also makes sense because the benefit upto Rs 1 lakh available on principal repayment and Rs 1.50 lakh available on interest repayment is individually available to both co-owners.
Once you work out your EMI possible and the loan that can be raised against the EMI , the next process in preparing your budget for purchasing the house is looking at the margins required by the lenders and the items that are not financed by them. Margins would be in the range of 15 to 25 per cent of the security value. Banks normally do not fund for stamp duty , documentation charges, service charges etc and thus the own contribution should be more than sufficient to fund these and the required margins.
If you are purchasing a ready built house there is no chance for a cost overrun. But if not there is every likelihood of a cost overrun. Even in the case of a ready built house you might want to make some modifications. All these will cost you money and a provision for the same should be made while budgeting your outlay.
As most of the lenders are now insisting on a credit score for granting of loans, it is very important that you get the credit scores right, especially if you are currently servicing some loans. Housing loans can be availed from commercial banks or specialized housing finance companies. Housing finance companies being more specialized in their operations would be able to provide personalized service but would normally being charging a higher interest rate. If interest rate and proximity are your main considerations, commercial bank would be a better choice. It is always better to approach your existing banker first, because they have a record of your transactions. Certain banks tie up with employers for providing personal and housing loan schemes to their employees. It would be better for employees to check up with their employers as to, if they are having any such arrangements. This could help the loan processing on the repayment capacity part. Many builders and real estate developers tie up with banks and take project approvals from banks. Approaching a bank which has given project approval for a particular project will help in speeding up the loan processing as far as documentation of property is concerned. Even if you are availing the loan from a bank that has pre approved the project , it is always better that entire set of property documents are collected from the seller and got scrutinized by a competent advocate so as to ensure the legal title is clear. It should also be seen that all necessary approvals for development and construction has also been obtained.
Pricing of the loan would be an important consideration in deciding the lender. You have a choice between fixed rate loans and floating rate loans. Very few bankers offer fixed rate loans that remain fixed through out the tenor of the loan. In most cases interest rate would be frozen for 2 to 3 years and would be reset after that. Typically the fixed interest rates would be higher than the floating interest rates by 2 to 3 percent. In the case of floating interest rates banks are free to change the interest rate depending upon economic conditions. The fixed interest rates are suitable in an increasing interest rate scenario and when interest rates are expected to go up in future. If you expect the interest rates to come down in the future its always better to opt for a floating rate loans. In addition to interest rate , the processing fee, legal scrutiny fee, documentation charges and any other charges should also be considered , before deciding the lender. It would be better to compare the EMI mentioned for a certain amount of sum for specified period with various lenders, so as to find out if there are any hidden charges. Charges in case of unexpected EMI default, should also form part of your selection process of the lender. Thanks to the latest direction from RBI, charges on pre mature closure of housing loans have been done away with.
Equally important is ensuring that you have all the documents required for processing the loan. In addition to the usual KYC documents, specific documents relating to the property should also be submitted to the bank. It is always better to request the bankers to give a full list of documents required. In case you are buying the property from a builder or developer, they should be asked to provide the documents as per list in one go. This will help in speeding up the loan sanctioning process and also in ensuring that all documents required by bankers are available with the builder. The documents most commonly asked by bankers are copies of title deeds , prior title deeds, conversion order, encumbrance certificate, up to date tax receipts, building permit, etc.
You can ask for an initial repayment holiday, if required. One advantage of having a home loan with a banker is that it acts as a cushion for your, in case of an emergency for fund. Most bankers are willing to give additional loan against the property already pledged with them, subject to adequate margins being maintained. Banks insist on having an insurance cover over the property offered as security. Some banks also insist on borrowers talking a life insurance cover for the amount of home availed from the bank. The tenor of the home loans being 15 to 20 years , it is always better to have a life insurance term plan covering the amount and period of the home loan, so that the safety requirements of the family are still met, in case of an unforeseen eventuality.
Bankers generally are more comfortable in granting housing loans , because of the security value and more importantly the emotional value Indians attach to the house. In case of a default banks can proceed under SARFAESI Act , give notice, take possession and sell the property and realize their dues. Banks, no doubt have to recover their money, because they are dealing with the deposits of the public. It is for the borrowers to see that they don’t over borrow, there by affecting the repayment. A house that should be a protection to the family should never be a head ache for them. Thus your repayment capacity, and not the tax benefits or your ego should be the deciding factor in determining the quantum of your home loan.
Jiz P. Kottukappally. The author is working as Asst General Manager, Catholic Syrian Bank and the views expressed are the personal opinion of the author. Author can be reached at firstname.lastname@example.org