Housing Loan in India FAQ

Terms used in Housing Finance :

• EMI: Equated Monthly Installment till the loan is paid back. It consists of a portion of interest and the principal
• Floating Rate of interest: Rate of interest, which varies with the market-lending rate. This means that there is an element of risk of paying more than budgeted amount in case the lending rates goes up
• Daily Reducing Balance: In this system interest reduces daily with the repayment of Principal amount, if repaid daily.
• Monthly Reducing balance: In this system interest reduces monthly with repayment of Principal amount
• Annual Reducing Balance: In this system principal is reduced annually at the end of the year so you end up paying interest even for the portion of principal you have actually paid back
• Fixed rate of interest: Rate of interest remains unchanged for a certain period of the loan
• Processing charge: It's a fee payable to the lender on applying for the loan
• Prepayment Penalties: When loan is paid back before the agreed term of the loan, then banks/ institutions charge penalty for the prepayment
• Commitment Fee: Some institution charge commitment fee in case the loan is not availed within a stipulated period, after it is processed and sanctioned
• Miscellaneous Cost: It is quite possible that some lenders may charge documentation or consultant charges.

These are general FAQs, some or many of following may not be applicable to BoB (pl visit our site for prevailing T & C and latest up dates)

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 Property insurance with personal accident benefit clause insurance

c) Discounts in festival season

d) Waiving of pre payment penalty

e) Waiving of processing fee partly or fully, if special scheme announced

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, confirmed income for 3 years. Form No 16 issued by the employer & duly filed ITR’s for past 3 years.

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 8.50% 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. If you are having facility to pay extra amount in your account other than EMI then it reduces interest being charge to your account. In simple word if you keep your EMI same & repays extra amount, your tenure will be reduced in proportionately.

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 certain period of the loan. This means you do not benefit for certain period, 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 2% and 4% 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.c) Miscellaneous Costs: It is quite possible that some lenders may levy a documentation or consultant charges. e) Registration of mortgage deed or equitable mortgage.

d) What are the repayment period options?

Repayment period options range generally from 5 to 25 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. Some Banks consider agreement value + stamp duty + registration. The 15%, sometimes called margin or '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 or their own-marketed product.

Do I require a guarantor to get a home loan?

Some institutions ask for 1 or 2 guarantors, some asks local guarantor, some asks co-applicant instead of guarantor and some requires no guarantor at all.

What is the time required for loan application approval?

About 0-15 days.

What is the time required for loan disbursement?

On an average, loans are disbursed within 3-5 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. Some times they follow 15:85 ratio.

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. (At present Rs.1,50,000/- is limit)
For rental property - It will be adjusted against rental income. (Please consult your tax consultant)