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Prithviraj Hegde |
September 24, 2003
My NRI sister-in-law wants to buy a property in India. She is coming down in December and wants to finalise things during her annual trip home.
She trawls the Net for good properties, writes to builders, and by now she has a healthy portfolio of properties she can look at when in India. In addition she has foot soldiers on the ground checking out sites.
She also needs a housing loan. For that she has a one-stop source. Me!
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Now why would a pen-pushing cynic be a source of information for housing loans? Simple, I recently took one and am the 'been-there done-that' guy for her.As she cuts her teeth on the jargon of HFIs (that's Housing Finance Institutions), this is how I advised her on going about her housing loan.
(The terms and conditions for home loans to Non-Resident Indians is the same as that offered to residents. NRIs only need additional documentation. That is listed later).
How to begin
The Net is good way to start. All banks that offer housing loans have Web sites.
Your opening gambit could be http://search.rediff.com/dirsrch/default.asp?MT=india+housing+loan&search=web (Rediff search on Housing Loans in India).
In addition to Web sites of individual banks, you also get links to specialised sites like:
Check out these sites. They'll spew a lot of jargon, but they give you an overview of what the whole shebang is all about.
If you are in India, you also can just pick up the phone. There are banks falling over themselves to offer you loans, including home loans.
Speak to as many banks as possible and decide which is the best one for you.
What to look for?
Never get taken in by advertisements/commercials that offer you loans at 8 per cent or now even 7.75 per cent interest rate.
There's always an ** over such figures. And if you can locate where that ** is explained in very, very fine print, you will see terms, like interest rates for fixed tenure, terms and conditions apply, et cetera.
Always go by one thumb rule: The bank that offers you the lowest EMI (equated monthly installments) is the best.
How to calculate EMI
Most housing loan sites have what is called an EMI calculator. Here you enter the loan you need, the tenure and the interest rate offered for that tenure.
You will get the amount that you have to pay per month.
Let's take an example: This is from HDFC:
Interest rates (for floating interest):
- Up to 5 years: 8.95 per cent
- 6 to 10 years: 9.00 per cent
- 11 to 20 years: 9.50 per cent
EMI (per Rs 100,000 on a monthly reducing rate):
- 5 years: Rs 2,076
- 10 years: Rs 1,281
- 15 years: Rs 946
So how do you calculate what is the best option for you?
Let us say you need a loan of Rs 10 lakh (Rs 1 million) and you can repay around Rs 13,000 per month.
From the table above it is clear that 10 year tenure is most suitable for you.
The EMI for Rs 1 lakh is Rs 1,281. The EMI for Rs 10 lakh will be Rs 1,281 x 10 = Rs 12,810.
What that means is you will be paying Rs 12,810 per month for a period of 10 years.
Depending on your requirement and what you can repay, the above table will help you find out the best options for you.
Interest rates
Almost all banks offer different interest rates for different tenures. The lowest interest is always offered for the short-term loans.
Hence, you will get the lowest interest rates for tenures up to 5 years. This will progressively increase as the term increases.
All banks offer floating rates and fixed interest rates loans, too.
A floating rate loan means that the interest rates prevailing will be applicable. So, if the interest rates go down your EMI will also reduce proportionately and vice versa.
A fixed interest rate means that your EMI is fixed and will remain unchanged despite fluctuations in lending rates.
Most experts feel that interest rates in India are on their way down and so a floating rate is the best option.
But even experts cannot predict 10 to 15 years into the future.
So if you are going in for a longer tenure, a fixed rate option may be worth looking at.
Also banks offer loans on annual rest, monthly rest and even daily rest.
Annual rest means that your interest is calculated on an annual basis. This is the worst option as your repayment is accounted for only once a year.
The daily rest option is the best, though all banks do not offer this. What this means is that the moment you pay, it is accounted for and interest is only calculated for the balance amount of your loan.
Pre-payment clause:
This is an important thing to look for. When you take a loan, you are always looking at it from the point of view of your present income levels. Five years from now, you are most likely to be earning at much higher levels.
Most will want to pay off their loans much faster. Always look for a bank that will allow you to pre-pay without any terms and conditions.
Some will allow you to only pay in multiples of EMI that you pay and allow you to pre-pay only so many times in a year. Select a bank that allows you to pre-pay any amount.
Processing fees:
Some banks will charge a fixed amount as processing fee. This is usually between 0.5 per cent and 1 per cent of the loan amount.
The nationalised bank from where I took a loan charged me 0.5 per cent as processing fee. It also charged me mortgage fees (around .75 per cent).
A one-time insurance (works out to around 0.25 per cent) and a fixed advocate fee of Rs 2,500 too is charged. The last two are actually good provisions as the insurance covers my life during the tenure of the loan and against natural or man-made calamities.
The advocate fee ensures that a lawyer goes and checks out the property and ensures that the papers are in order.
How much can you get:
The standard is 48 times your gross salary. Most nationalised banks offer only 85 per cent of the cost of the property. But there are banks that will offer you up to 100 per cent of the loan amount, provided you can show them that you have the capacity to repay.
But remember there is stamp duty, registration and other charges that will work out to around 10 per cent of the cost of the property. Take that into your calculations.
Documentation needed:
Most banks will ask for your latest salary slip, your bank statement for the last one year and last three years' income tax returns.
If you're a businessman / trader you will need copies of you tax returns for the last three years. And two guarantors.
For NRIs: You need a salary slip, certified by the Indian Embassy. You need to open an NRI account in a bank from which you are taking loan. Then a photocopy of your passport is a must, as also a bank statement and two guarantors.
Tax benefits:
The Income Tax department, which all of us dread, shows some compassion if you are repaying a housing loan.
Interest paid on a housing loan or on capital borrowed to buy or build property is entitled to a deduction.
The housing loan interest is deductible under income tax up to Rs 150,000.
Finally:
Once you have selected the bank you want to do business with, sit down with its officials and get a pre-approval for the loan before committing on the property.
Banks will only disburse the loan after you have paid stamp duty and registration, and your share of the money.
Do not pour all your savings on the loan. Keep a buffer amount in the bank for emergencies. Remember you are committing for the long term a significant amount of your earnings to repaying the loan.
There is no harm in going for a longer tenure. If you get a pay hike or a bonus, you can always pre-pay your loan. This will bring down your tenure drastically.
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