India
is a vast country, having a population of more than 1000 million. Many are
without owned shelter.After independence, the successive governments addressed
this problem with various government-sponsored programmes. They are targeted at
poorest of poor, and houses with barest facilities were provided.
The
problem was too gargantuan to be met with government alone. The government of
India established National Housing Bank, under the supervision of Reserve Bank
of India. Scheduled commercial banks, co-operative banks, were also directed to
lend for purchase/construction of houses.In the beginning 1.5% of incremental
deposits of commercial banks during 1988 was earmarked for housing finance
sector, which was enhanced to 3% during the year 1999 and subsequent years. The
banks were given freedom to exceed this stipulation depending upon their
resources. The slow down of economy, slump in the demand for loans from
corporate sector goaded banks to aggressively market housing loans. In the
course of the time, banks have overtaken the housing finance companies in
market share. The easy availability of finance, the tax benefits extended by
the union government and increased earning/spending capacity of middle class,
mostly wage earners have fuelled the growth of this important sector.
Change of Mindset
Owning a house, previously was the last priority, mostly at the time of retirement
from out of terminal benefits savings as one could rarely find the means of
financing the purchase/construction. This mindset has changed. The youngsters
in early twenties are earning substantial salaries, with increased spending
capacity. They prefer to own houses out of borrowed funds, which is repaid over
a period of time. This helps them to avail of lower interest rates and also tax
benefits for longer period.
Legal Scrutiny Report and Valuation
It is
very important to have legally established ownership of the property to avail
of the Housing Finance. The applicant should have all the documents to establish
his title to the property. He should verify the documents available with him/or
with the seller and perfect the title to the property. Financing Institutions
will rely on the legal scrutiny report of their advocates on panel. In view of
the severe competition in the field, many institutions are ignoring the
importance of the legal scrutiny, and title to the property, and are giving
much importance to the repayment capacity
Apart
from perfect title to the property, the valuation of the property is also very
important, based on which the loan component will be determined. The banks have
approved valuers on their panel, who will value the property and arrive at the
market value.
Loan Amount
Many
institutions have a maximum ceiling of one crore-per party. The loan depends
upon the cost of construction, land, purchase cost, stamp duty, registration
charges, legal charges and also other additional expenses. The borrowers may
have to bring is 10 to 15% of the cost as margin money. There are institutions,
which finance full cost without insisting on margin money. In addition to these
parameters, the income of the applicant, repaying, capacity of all the
borrowers are being considered Maximum amount that an individual may require is
10-15 lakhs, for a good house, which is within the reach of average wage
earner.
Repayment Schedule
The
loan is to be repaid in monthly instalments comprising interest and principle
called equated monthly instalments (EMI). The amount of repayment remains the
same during the entire tenor of the loan.
In case
of construction, the loan amount is disbursed in instalments depending upon the
progress of construction.The regular repayment commences after the completion
of construction or after the expiry of certain stipulated time. Interest for
intervening period, from the date of loan to the commencement of equated
monthly instalment is called pre-EMI. This has to be paid quarterly or monthly.
Though
the repayments offered vary upto a maximum of 20 years, it is preferable to
avail of the period of 10-15 years, considering the interest rates, tax
benefits and repayment capacity. The repayment period of 5 years attract heavy
monthly instalments, which prove to be burden; in repayment beyond 15 years,
one has to pay heavy interest. There are institutions, which offer repayment
period beyond 20 years also.
Certain
banks have special schemes, under which any surplus amount available may be
paid though in excess of equated monthly instalment with facility to with draw
such amount in case of necessity. The account operates like a current/over
draft account.This would be useful for business people. Such schemes are
called Home Loan Saving Schemes, where by paying off the loan earlier
substantial amount of interest is saved.
Interest
At
present interest rates are very low the loans are available at 7.25% but there
are signs of interest rates hardening. There are two different types of
interest rates floating and fixed.
Floating Rate
Here
the rates are not constant, but keep changing.There are linked to market
condition.They may increase or decrease.The present floating rates has
reached the bottom and there may not be further reduction. The lending
institutions are very reluctant to pass on the benefits of reduced interest
rates to borrowers. They adopt different strategy to keep the borrowers paying
higher rates. In most of the case the old borrowers pay higher rate than a new
borrower for a similar loan.
Fixed rate
This is
supposed to remain fixed through the tenor of the loan. Fixed rates are higher
than floating rates but many banks/housing finance companies have “Force
Majeure” clause in their agreement, which gives absolute powers to change the
fixed rates.
In
general, the fixed rates for loans of long tenor, floating rates for loans of
short tenor may be preferred.
Many
offer a combination of both fixed and floating, where some percentage is
charged as fixed or balance as floating.
Reducing Balances
Reducing
balance means the period at which the instalments collected from borrowers are
credited to the loan account. In annual reducing balances the monthly
instalments collected are credited to the loan account once in a year. In
monthly reducing balance they are credited on a particular day of month; and in
daily reducing banks, it is credited on the same day. Annual reducing balance
is mostly costly, where as daily reducing is the best. Many have monthly
reducing balance, and few have daily reducing balance.
Hidden Costs
There
is no transparency in Housing Finance sector. Apart from interest the borrower
has to pay processing charges legal fee, but many other types of fees, such as
administration fee, inspection fee, etc. Further the rates at which these are
charged are also not clear. In such cases, though the interest rates are low,
the hidden costs increase the burden. As stated earlier, interaction with
borrowers would help.
Switch over
The
borrowers have an option of switching from floating/fixed to other mode on
payment of certain penalty. Generally it is 1% on the outstanding loan amount.
But recently, the financing institutions have increased fee for switching over.
While switching over, consider the penalty payable, the loan balance, the rate
of interest available and the balance repayment period. If the balance
repayment period if short it is not advisable to switch over.
Transfer of Loans
The
borrowers may also transfer the loan to other institutions, which take over the
loans. Many borrowers transfer the loans to avail the reduced interest rates
available. The interest rates during 1990-2000 were very high. In case of
transfer of loan, the borrower has to pay some prescribed fee calculated on the
outstanding loan. Apart from such fees, the institution, which takes over the
loan, charges processing fee, legal charges etc. They may offer some additional
loan also. But avail of such additional loan only in case of absolute need.
While transferring the loan apart from interest rate, calculate the transfer
fee, processing/legal fee, and mode of reducing balance adopted by the
institution, which takes over the loan and hidden costs. If the balance
repayment period is small, transfer is not recommended.
Tax Benefits
Home loan borrowers have two types of income tax benefits:
1.Rebate on
repayment of principal and stamp duty and registration charges.
2.Deduction of
Interest
The
Stamp duty and registration charges paid and repayment of principal is eligible
of rebate on a maximum amount of Rs. 20,000/- within a over all limit of Rs.
70,000 under section 88 of income tax act 1961.
The
interest paid in a financial year on housing loan is allowed as deduction under
section 24 of the income tax act 1961. The maximum interest allowed at
deduction at present is 1.5 lakhs in case of self-occupied house. This is per
individual. If there are more than one borrower, with definite shares in property, each may avail of this deduction, subject to his share, with a
maximum ceiling of 1.50 lakhs. There is no such ceiling in case of properties,
which are let out. Any amount of interest paid on the loan is allowed as deduction,
and the income from the property by way of rent is taxable.
Insurance
Apart
from insurance of property, against fire, riot, civil commotion, many insurance
companies offer term policies on payment of single premium. These term policies
cover risk for certain period and repays the loan in case of any lose of life
of borrower.
Selection of Financier
Housing
finance is most easily available credit product. All the commercial schedule
banks, co-operative banks, extend finance for purchase/construction of houses.
In addition there are housing finance companies specialized in this line. Many
of these institutions are concentrated in metro and urban centers. There is
severe competition. In general the rates of interest in housing finance
companies are slightly higher than banks. Though there is intense competition,
there is no transparency in Housing Finance industry. It is better to interact
with borrowers of different lending institutions and select the best. If one is
a regular customer of any bank, it would be better to borrow from such bank.
While selecting the Financing Institutions, examine the rate of
interest, charges for shifting, hidden charges, transparency, and accessibility
to the financing institutions. Many institutions operate through direct selling
agents, and the borrowers will rarely have a chance to interact with the
officials of the institutions. Further there is very little of select between
any two institutions.
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