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Home loan: Credit appraisal to arrive at eligibility

Ashish Gupta, ET Bureau, Aug 8, 2010, 04.34am ISTTags:

A credit appraisal for a home loan is an important part of a loan eligibility evaluation process. The

appraisal is undertaken by a bank. Each bank has set its own parameters and standards for evaluatingthe credit worth of a potential borrower. The eligibility for a loan that a person can avail of depends on hiscreditworthiness.

A bank evaluates the repayment capacity of a borrower considering factors such as income, age,qualifications , experience, employer , nature of business (if selfemployed ), security of tenure, tax history,assets owned, additional sources of income, other loan obligations , investments etc.

Based on the parameters of the bank, the maximum loan eligibility is worked out. The final loan amountsanctioned by the bank is according to the loan-tovalue (LTV) norms, instalment-to-income ratio (IIR)norms and the fixed obligation to income ratio (FOIR) norms laid down by the bank.

IIR

This ratio is used to calculate the loan eligibility of a borrower and is generally expressed as apercentage. This percentage denotes a portion of the borrower's monthly instalment on the home loantaken. The percentage may vary from 33.33 to 40.

For example assume the IIR is fixed at 40 percent. Now, if the gross income is Rs 1 lakh per month,according to the given IIR ratio, the borrower is eligible for a loan where the instalment does not exceedRs 40,000 per month (i.e. 40 percent of the gross monthly income).

LTV

Banks also use this ratio to calculate the loan amount that a person is eligible for on the total cost of theproperty . There is an upper limit on the maximum loan amount that a person is eligible for irrespective ofthe loan eligibility norms. The maximum amount of loan is pegged to the cost or value of the property.

The loan eligibility according to the other parameters may be higher, yet the loan amount can't exceed thecost or value of the property. The ratio varies between 70 and 90 percent of the registered value of theproperty.

FOIR

A bank takes into account the instalments of all other loans previously availed of by the borrower,including the home loan applied for. This ratio includes all the fixed obligations that the borrower issupposed to pay regularly on a monthly basis. The fixed obligations do not include statutory deductionsfrom salary such as Provident Fund, professional tax and deductions for investments such as insurance .

For example, assume a borrower has an income of Rs 1 lakh per month. If he has a car loan instalmentof Rs 10,000 and a personal loan instalment of Rs 2,000 per month, and a proposed housing loaninstalment of Rs 20,000 per month, the FOIR is 32 percent, the eligibility is Rs 32,000 - all loaninstalments divided by the monthly income.


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The bank may have a standard 30 percent of FOIR. So the total instalments the person can pay, as perthe bank's FOIR standard, would be Rs 30,000 per month. As he is already paying Rs 12,000 towards thecar and personal loans, he has Rs 18,000 left, and the loan will be calculated taking Rs 18,000 per monthas the housing loan repayment capacity. Accordingly, the housing loan amount is reduced.

Generally, the lowest of these three parameters is the amount of loan that a borrower is eligible for.

EMI EMI (equated monthly installment) is an unequal combination of two components - principal andinterest. This is the amount of money the borrower owes the lender every month, through the tenure ofthe loan.

Margin money

Also called down payment, margin money is typically around 10-15 percent of your loan amount. Thebank does not disburse the entire cost of the property when you seek a home loan. It lends only around85-90 percent of the project cost. The borrower is expected to bring in the remaining money. This isreferred to as down payment or margin money.

Home improvement loan

Some people may need money to repair, renovate, remodel or extend their home. Banks offer homeimprovement loans that you can use for making structural improvements, external and internal repairs,flooring, painting, improving plumbing, electrical work etc.

Joint loan

A loan applicant can apply jointly for a loan with his spouse or parents. This way he can club the incomes.This increases his loan eligibility.

Householder's insurance

This policy offers insurance for household belongings against fire, malicious damage, burglary andnatural disasters like flood and earthquake. The householder's insurance policy is a comprehensivepackage that protects the house and its various contents against a variety of risks. It is a single policy thattakes care of a number of contingencies.

Basics of a home loan

Kavita Sriram, TNN, Feb 3, 2008, 05.44am IST

Times are fast changing. Remember when your father purchased a house? In all probability, it was whenhe was close to retirement. It was possible to have saved enough money to buy a house only after yearsof working.

Supplemented with his retirement money, he could have managed to purchase a house. Today, manyhomeowners are young people in their thirties. Thanks to banks offering loans and increased earningcapacities, buying a house is no longer a distant dream.

Borrowers can live in the property, even when they are still repaying the loan. At the end of it, you havean asset that has multiplied manifolds in value. Home loan enables you to do just that.


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Banks give home loans for constructing a home or purchasing a ready-built house, flat or residential plot.They even re-finance existing loans that borrowers may have availed from other banks. The loan amountsanctioned to borrowers is based on age, salary, educational qualifications, credit history and previousemployment track record.

You can club the income of your spouse, in order to increase your loan eligibility. Typically, banks only

lend the amount where your monthly EMI outflow is 30 to 50 percent of your salary. Any amount greaterthan this would make repayments towards the loan a burden and one may default.

What is EMI?

EMI stands for equated monthly installment. It comprises interest and principal components. EMIrepayments commence when you take a full disbursement of the loan amount. Pending finaldisbursement, borrowers only pay interest on the amount disbursed. This is called the pre-EMI interest.

When a borrower makes EMI payments to the lender, during the initial years, a large chunk of money willflow towards interest repayment. As the years roll by, the principal component increases.

If you do not own a house of your own, it is time you consider taking a home loan. Borrowers can also

avail tax benefits on both the principal and interest components of the loan. This makes it even morelucrative.

Options in home loans

Home loans usually come in three flavours - floating, fixed and hybrid. In case of a floating rate loan, theinterest rate fluctuates with the prevailing market rates. It is usually pegged against the bank's primelending rate.

This moves up or down depending on the movement of repo rates, inflation, cash reserve ratio andliquidity in the system. Exposed to a host of external factors, a floating rate of interest is simplyunpredictable. But as much as 80 to 90 percent of the borrowers have opted for the floating rate.

Borrowers, who opt for the floating rate, intend to benefit from a fall in interest rates. If, on the contrary,the rates go up, they have to pay out more money in the form of EMI to the lender.

They understand that interest rate fluctuations follow a cyclic pattern and are further lured in by the lowercost of this loan. If you are taking a short-term loan, simply float. It is difficult to predict the interest ratescenario over a long term.

Pure fixed rate loans, as the name implies, remain fixed for the entire tenure of the loan. Such a productis offered by very few banks as interest rate on them is very high compared to floating rate loan. Whatmost lenders offer is fixed rate loans - fixed for a short tenure, say five years. So the rate remains fixed for

five years, after which the interest rate is reset to the value prevailing at that time.

Fixed rate is for borrowers who are anxious every time the rates climb up. Those who want predictabilityand want to set aside fixed money towards their loan repayment can select fixed loans. Such borrowersbelieve that the rates will travel northwards.

Before locking into a fixed rate, go through all the fine print to know how 'fixed' the product really is. If itcomes with a reset clause, it means the bank can at its own discretion increase your rate, though it iscalled a fixed rate loan.


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Between the fixed and floating rate option, investors have the hybrid loan alternative. It is a combinationof fixed and floating rate loan, where a borrower can decide how much he intends to lock under fixed andhow much he wants to expose to floating rates.

If you're unsure simply lock 50 percent of the loan under fixed and remaining under floating rate. Thisinnovative product gives more flexibility and option to the borrower.

With interest rates giving all indications of going southwards, it is time to consider investing in a house. Ahome loan will help you realise your dream of owning a house.

Step-up and step-down loans

Kavita Sriram, TNN, Nov 11, 2007, 02.31am IST

Just when everyone thought that the real estate sector boom had saturated, things seem to be rollingonce again. New borrowers are offered lower rates and existing borrowers are waiting for their due ratecuts. Fixed, float, monthly rests, yearly rests, fees, penalties, lender, rates -an applicant must decide on ahost of factors when it comes to home loans. Lenders also offer numerous flexible products thatapplicants can opt for. Banks give home loans for constructing a home or purchasing a ready-built house,

flat or residential plot. They even re-finance existing loans that borrowers may have availed from otherbanks.

The loan amount sanctioned to a borrower is based on his age, salary, educational qualifications, credithistory and previous employment track record. You can club the income of your spouse, in order toincrease your loan eligibility. Typically, banks only lend an amount where your monthly EMI outflow is 30to 50 percent of your salary.

Any amount greater than this could make repayments towards the loan a burden. When a borrowermakes EMI payments to the lender, during the initial years, a large chunk of the money will flow towards

interest repayments. As the years roll by, the principal component increases. Step-up option The cost ofbuying a house has gone up manifolds. It might be unaffordable to a large chunk of people, especiallythose who have started earning recently. Step-up loan is a flexible and innovative product designedspecially for this segment of people.

A step-up loan is a kind of home loan, which offers varying EMIs spread over the loan's tenure. During theinitial years of the tenure of a step-up loan, the EMIs are small. This makes it affordable for the youngworking population that has embarked on its career and holds tremendous growth prospects.

As the years roll by, the EMI outflow increases. It is assumed that the borrower will grow up the ladder,get promotions and earn increments. Hence, though EMI increases with time, it will still appear affordablefor the borrower.

Since a step-up loan takes into account the future earning potential of the prospective borrower, itincreases his loan eligibility. He is lent a huge amount - much more than his current income. Hence, thoseearning lesser income initially, can also afford a larger home with their loan. Step-down option If aborrower is close to his retirement years and has a huge earning capacity, some lenders offer stepdownloan products. Here, the rates are huge initially as the borrower can easily afford high EMI repayments.

Gradually, as the years roll by, the EMI installments come down. This is the step-down loan, where theburden of EMIs comes down with time. Depending on your requirement and financial position, select aproduct that best suits your needs.


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Some convenient repayment options

Kavita Sriram, TNN, Apr 8, 2006, 10.40am IST

Today's dream homes are no longer the four walls and a roof. Builders have built apartment complexesand condominiums that give the residents' a resort-like lifestyle. A gymnasium,swimming pool,billiards

table, party halls, gardens, children's play area, round-theclock security, badminton and tennis courts, andthe list goes on.

The joys of companionship in community living, the feeling of security, reduced pollution within thecompound, doctors and daycare facilities at your doorstep, and other services - this is an unimaginablearray of benefits that today's home owner is bestowed with. Affordable interest rates, booming housingsector and banks trying to woo customers, all seem to go in the favour of a potential investor. However,houses with these facilities come with a hefty price tag that could mean decades of EMIs. To top it up arethe registration, legal and other home improvement expenses that cannot be simply overlooked.

So will your dream home remain a dream for the want of more funds? Hold on. There is some good news.

Some banks are experimenting with innovative schemes that could make you eligible for those expensiveabodes.

Let us explore them

Consider a scenario where you and your neighbour earned Rs 30,000 a month. If you and your neighbourboth approach a bank for a home loan,will both be sanctioned the same loan amount and pay the sameEMI? Not anymore. If you are young, work for a big company, have been in a steady job over the pastfew years, have great potential to climb up the ladder and are expected to get greater pay hikes, thensome banks are willing to stretch your loan eligibility .

Step-up loans

It is a flexible innovative scheme conceived by housing finance companies (HFCs) that seems to meetthe borrowers' financial needs while re-evaluating his repayment capacity. People who embark on newcareers draw lesser incomes than their experienced counterparts.

However, as years roll by their salaries are sure to shoot up. So, when a young trainee engineer in asoftware firm approaches a bank for a loan, his actual eligibility may be very less. However, keeping hisgrowth potential and future earnings potential in mind, some banks sanction him a bigger loan amount.Wouldn't it be nice if the EMIs were less over the initial years and increased when the borrower's salaryincreased? This is exactly what happens when you go in for a step-up loan option.

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This flexibility makes buying a home affordable rather than paying rent every month. The bank makes anassumption of your annual salary increase and calculates your loan eligibility accordingly.You get a largeramount of loan as compared to the loan under the normal housing loan. Further, repayment schedule islinked to your expected growth in income. Step-up loans can be easily availed by young salariedemployees or professionals in the beginning stages of their careers and whose earnings potential arebound to head northwards in years to come.

Step-down loans


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Assume that you can work for another 10 years before contemplating retirement and your spouse hasanother 15 years of service left. If you take a 15-year loan, then evidently your repayment capacity ismore in the initial years of loan tenure than in the final years. The years closer to retirement will be morefinancially demanding for other purposes like medical expenses and so on. Step-down loans are aimed tobenefit borrowers who fall under this category. The loan is structured in such a way that the EMl is higherduring the initial years and subsequently decreases in the latter part proportionate to your reducedincome.

Calculating home loan eligibility

Kavita Sriram, ET Bureau, Aug 2, 2009, 06.16am IST

Vijay is a maintenance engineer with a private firm. His monthly take-home salary is around Rs 35,000.With many public sector banks offering single-digit interest rates, Vijay feels this is the best time to investin his dream house. A two-bedroom house on the outskirts costs about Rs 16 lakhs. Will any banker lendhim this money? Is he eligible for a home loan of Rs 16 lakhs?

There are numerous factors that banks take into consideration when computing your loan eligibility. Ageof the applicant, his salary, repayment/credit history, savings, profession, location of property, healthcondition and other debts have a direct bearing on the loan amount sanctioned. Some professions arecategorised as negative or risky by the lenders. People in such professions may find it difficult to get aloan sanctioned. On the contrary, some jobs are considered more stable with lesser probability of default.They are on the preferred list of most lenders.

It is imperative that the property an applicant wishes to purchase falls within the geographical limits asdefined by the bank. As a thumb rule, banks will lend to applicants who can set aside 40 percent of their

monthly income towards their home loan repayments. Based on this, an individual's loan eligibility iscalculated. It is assumed that a person who earns more can set aside more money towards his EMIrepayments.

How does a bank compute your loan eligibility?

Most loan eligibility calculators available on the Internet are based on a formula. The home loan eligibility,in lakhs, is arrived at by dividing the amount available for the loan repayment with the borrower by theloan installment per lakh for the given tenure.

The simplest way to increase your loan eligibility is by increasing the loan tenure. Consider Vijay's case.At 9 percent rate of interest and for a tenure of 10 years, banks will sanction him not more that Rs 12lakhs. However, for a greater tenure of 20 years his loan amount shoots up to Rs 18 lakhs. However, thelonger the tenure of the loan, greater is the cost of borrowing.

Applying jointly, with your parent or spouse, increases your loan eligibility. The incomes of both applicantsare combined when computing the loan eligibility. You can almost double your loan eligibility with a jointloan.

Computing home loan eligibility

TNN, Jan 28, 2002, 01.19am IST


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the eligibility of a housing loan is determined on the basis of borrower's repayment capacity, which, inturn, depends upon his income and other factors such as age, qualifications, number of dependents,stability and continuity of the income. besides the proposed owners in respect of which he is seekingfinancial assistance will have to be co-applicants. however, all co-applicants need not be co-owners.income of the spouse can also be clubbed if he/she has been made the co-applicant. the housing financecompany can consider all the income accruing to the applicant on a monthly basis, i.e. all the recurrentcredits (basic salary, hra, other allowances but not the lta and medical), any rental income that he isgetting and the savings in rent payment which might accrue to him on account of his moving from arented dwelling to self-occupied property. in short, the calculation will be as per the applicant's net cashinflows, less expenses and commission for the salaried class, and as per his profit-and-loss account forthe self-employed or a private company (net profit + 2/3rd depreciation+ directors' remuneration). anexample: an individual has a salary of rs 3,00,000 p.a. taking all factors into consideration, an hfc decidesthat the individual has an annual repayment capacity of 1/3 of his income, meaning rs 1,00,000. thiswould work out to emi capacity of about rs 8300 per month. once the emi capacity of the person has beenestimated and the tenure of loan repayment is known, the hfc decides on the amount of the loan it canprovide to a person. this is done with the help of an emi table. in this case let's take the repaymentschedule as a period of 10 years. going by his emi capacity of rs 8300, this individual can go for a loan ofabout rs.5 lakh for a period of 10 years. here the emi works out to rs 8145 per month at 14.5 per centcompound interest rate on the annual, rest on a loan of rs 5 lakh. some hfcs have plain vanilla deals forprofessionals such as cas, doctors, mbas and architects: it is 1-2 times the gross receipts. it also depends

on the purpose for which the house loan has been taken. it can be for purchase, construction, extensionor renovation of the house property. it is also dependent on the tenure that the person requires the loanfor.

Tax benefits of a joint home loan to co-borrowers

Vikas Agarwal, ET Bureau, Nov 22, 2009, 12.27am IST

One of the most attractive features of a housing loan is that it helps in reducing your income tax liability,and thus makes it easier and cheaper to build a fixed asset. A housing loan makes you eligible for taxrebates under Section 80C and Section 24 of the income tax regulations.

A joint housing loan comes with the twin benefit of increasing the overall loan eligibility and the incometax rebate that can be claimed by both co-applicants individually under Section 80C and Section 24. Themandate in claiming the income tax rebate is that the co-applicants of the housing loan should also co-own the underlying residential property.

Who are eligible?

A joint home loan can only be availed by a minimum of two and maximum of six applicants. A borrowercannot take a joint home loan with just any person. In general, the lender defines the relationshipbetween co-borrowers eligible to take such a loan. A joint housing loan is given to married couples orclose blood relatives like parent and child.

Some banks allow brothers to take a joint home loan provided they will both be co-owners of the property.

Usually, banks insist that all co-owners of the home must be co-borrowers in a joint home loan. Generally,friends or unmarried couples living together are not allowed to take joint housing loans.

Ownership structure


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Repayment capacity

The financial position of the individual is an important determinant. The individual's financial profile is animportant consideration for the bank. The loan eligibility as well as repayment capacity depends on thefinancial position of the borrower. The income level, net income, liabilities etc determine the amount ofloan a person is eligible for.

The requirements include a particular minimum income or a fixed source of income. The credit history ofthe borrower also plays an important role. Usually, the lenders maintain a database of the borrower andverify the credit history to check out previous repayment defaults, even from other lenders.

Profile

The personal profile of the individual is also important. Banks take into account the personal profile of anindividual. These include factors like educational qualifications, profession, number of dependents, assetsowned, liabilities owed, savings history etc. A higher number of dependants or existing liabilities implieslower repayment capacity.

Age

It plays a major role in determining the earnings potential of an individual. In case a property is coowned,the co-owner cannot be a minor. Also, the coowner cannot be above a certain age limit. The age limitsare set to minimise ownership disputes. The age limit also affects the tenure of the home loan and EMIs.

The applicant's retirement age is also considered. For example, if an applicant is 45 years of age and isset to retire at 60 years, the maximum loan tenure available will be 15 years. Also, in case the bank has a75-year age limit for a coapplicant, and if the applicant is 40 years old and the co-applicant is 60 yearsold, the home loan will be sanctioned for a maximum period of 15 years only.

Location of property

This also affects the eligibility. Certain areas are specified as being 'negative' in the books of some banks.If an individual intends to buy a property in such an area, he will not be granted a loan. Banks havespecific norms with respect to a minimum area of the flat. This may be built-up area or carpet area. Theage of the property is also an important consideration in case of purchase of existing properties. Homeloans on resale properties are sanctioned only if they are less than 50 years old.

Banks conduct legal and technical appraisals of the property to see whether the title of the property isclear, there are no ownership disputes, the property is free from any encumbrances etc. In case there areany objections in these appraisals, the loan application is bound to be turned down.

Each bank has a list of pre-approved builders. Their credentials will be verified by the bank and as suchloans are easily available for their properties.

Get all your paperwork right

Ashish Gupta, TNN, Dec 10, 2005, 03.46pm IST

In this era of keen competition and existence of many housing finance companies and banks, it is difficultto imagine that your application for a housing loan may be rejected . But this is true. There may be caseswhere a bank may be unwilling to lend. This may be the case if your case falls outside the purview of theirparameters (rather extended parameters).


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Here are some reasons which may be the potential cause for such an action on the part of a bank:

Sound financials

First and foremost is the financial position of the borrower . On this depends the loan eligibility as well asrepayment capacity. The financial position of the borrower, his income level, net income, liabilities etc

determine the amount of loan he is eligible for. Any request for more than the eligible amount is bound tobe rejected. The individual's financial profile is an important consideration for a bank.

Requirement may be of a particular minimum income or a fixed and certain source of income. The credithistory of the borrower also plays a major part. Usually, these lenders maintain a database of borrowersand verify the credit history to check out previous repayment defaults, even from other lenders.

Personal profile

Banks also take into account the personal profile of an individual . These include parameters such aseducational qualifications , profession, number of dependents, assets owned, liabilities, savings historyetc. A higher number of dependants or existing liabilities implies lower repayment capacity.

Credit appraisal: Are you eligible for a home loan?

Kavita Sriram, TNN, Oct 2, 2005, 11.38am IST

Acrucial process before your request for a home loan is actually sanctioned by any bank is the creditappraisal process, which is a three-fold securitisation process that decides your loan eligibility. This is todetermine your loan repayment capability and with increasing loan applications, banks can definitely runinto credit risk when doling out lakhs of rupees to borrowers. Hence, evaluation of home loan applicantsbecomes critical.

Financial appraisal

An important part of credit appraisal is financial appraisal, where the applicant's financial position isreviewed. Past repayment records including defaulting, late payments, delinquencies and bankruptcies,earnings potential including your spouse's, any outstanding debt, assets, liabilities, and stability of youremployment income comes under close scrutiny.

Financial stability of the borrower and the co-borrower is an important factor not only for credit appraisalbut also for increasing your creditworthiness. A housing finance company or bank sets a fixed upper limitfor the amount of money that can be sanctioned for a particular type of loan. Depending on thecreditworthiness of a customer, the amount of money sanctioned to him can be increased to a certaindegree.

Age is another factor that can also impact how much you will be sanctioned and speaks about yourrepayment capacity. Those earning high salaries and carrying a professional degree with a bright growthpotential can definitely strike a great bargain. Age also matters when the tenure is quite long.

Technical appraisal


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Apart from the financial appraisal, the technical appraisal is also an integral part of the credit appraisalprocess. Here the validity for approvals for construction from local government bodies is verified.Compliance with building laws, like restrictions on the number of floors or height of the building, is alsoverified, and the property to be financed is valuated and its condition is checked. Technical appraisaljudges if the property to be financed is viable at all.

Understand all the implications before standing guarantee for a loan

, May 14, 2006, 11.29am IST

Most banks do not insist on a guarantor when giving home loans. A guarantor is equally liable to pay upthe loan in case you miss out on repayments . By seeking a guarantor, the lender tries to enforce a moralcheck that prevents you from defaulting.

If you're a salaried individual with a good employment record and laudable debt repayment history, banksare assured of your financial stability and credibility. In case one runs a small business with low profits ,the banks are taking a risk.

To safeguard their interests in such circumstances, banks seek a guarantor who is legally bound to makerepayments in case of default. The bank seeks a guarantor in case the loan applicant does not live in thesame city in which he is purchasing the property. If the nature of his job is such that he will be constantlytransferred or could go abroad, the banks need a guarantor.

The same is the case for self-employed individuals who lack required professional qualifications. Absenceof a co-applicant for a loan sometimes calls for a guarantor. In most other cases, there is no personalguarantor required as home is an investment to which people have emotional bonding.

And they are sure to go to any extent to keep it. Who can be a guarantor? Any friend or family membercan guarantee the loan. A guarantor has to fulfill the criteria relating to age and income of a normalcustomer. The minimum income criteria vary from one housing finance company to another.

This is to ensure that since he is equally liable to pay the loan in case of default , he has to be financiallysound too like the loan applicant himself. Since a guarantor is liable to pay up in case the original homeloan borrower misses out on repayments to the lender, he needs to be extremely cautious.

Before agreeing to become a guarantor, it is imperative that he is doubly sure of the credibility of theborrower. Suppose you are a guarantor for your friend's property. One fine day, you decide to go in for ahome loan yourself. Will it in any way interfere with your loan eligibility?

Being a guarantor for a huge loan, will definitely have an impact on what the banker perceives as your

repayment capacity. It significantly pulls down your loan eligibility and your capacity to borrow. By whatamount will a guarantor's own loan eligibility be affected?

Suppose you stand guarantor for your friend's home where the EMI is Rs 10,000. Assume you bringhome a pay packet of Rs 25,000.When computing your loan eligibility, the HFC will consider Rs 10,000as your potential liability and deduct this amount from your income. The net result is that your earningswill now be considered as Rs 15,000.


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The bank will estimate that you can only pay an EMI of say 40 percent of this Rs 15,000 and sanction youa proportionately lesser loan amount. It is of utmost importance to understand the legal consequences ofacting as a guarantor .

Before you actual sign on the dotted line, it is advisable to get an expert legal opinion on your rights andliabilities. So should you stand as a guarantor to a relative or an acquaintance? Explore possible risksinvolved. If the person seeking help is a trustworthy person and you're very sure he'll not default, probablythere is less risk.

However, turn down any request from persons whom you're unable to judge or are in doubt. Having tobear the responsibility of someone else's financial burden is painful enough. And when it comes to homeloans, the burden could be a few lakh rupees. In extreme cases where you cannot decline, try to, at best,limit the guarantee amount

Enhance your loan eligibility

TNN, Aug 20, 2006, 02.06pm IST

BANGALORE: While assessing eligibility for a loan, any bank or housing finance company primarily looksat two factors: the ability of the borrower to repay the loan, and the safety of the loan. The main concernis whether the borrower would be able to repay the loan along with the interest as per the agreed timeschedule.

The methods adopted by banks to assess these abilities and capabilities of borrowers are many andvaried. They differ from bank to bank. A bank attempts to minimise its credit risk to the lowest possiblelevel.

In order to be eligible for a housing loan a number of factors are taken into account . Primary among themis the income of the borrower . Apart from income, age, number of dependants, qualifications, assets andliabilities , stability, continuity of employment/business , past repayment record etc are also considered toassess the repayment capacity of the borrower.

However, there are a few ways to enhance the amount of loan eligibility. Banks recognise someadditional sources of income and will club them with your income, thereby enhancing the eligibilityamount of the loan.

In the case of a salaried person, if he has some additional sources of income, the bank may consider it.The pre-condition is that the source of income should be somewhat regular in nature rather than being adhoc or one-time .

In case an applicant's spouse has an income source, the applicant should make him/her a co-applicant .The additional income of the spouse can be included to enhance the applicant's loan eligibility.

In case there are any co-owners they must necessarily be co-applicants . If an applicant is staying withhis parents, the income of the parents can be clubbed subject to certain conditions.

In some cases, if an applicant can provide additional security, he can have his loan eligibility enhanced.Additional security may include instruments like bonds, National Savings Certificates , fixed deposits, andLIC policies. Generally, investments in shares are not considered for this purpose.


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In case an applicant has already taken a loan from the bank in the recent past, the institution alsoconsiders the repayment record of the individual. A good repayment record also enhances the eligibility ofthe loan amount.

Many banks waive off the requirement of having a guarantor. However, if one can provide a financiallygood guarantor, it will enhance the applicant's credibility with the bank and thereby the eligibility amount.

The final amount to be sanctioned will depend on the repayment capacity of the individual. This appraisalonly sets the maximum limit, which an individual can get as a loan. There are limits fixed for eachcategory of loan. The amount that an applicant will be ultimately entitled to is governed by this factor.

Higher disposable income means higher home loan

Ashish Gupta, TNN, May 9, 2008, 07.34pm IST

In order to be eligible for a housing loan, a number of factors are taken into account. Primary among themis the income of the borrower. Apart from income, the age, number of dependants, qualifications, assetsand liabilities, stability and continuity of employment /business, past repayment record etc are alsoconsidered to assess the repayment capacity of the borrower.

There are a few ways to enhance your loan eligibility. The banks recognise some additional sources ofincome and club them with your income, thereby enhancing the eligibility for the loan.

In the case of a salaried person, if he has some additional sources of income, they may be considered bythe bank. The pre-condition is that the source of income should be somewhat regular in nature.

In case the spouse has an income, he/she should be a co-applicant. The additional income of the spousewill be included to enhance the applicant's loan eligibility. In case there are any co-owners they mustnecessarily be co-applicants.

If an individual is staying with his parents, the income of the parents may be clubbed subject to certain

conditions. Some banks allow inclusion of the fiancee's income for sanctioning the loan along with theapplicant's income. However, the catch is that the disbursement of the loan is done only after theapplicant submits proof of his marriage.

In some cases, if the applicant can provide additional security, he may have his loan eligibility enhanced.The additional security may include instruments like bonds, National Savings Certificates, fixed depositsand LIC policies. Normally, an investment in shares is not considered for this purpose.

In case the applicant had taken a loan from a bank in the recent past, the bank also considers therepayment record of the individual. A good repayment record also enhances the eligibility of the loanamount.

Many banks waive off the requirement of having a guarantor. However, if one can provide a good

guarantor, it may enhance the applicant's credibility with the bank and thereby enhance the eligibility forthe loan.

The final amount to be sanctioned will depend on the repayment capacity of the individual. Of course, thisappraisal only sets the maximum limit which the individual can get as a loan. The amount that anapplicant will be ultimately entitled to will have to conform within the limits fixed for each category of loan.

While deciding on what incomes can be included in the eligibility criteria, the bank would consider thecertainty of these additional incomes and may include certain margin requirements as well - for example,


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50 per cent of salary of spouse or 40 per cent of value of investments may only be eligible. The fullamount of the additional income may not be considered. Also, the bank would take into account theadditional expenses which may be incurred in earning the additional incomes.

Planning short tenure loan repayment

Kavita Sriram, ET Bureau, Dec 14, 2008, 04.55am IST

Borrowers who have availed short tenure loans often reel under extreme financial pressure. A hugechunk of their monthly income goes towards home loan repayment. Job cuts and pay cuts are a commonphenomenon post global meltdown and cost of living has gone up owing to inflation.

In such a scenario, the borrower faces a serious financial crisis as home loan repayments are not his onlymonthly commitments . How does a borrower plan a short tenure loan repayment effectively? Bear inmind that your EMI outflow doesn't remain constant over the tenure of the loan. Be it floating or fixed (canbe reset by the lender), the EMI that you must dole out after 2 years may be quite high compared to whatyou are paying today.

Keep a cushion for this increase. Sometimes, the borrower's salary may not increase at this rate andmanaging finances becomes tedious. Home loan repayments form a large chunk of your salary. But thisis not your only commitment. Setting aside money for children's education, marriage and retirementplanning are crucial. One must start early for retirement planning and invest systematically.

Only then you can benefit from the power of compounding and earn larger return. When planningfinances do not overlook the need to save for emergencies such as hospitaliation and health care.Anticipate greater money squeeze and desist from lavish expenditure. Avoid acquiring newer debts.Newer debts could drag you into deeper financial crisis where meeting even regular monthly expensesbecome a challenge. Avoid using credit cards.

Defaulting on credit card loans can prove very expensive. Pay off higher interest rate debts first. This wayyour savings will be greater by decreasing first the debt that continues to grow at a faster rate due to thehigher rate of interest. If you do not make enough money to repay all debts, prioritise your debts.

Borrow as little as possible . This way your EMI burden will be less. If you feel it is difficult to make regularEMI repayments , contact the lender. Explain to him your financial crisis. See if he can reduce your rate ofinterest. Otherwise increasing the tenure of the loan is the simplest way out of the crisis. This way the EMIcomes down.

Taking loans: Longer tenure means lesser EMIs


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Kavita Sriram, TNN, Oct 28, 2007, 12.45pm IST

The lure of an interest rate that is lower than prevailing interest rates is drawing prospective borrowers tobanks. A home loan is a huge financial commitment for most borrowers that and it is bound to affect themfor decades.

With lenders vying with one another to expand their customer base in such times, it is very important fornew borrowers to understand what they are getting into. Before choosing an option, you must make cleardecisions on elements like repayment capacity, type of loan, and rates. Choosing the right tenure is oneanother factor that a prospective borrower must decide before approaching a lender.

Ramesh takes a loan of Rs 30 lakhs. The rate of interest is pegged at 11 percent. If the repayment tenureis one of six years, his net EMI outflow will come to around Rs 57,600. If the tenure were a longer 20years, then for the same rate of 11 percent interest, his monthly EMI will come to around Rs 31,000.Banks normally offer loans only to an extent where the borrower's monthly repayments are less than 35-50 percent of their gross monthly salary.

Increasing home loan tenure increases an applicant's loan eligibility. However, very huge loans can makerepayments an unmanageable burden. In an ideal situation, it is better to opt for a short tenure and payoff the commitment towards the home loan as soon as possible.

However, as in the case of Ramesh, when the tenure is shorter, the burden of EMI becomes greater.Many borrowers may not be able to set aside such huge amounts towards a loan repayment as there willbe other financial commitments too. What is the maximum loan tenure that lenders offer? Most lendersoffer loans for a repayment time period of 20 years. Some banks are willing to give a 25-year loan too.

In case your loan eligibility is less, it makes sense to opt for a very long tenure loan. Otherwise, youshould remember that longer the tenure, there is more outflow from your pocket towards interest.Suppose, an applicant is 50 years old and will retire in another 12 years, the bank will not give him a loanfor a tenure greater than 10 to 12 years.

The case may be different if the applicant is selfemployed or draws income from his business. He may beeligible for a longer tenure loan as his period of employment will be longer. Short tenure home loans arefor people who can afford high monthly repayments towards the loan. Every borrower dreams of the daywhen his loan is fully paid off and the house becomes completely his. If you want to be free of the burdenof the home loan, go for a short tenure one.

It is seen that most home loan borrowers tend to repay their loans fully within eight to 10 years. For otherswho cannot afford to set aside big amounts every month towards a home loan, a 15 to 20 year loan is theonly option out. Take a long tenure with a no prepayment penalty option. This will ensure that you are notpenalised if you want to prepay the loan.

Short tenure a better option

Kavita Sriram, ET Bureau, Jan 4, 2009, 04.56am IST

For families living in rented homes, owning a house is a sweet and expensive dream. Wouldn't it be nice ifthe dream turned true? For Prakash, this seems to be the right time to invest in a house. The current lullin the market gives him a tremendous scope to haggle. Prakash has struck a bargain deal - a twobedroom house with all amenities for Rs 30 lakhs. Now, Prakash faces a dilemma . Will he gain more taxbenefits if the tenure is short or if the tenure is long?


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If the tenure of the loan is short, say 8-10 years, the borrower's monthly EMI burden is bound to be high.Short tenure loans can be burdensome and might require the family to restrict themselves to a strict andsimple lifestyle. On the brighter side, he can clear his debts faster.

If the tenure of the loan is long say, 20 to 25 years, the borrower's monthly EMI burden drops downconsiderably . Long-term loans are opted for by borrowers who seek to increase their loan eligibility. EMIsappear more affordable though the cost of borrowing may work out to be expensive.

How they compare

At first glance Scenario II may appear enticing as the borrower can avail a huge tax deduction on theinterest component of the EMI. This is when you compare Rs 27 lakhs over a 20-year period against Rs13 lakhs for a 10-year loan. However, your tax deduction is not the actual money you save. This isassuming tax rates at the highest slab of 30 percent will be applicable.

In both the scenarios the borrower can claim upto Rs 1 lakh under Section 80C on the principalrepayments. However, this is only an opportunity. There are numerous other instruments under Section

80C like the PF that also come under this Rs 1 lakh cap. Not all borrowers can show their principalrepayments and investments in other Section 80C instruments fully under the Rs 1 lakh cap.

The interest or cost of borrowing a 20-year loan is almost double that of a 10-year loan. Hence, it isunwise to indulge in a long tenure loan. The only exception is when you cannot afford high monthly EMIsand have no option but to increase the tenure.

Choose home loan tenure that suits you

Kavita Sriram, ET Bureau, Aug 2, 2009, 05.57am IST

Home loan borrowers spend as much time debating on the right tenure as they do with repayment optionsor interest rates. An ideal tenure depends on the age of the borrower, his income, job stability, retirementplans and other debt obligations. In these times of uncertainties and increasing cost of essentialcommodities, borrowers are more eager to clear their debts sooner.

Long tenure and implications

Suppose a borrower takes a loan of Rs 20 lakhs for a tenure of 25 years. At a 10 percent interest rate, hismonthly EMI outflow comes to Rs 18,100. The EMI appears more affordable since the tenure is long.However, borrowers must bear in mind that the longer the tenure, greater is the cost of borrowing.

A long tenure is chosen generally to enhance the loan eligibility of the borrower. A person close to hisretirement years will not be eligible for a long tenure loan, beyond his working years.

There is a lot of uncertainty associated with long tenure loans. The interest rates can fluctuate in eitherways and the inflation number could touch unanticipated highs. There is an unpredictability element


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regarding the state of the economy too. Borrowers who have taken a long tenure loan must factor ininterest rate fluctuations and set aside a cushion for them.

Short tenure and implications

Some borrowers cannot bear the uncertainties of rate fluctuations. Such borrowers opt for short tenure

loans where they pay off their debts as soon as possible. Shorter tenure loans implies larger EMI outflowmonth after month. While it may sound appealing to clear your loans faster, it can become difficult to setaside a major chunk of the salary to repaying home loans alongside other routine monthly expenses.

Suppose a borrower takes a loan of Rs 20 lakhs for a tenure of five years. At a 10 percent interest rate,his monthly EMI outflow comes to Rs 42,500. The EMI is huge because the tenure of the loan is verysmall. Most borrowers may find it too difficult to manage huge EMI repayments.

Choosing the middle path

Choose a tenure that suits your needs. If you cannot make huge EMI repayments, a 10 to 15-year loantenure could be ideal. Young borrowers must try to repay their home loan before they start saving for theirchildren's higher education. Older borrowers must ideally repay all their debts before they retire. Repaying

debt without a regular income is a tough job indeed.

Suppose a borrower who has taken a loan of Rs 20 lakhs for a tenure of 10 years. At a 10 percentinterest rate, his monthly EMI outflow comes to Rs 26,400. It is seen that most borrowers repay theirhome loan in eight years. A tenure of 8-10 years would be ideal for a borrower who has not planned forany immediate major expenses.

Check out the components of EMI

Kavita Sriram, ET Bureau, Nov 21, 2010, 03.00am ISTTags:

EMI is the equated monthly installment that a borrower pays the lender every month. This monthlypayment or EMI goes towards both interest and principal components of the borrowed money.Prospective homebuyers evaluate if the EMI towards the home loan is affordable and can be managedcomfortably without defaulting.

Components of EMI

EMI can be broken down into two components - interest and principal. During the initial years of a loantenure, it is mainly the interest payments that are being made while the principal repayments are muchless. Towards the end of the repayment tenure, a bulk of the repayment is made towards the principalcomponent.

Arriving at EMI

Arriving at EMI EMI is calculated using a formula where loan amount, interest rate and loan period arevariables.

Factors that impact EMI

If the EMI charged by the bank is large, the borrower may find it difficult to repay his debt. Hence, bankslend only so much to ensure that home loan repayments do not exceed 40 percent of the borrower's


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monthly income. A borrower's EMI outflow is directly dependent on principal amount, rate of interest andloan tenure.

If the amount borrowed is high, EMI repayments are high. On the contrary, borrowing less ensures thatyour EMI commitments are lesser. EMIs will remain constant for the entire loan repayment period, ifinterest rates do not fluctuate. However, in case of floating rate loans, EMIs increase when interest rate

goes up and fall when interest rate comes down. Short tenure home loans are usually in the range of 5-8years.

Shorter the tenure of the loan, greater will be the EMI due every month. If the tenure of the loan is short,the borrower will be debtfree sooner. Some loan tenures could be as long as 25-30 years. A borrower'smonthly EMI outflow comes down significantly, in case of longer tenure. However, long tenure loans areassociated with higher cost of borrowing.

When EMI fluctuates

The EMI remains constant only in the case of 'pure' fixed rate loans. Otherwise, it tends to fluctuate intandem with market pressures, inflation and the economy. Floating rate loans are exposed to interest ratefluctuations. In case of step-up loans, the banks lend the borrower a much bigger loan today based on an

anticipated increase in their future income levels.

Here, EMI due to the lender is less initially and increases as the years go by. In case of step-down loan,the EMI burden is high during the initial years and reduces as the years go by. Step-down loans aredesigned for borrowers who are approaching their retirement age. Some lenders allow for acceleratedrepayment.

Here, the borrowers can repay their loan faster by increasing the EMI dues. On getting a salaryincrement, a bonus, an increase in disposable income or lump sum funds, the borrower can make partialprepayment and bring down his EMI commitment considerably.

Tax benefits on second home

Kavita Sriram, ET Bureau, Oct 12, 2008, 03.56am IST

Kumar purchased a two bedroom apartment for Rs 18 lakhs five years ago. He intends to purchaseanother apartment for Rs 20 lakhs. His monthly gross taxable income is roughly around Rs 75,000. Hedecides to rent out his second house.

What are the tax sops he is entitled to?

Kumar has found a lender who is willing to give him the huge loan amount. The loan amount for his firsthouse is Rs 18 lakhs. For a loan tenure of 15 years and interest rate of 13 percent, his monthly EMIoutflow comes to Rs 22,774 approximately . The loan amount for his second house is Rs 20 lakhs. Forloan tenure of 20 years and interest rate of 13 percent, his monthly EMI outflow comes to Rs 23,430

approximately.

The EMI calculated by the lender depends upon the loan amount, interest rate charged for the loan andloan tenure. EMI is an uneven combination of the principal and interest components . During the initialyears, lenders collect more interest than principal but as the tenure approaches the end, the principalcomponent of the loan increases . In the beginning, a major portion of the EMI - as high as 90 percent -goes in servicing the debt.


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Tax benefits that come with home loans are a major reason why many people eagerly join thebandwagon of homeowners. The principal repayment that borrowers make on their home loans is eligiblefor income tax deduction under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1lakh in case of a selfoccupied property.

Self-occupied property

Kumar's taxable income is Rs 9 lakhs. The principal component of the EMI that he repays to the lenderannually comes to around Rs 79,638. Kumar can deduct the home loan principal amount repaid from histaxable income directly.

Therefore, his taxable income becomes Rs 9 lakhs minus Rs 79,638 - i.e. Rs 8.20 lakhs. He can invest inother instruments mentioned under Section 80C and further reduce his taxable income by another Rs20,000.

Homeowners can avail tax benefits on the interest component repaid under Section 24. Under Section 24of the Income

Tax Act, the maximum amount of interest that can be deducted from your taxable income for a

selfoccupied property is Rs 1.5 lakhs. As a result, your taxable income decreases by that amount.

Suppose Kumar has repaid Rs 1.9 lakhs towards the interest component of the existing home loan in oneassessment year. Since there is a limit of Rs 1.5 lakhs, he can deduct this amount from his income.

Second property

For Kumar's second house, there are no benefits of principal deduction like in the self-occupied property.Homeowners can, however, claim benefits for interest repayments of the home loan. There is no limit onthe interest repaid unlike the Rs 1.5 lakh limit under Section 24 for self-occupied property. The rentalincome earned by the second property has to be shown as taxable salary with upto 30 percent deductionon rental income allowed as deduction towards property tax and maintenance.

Banks introduce reset clause to alter interest rates

Ashish Gupta, TNN, Nov 4, 2007, 03.30pm IST

A reset clause allows banks to review rates at the end of a certain number of years. The housing loanagreements include a reset clause either explicitly or implicitly. The clauses are triggered during eras ofincreasing interest rates.

Previously, loans carrying a fixed rate of interest were considered to be insulated from interest ratevagaries. They were supposed to remain neutral to the market rates of interest. With the continuousincreases in the interest rates, this had entailed a loss for banks.

Many banks have introduced reset clause in their fixed home loan documents to effect a change in theinterest rate at a future date. Effectively, this makes the fixed rate loans equivalent to floating rate ones,and nothing remains fixed in the strict sense of the word. The banks are under pressure to protect theirmargins and need to review the pricing and product structure of loans.

Reset clauses enable the banks to revise the interest rates on the loans in case of certain circumstances.The banks have the discretion to increase the interest rates in case the market rates of interest increase.This is a hedge for the banks against interest rate increases at a future point.


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The interest rates on fixed rate loans are higher than the floating rate loans. This is because of the factthat there is an additional element of risk, which the bank has to bear. Normally, people opt for fixed rateloans, when the interest rate is low. They wish to lock in the interest rates for the long term.

Initially, banks were offering these loans without any apprehensions of any drastic increases in interestrates in the future. However, as the interest rates started increasing, trouble for banks started. So the

reset clauses were introduced. Effectively, this clause can convert a fixed rate loan into a floating rateloan.

The interest rate reviews and hikes may be linked to various factors - the prime lending rate (PLR) of thebank, the money market conditions, and so on. Moreover, the increases may apply to select borrowers -loans above a certain amount or loans for above a certain tenure. The periodicity of review and increasein the interest rates may be mentioned - once in a quarter or once in six months.

Home loan reset clause gives banks flexibility

ET Bureau, Jul 13, 2008, 04.51am IST

Home loan interest rates have been increasing over the past few months. These increases have beentriggered by a number of factors . The Reserve Bank of India (RBI) has also been increasing the repo rateand reverse repo rate, which has compounded the interest rate increase process. Interest rates onhousing loans are no exception.

Till now, loans carrying a fixed rate of interest were deemed to be insulated from interest rate movements.They were supposed to remain neutral to the market movements. With the recent continuos increases inthe interest rates, this has entailed a loss for banks. Many banks are introducing a reset clause in theirfixed home loan documents to effect a change in the interest rate at a future date.

Some banks have set the reset clause as applicable at the end of certain number of years - usually two tothree. The reset clause allows banks to review rates at the end of certain time period.

Most banks have introduced these clauses in their home loan documents since the interest rates startedmoving upwards. Effectively, this makes the fixed rate loans equivalent to floating rate ones and nothingremains fixed in the strict sense of the word.

From the perspective of banks and financial institutions , such a step may be warranted as they no longerhave access to relatively cheap long-term lines of credit to offer long tenure fixed rate loans. For mostbanks, the average tenure of deposits is less than four years, and if they lend for a longer period, theircost of funds take a hit as also the yields. The interest rates have become volatile.

Because of the increasing volatility in the interest rates, the banks are not willing to take a view on whereinterest rates are headed in the times to come. Banks are already under pressure to protect their margins.All these factors have forced banks to review the pricing and product structure of loans.

Reset clauses enable the banks to revise the interest rates on loans in case of certain circumstances.The banks have the discretion to increase the interest rates in case the market rates of interest increase.This tends to hedge the banks against interest rate increases at a future point in time. However, this putsthe borrower in a disadvantageous position. The fixed rate of interest is in any case higher than thefloating rate.


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The criteria that can trigger the rest clause are specified in the loan document. Reset clause exposesfixed rate borrowers to changes in interest rates. The only difference vis-a-vis a floating rate loan is thatthe interest rate changes don't happen that often.

Banks won't let you shuffle home loan

Sangita Mehta, TNN, May 15, 2007, 03.20am IST

MUMBAI: Banks are inserting new clauses in home loan agreements to protect their books amidhardening interest rates and rising defaults. These loan conditions will make life a little more difficult forborrowers who are struggling to pay higher EMIs.

Some banks have stopped giving fixed rate loans beyond a few years, a few have set an early resetclause whils others are insisting on a lock-in period during which a switch from fixed to floating rates (andthe other way round) isn't possible.

Borrowers who have taken home loans on floating rate have already seen it increase by three to fourpercentage points in the past 18 months to around 11.5-12%. With rising rates, new borrowers arelooking at taking fixed rate loans, while the existing borrowers are thinking of a switch from floating tofixed rate loans despite a higher rate. However, banks are designing loan documents to discourage this.

A fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a resetclause will enable banks to charge a higher rate at the time of reset (if interest rates moves up).Government-owned IDBI Bank and Union Bank do not provide fixed rate loans above five years. "Thefixed and floating rate concept is slowly losing its relevance. Over the past two occasions, we have notraised interest rates for existing floating rate customers, which means loans have been at a fixed rate ofinterest for them even as interest rates have moved up in the system," said MV Nair, Union Bank of Indiachairman.

A number of other banks are offering a long-tenure fixed-rate option, but with a reset clause. Last month,Bank of India reduced its reset option on fixed rate home loans from 10 years to five years. Justifying themove to reduce the reset clause, D Krishnamurthy, general manager in charge of retail at Bank of India,said, "In such a volatile interest rate scenario it is not advisable for the customer and the bank to go for afixed rate for a long time."

The country's largest bank State Bank of India with a home loan portfolio of almost Rs 38,000 crore,which is 13% of its total credit, has a reset clause at the end of two years. Canara Bank and PunjabNational Bank have a reset option on fixed rate home loan at the end of five years; it is three years in thecase of Allahabad bank. PNB has recently inserted a lock-in clause in loan documents, wherein acustomer cannot switch from floating to fixed and fixed to floating within three years of taking a homeloan. "The move follows a requests from a number of big-ticket borrowers who were looking a switchingloans from floating to fixed rate due to rise in interest rates.

Some home finance terms

Kavita Sriram, TNN, Nov 18, 2007, 05.15am IST

What is a home loan? Home loan refers to the funds the home buyer borrows from a bank or a homefinance institution to purchase a property, generally secured by a registered mortgage to the bank overthe property being purchased. It is very important for new borrowers to be familiar with certain often-usedjargon in the context of home loans. This will ensure that borrowers do not sign into something they are


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unfamiliar with or have no idea about. Make sure you're familiar with these terms before you startscouting for a suitable loan product for your needs.

Principa l: The total amount of debt, excluding interest and late charges, remaining on a loan. Refinance:

Paying off an existing loan with the proceeds from a new loan.

Floating rate loan : The interest rate on these loans fluctuates periodically in response to changingmarket conditions. As the interest rate fluctuates, your EMI re-payment will be adjusted up or down.LTV/LCR: LTV is an acronym for the loan-tovalue ratio while LCR stands for the loan-to-cost ratio. Theyare terms used by various lenders to determine the loan amount that a person is eligible for on the totalcost of the property.

Debt consolidation : Rolling all your debts into one loan can help reduce your monthly loancommitments.

Advanced EMI : The EMI payments in the form of post-dated cheques, paid out in advance at the time of

disbursement of loan.

Margin money : Lenders only offer loans up to 80-85 percent of the value of the property. The balance

would have to be paid by the buyer, as a payment before he draws on the loan amount. This balanceamount is the down payment or margin money.

Fixed rate of interest : When a borrower opts for a fixed rate of interest, the rate of interest remains fixedover the tenure of the loan. An ideal option for situations when one expects the rates of interest to go upin the future. The fixed rate option comes in various flavours like pure fixed, fixed for two years and so on.Prepayment: Repaying the loan before the tenure of the loan.

Penalties: Numerous penalties like prepayment penalty, late payment fees, cheque bounce penalty - thefines are plenty. Read the fine prints on the loan documents to know all the fees and penalties. Saledeed: The sale deed transfers the ownership of the property in exchange for a price paid or considered.This document is required to be registered.

Appraisal: A written analysis of the estimated value of a property prepared by a qualified appraiser.

Clear title : A title that is free of liens or legal questions as to ownership of the property.

Collateral: An asset that guarantees the repayment of a loan. The borrower might lose the asset if the

loan is not repaid according to the terms of the loan contract.

Total debt ratio : Monthly debt and housing payments divided by gross monthly income. It is also known

as obligations-toincome ratio.

Easement: A right of way giving persons other than the owner access to or over a property.

Tax Benefits on Home Loans

As the Indian real estate market makes an upward swing, and investors opt for housing finance or home

loans, tax benefits obtained from them is a lucrative option. Customers availing of Home Loans can claim

a certain portion of the interest and principal that they pay towards the loan installments for reducing tax

liability. Resident Indians are eligible for certain tax benefits on principal and interest components of a

loan under the Income Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of


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principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax liability by about

Rs. 30,000 p.a.

Tax benefits can be claimed on both the principal and interest components of the home loan as per the

Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy

or build a house, under Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if thefollowing conditions are satisfied:

y Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.

y The acquisition/construction should be completed within 3 years from the end of the financial year

in which capital was borrowed.

y The person, extending the loan, certifies that such interest is payable in respect of the amount

advanced for acquisition or construction of the house

y A loan for refinance of the principle amount outstanding under an earlier loan taken for such

acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs

30,000 though the following conditions have to be satisfied:

y Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or

renewal of a house property.

y Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a

house property.

y If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years

from the end of the year, in which capital is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up

to Rs 100,000 under Section 80C from assessment year 2006-07.

Terms and conditions for availing Tax benefits on Home Loans

1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs

150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject o

the stated upper limit.

2. An additional loan for extension/addition to the same house and the person's deductions on the

existing loan are less than Rs 150,000; he can claim further benefits from the additional loan

taken, subject to the upper limit of Rs 150,000 for a financial year.

3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be

claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim

tax benefits for the same.4. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates.

5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the

deduction of Rs 150,000.

6. A husband and wife, both of whom are tax-payers with independent income sources, get tax

deduction benefits, with respect to the same housing loan; to the extent of the amount of loan

taken in their own respective name.


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7. If a person buys a house and sells it within the same year/after 3 years, and if any profit is made,

then a capital gains tax liability arises on the same for which the individual is liable to pay short-

term capital gains tax since the sale took place in the same year. But, if the sale had taken place

after 3 years, then a long-term capital gains tax liability would have arisen.

8. If it is proved that the home loan is simply an arrangement between the loan-seeker and the

builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be

allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.

9. Tax benefits on interest on housing loans are allowable only for the original loan and for a second

loan taken to repay the first loan and not for subsequent loans. This means that if you have

already availed of one loan to refinance the original loan and want to now avail a third loan to

refinance the second loan, tax rebate on interest payments will not be permissible. This is

because the Section 24 (1) only talks of the second loan and not of subsequent loans. Even if you

take the second loan at a rate of interest higher than the original loan, you will be eligible for a tax

rebate on the second loan

Refinancing refers to the replacement of an existing debt obligation with a debt obligation under different

terms. The most common consumer refinancing is for a home mortgage.

If the replacement of debt occurs underfinancial distress, it is also referred to as debt restructuring.

A loan (debt) can be refinanced for various reasons:

1. To take advantage of a better interest rate (which will result in either a reduced monthly paymentor a reduced term)

2. To consolidate other debt(s) into one loan (this will result in a longer term)3. To reduce the monthly repayment amount (this will result in a longer term)4. To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)5. To free up cash (this will result in a longer term)

Refinancing for reasons 2, 3, and 5 is usually undertaken by borrowers who are in financial difficulty inorder to reduce their monthly repayment obligations, with the penalty that they will remain in debt foryears longer.

In the context of personal (as opposed to corporate) finance, refinancing multiple debts makesmanagement of the debt easier. If high-interest debt, such as credit card debt, is consolidated into thehome mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longerperiod.

For home mortgages in the United States, there may be tax advantages available with refinancing,particularly if one does not pay Alternative Minimum Tax.

[edit] Risks

Most fixed-term loans have penalty clauses ("call provisions") that are triggered by an early repayment ofthe loan, in part or in full, as well as "closing" fees. There will also be transaction fees on the refinancing.These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savingsgenerated through refinancing.


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If the refinanced loan has lower monthly repayments or consolidates other debts for the same repayment,it will result in a larger total interest cost over the life of the loan, and will result in the borrower remainingin debt for many more years. Calculating the up-front, ongoing, and potentially variable costs ofrefinancing is an important part of the decision on whether or not to refinance.

In some jurisdictions, varying by American state, refinanced mortgage loans are considered recourse

debt, meaning that the borrower is liable in case of default, while un-refinanced mortgages are non-recourse debt.

[edit] Points

Main article: Point (mortgage)

Refinancing lenders often require a percentage of the total loan amount as an upfront payment. Typically,this amount is expressed in "points" (or "premiums"). 1 point = 1% of the total loan amount. More points(i.e. a larger upfront payment) will usually result in a lower interest rate. Some lenders will offer to f inanceparts of the loan themselves, thus generating so-called "negative points" (i.e. discounts).

Borrowers with this type of refinancing typically pay few upfront fees to get the new mortgage loan.[citation

needed]This type of refinance can be beneficial provided the prevailing market rate is lower than the

borrower's existing rate by at least 1.5 percentage points.[citation needed]

However, what most lenders fail to disclose is that the money a borrower saves upfront is being collectedon the back end through what's called yield spread premium (YSP). Yield spread premiums are the cashthat a mortgage company receives for steering a borrower into a home loan with a higher interest rate.The latter will even eventually lead to borrowers overpaying.

True No Closing Cost mortgages are usually not the best options. When the borrower pays out of pocketfor their closing costs, they are better able to understand all the costs associated with the loan. In mostcases, the borrower is also able to negotiate the fees for the appraisal and escrows down to a reasonablecost. Sometimes, when wrapping closing costs into a loan, borrowers forget about the fees because theyare usually not coming into the loan with any money.

This type of refinance may not help lower the monthly payment or shorten mortgage periods. It can beused for home improvement, credit cards, and otherdebt consolidation if the borrower qualifies with theircurrent home equity; they can refinance with a loan amount larger than their current mortgage and keepthe cash difference.

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