Understanding home loans in India

Buying a home is all about making the right decisions, after sieving through a host of options. This is not just relevant when choosing the right home, but is equally important in finalising the best home loan. Considering a home loan is probably the longest financial commitment for most of us, a systematic approach in making this important.

Getting a home loan

Who can get a home loan? Home loans can be availed of by individuals (salaried and self-employed), co-operative societies, corporate bodies and associations of persons. Typically, the home loan seeker can avail a loan amount that does not exceed 80 per cent of the cost of the property.

The three pillars

Higher eligibility, competitive interest rates on repayment and tax benefits are the three pillars of home loans providing a fillip to the buying of new homes. If we are seeing families buying a home in an area considered ‘more expensive’ than what their budget would originally have allowed them to, this trend is attributed to these three pillars. It has empowered families to move into bigger homes, in locations that they earlier would only have dreamt of staying in – home loans have changed things in the residential real estate market and empowered families to move into better lifestyles.

The actual loan amount

How is the actual loan amount determined? This is done after taking into account factors like repayment capacity, age, educational qualifications, stability and continuity of income, number of dependents, assets, liabilities, saving habits etc.  If the individual is married and is an earning member of the family, that individual can become the co-applicant.  This will substantially improve both the chances of getting a loan as well as increase the total amount of loan taken.

Tenure

The tenure of the loan ranges from 1 to 20 years. In some cases, loans up to a 25 year tenure can be availed of. The term however, does not extend beyond the retirement age or 60 years whichever is earlier (65 years for self employed individuals).

One should also consider plans for retirement and amount required whilst deciding on the tenure of repayment.

Document Requirement

The following are the basic documents required to apply for a home loan. However, the documentation requirements may vary basis customer profile, location of home, loan requirement and several factors.

1. Income and identity proof related documents for the salaried include Salary Slip, Form-16 and ID.
2. Balance Sheet, P&L A/c and Bank statements for Businessmen.
3. Photocopy of property documents if the property has been identified.

Tax benefits

It is not just those who do not have adequate funding to buy homes who find a home loan attractive. Tax benefits on home loans can be availed under Section 80C on complete and self-occupied properties. Thus, many a person who doesn’t quite need a home loan still finds it advantageous to take a loan and avail of tax benefits. In most fast-growth residential areas, this has been the norm rather than the exception. If one looks back at the past couple of years, growth of the home loan segment and the residential realty market’s growth seem to be in sync with this trend. However, it is worthwhile to note that tax benefits on home loans cannot be availed on under construction properties or for properties being acquired only for investment purposes.

Types of home loans

Some of the more popular home loan products are the regular home loans, home extension loans, home improvement loans, home mortgage loans, home loans for women, non residential property loans, lease rental finance, step up EMI product etc.

The days of the regular ‘take it or leave it’ home loans are long since gone. Home loan seekers find on offer several tailor made products aimed at specific locations, with add-ons that are obvious sweeteners for the loan applicant. This can be an add-on insurance policy for the property or the loan taker, for example. Today, given that the average customer’s financial awareness has improved significantly, he / she lists out the desired add-ons for the home loan provider to evaluate.

The size of the EMI depends on the quantum of loan, interest rate applicable and tenure of loan.  Some Housing Finance Companies have a regressive payment scheme meant for home loan seekers who are due for retirement within the term of the loan and have applied jointly with an eligible younger co-applicant.

Repayment Capacity

One should judge one’s repayment capacity considering all the above elements and then seek an appropriate loan amount. If you are married and have a family to support you must not aim to shell out more than 40 per cent of your net income as the EMI (Equated Monthly Installment).

Should you be single and planning to settle down with family after the first five years of loan disbursement, you could easily budget 60 per cent of your net income for the EMI, depending on your lifestyle and spending habits. While these are general thumb rules, it may help for you to consider your other financial commitment – both short and long term – before deciding on the loan amount.

Advantage of Shifting current home loan lender

Banks generally do not pass on the advantage of decreasing loan rates to the existing Loan borrowers who are repaying a loan for the past two or three. However, on the basis of good repayment track record, individuals can also discuss and re – negotiate with the new lender for better interest rates. Not just the reduction in interest rates, there are several more reasons due to which one would want to change his current lender. The new lender may be more flexible. In case, you need to renegotiate on some terms and conditions with existing bank such as increasing the tenure of your loan and decrease the amount of your EMI but your bank has not agreed to that whereas the new bank may agree on these terms.

Further the value of property has climbed much higher in comparison to its original value. Based on this, you might want to top – up your loan to meet further requirements like renovation of home. But the lender might  not  be open to these. The new lender may be open for loan top-up. Sometimes, you are just not happy with the services and accessibilities of the bank and the new bank may offer better services.

How HFCs (Housing Finance Companies) look at loan applicants

HFCs look at minimising risk at the time of processing any loan application. There are two distinct processes in a home loan. The first process entails working out your loan eligibility, based on your fiscal status that is rated on the strength of the documents that you submit. Once the eligibility part is through, it means the HFC considers you a ‘good’ credit risk for that amount, and will sanction a home loan of that value, so long as the property stands true on the touch stone of documentation – which is part two: now, the property’s title has to be verified. Only after this is completed can the loan be considered as sanctioned and ready for disbursal.

Rakesh Makkar, President & CDO, DHFL

The views expressed in this article are the author´s own.