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All loans are not created equal, personal loan has become a great option for people to use.
Home Loan is a loan taken by a borrower to purchase a new house or an old or pre-owned house property. The Loan is given to purchase any apartment, bungalow, independent house along with land, house in any housing society or any villa in residential community. Home loan can also be borrowed for any kind of construction, extension, modification and renovation of the house or any other kind of residential property. The house or residential property can be located in any metro city, other city (Tier I, II & III city) or town located in India. Generally, banks/lending institutions provide loans up to 85% of the cost of property. Rest 15%, has to be arranged by the borrower from his own funds. Home Loan is offered by various types of lending institutions viz. Scheduled Commercial banks (Public Sector Banks, Private Banks & Foreign Banks), Housing Development Banks, NBFCs, Regional Rural Banks, State Co-Operative Banks, Scheduled Urban Co-Operative Banks & other lending institutions. Currently, in India more than 300 major lending institutions/banks offer home loans. Home loan is very popular loan product and is one of the largest contributor to the income of banks, NBFCs & other lending institutions.
There are 9 types of Loans offered by banks, NBFCs, Various Co-Operative Banks, Regional Rural Banks & other lending institutions:
1. Home Loan for the Purchase of House, Apartment, Bungalow, Villa etc. This is the most common and popular type of Home Loan offered by banks, NBFCs, Various Co-Operative Banks, Regional Rural Banks & other lending institutions. Home loan is offered for the purchase of ready-made new or old/pre-owned house property.
There is a wide range of interest charged by banks, NBFCs, Co-Operative Banks, Regional Rural Banks & other lending institutions. Range is generally between 9.85% to 11.25%. The loan is sanctioned up to 85% of the cost of residential property. Balance 15% is to be arranged by the borrower through his own funds. Both interest and loan amount (as a percentage to the cost of purchase) varies from bank to bank.
2. Loan for the Purchase of Land This type of loan allows the borrower to purchase the land. There is no compulsion to construct a house on the land purchased on loan. The loan is sanctioned up to 85% of the cost of land. Balance 15% is to be contributed or arranged by the borrower using his own funds or finances. 3. Loan for the Construction of a New House
Some people refuse to reside the houses designed by others. They want to sing the tune of their imagination by designing & constructing their house on their own. In Construction loan, the cost of land/plot is to be considered by the bank too. In case the borrower wants to add the cost of land/plot to the total loan amount, then he/she must purchase the land within one year from the date of sanction of loan amount. The lender sanctions the loan amount by working out a rough estimate of cost of construction. Generally, the amount is disbursed in stage-wise or multiple installments. In rare cases, the loan may be disbursed in a single instalment. 4. Loan for renovation or extension of an existing house
If a borrower has an existing house and he/she wants to extend, modify, renovate or alter the existing house, then he/she can avail this kind of loan. 5. Loan for House Switching or Conversion
Have a loan but not happy with it? Now, want to take a new house and switch the loan from existing house to the new house? Transfer your ongoing or current loan to new house by availing Switch/Conversion loan. 6. Home Loan for Non-Residents of India (NRI)
As the name explains it, NRIs can avail a home loan for the purchase of a new or old house property in India. Since the NRIs are not present in India for the major part of the year, the rules & procedures for sanction of loan amount is different than that of the loans for the other ordinary residents. 7. Balance Transfer loan (BT)
As it is self explanatory, Balance Transfer Loan (BT Loan) is the loan where the borrower let the new lender take over the loan from the existing lender. Borrower may have various reasons viz. interest cost saving, top-up over the existing loan amount etc to shift to new lender. The upside is that the borrower ends up saving the cost of interest in the long run. The down-side is that the borrower may have to pay pre-closure penalty to the existing borrower and processing fee to the new borrower. The various factors need to be considered before taking such a critical step. 8. Stamp Duty Loan
Stamp Duty Loan is offered by majority of the banks to cover the stamp duty charges levied by the government authorities at the time of the purchase of the property. Stamp duty is levied even in the case of registration of property acquired by way of gift or any other change of ownership without actual consideration being paid. In such cases, the new owner may avail the Stamp Duty Loan. 9. Bridge or Mezzanine Loan
Existing homeowners who want to buy a new house can apply for a Bridge or Mezzanine Loan, which will fund the new house/property. Generally, the tenure of this loan is below 2 years and it requires the borrowers to mortgage the new property with the lender until the loan is repaid.
When you buy a house, particularly, your first house, then the house becomes an asset on your personal balance sheet. To buy this asset, you need funds. The sources of funds can be money saved, money inherited or money borrowed. Most commonly, a person buys a house at his youth and he intends to repay the debt over the next 20-25 years, so that he can retire peacefully, without having any liability to pay, especially, when he will be depending only on his pension to live. The home loan gives you an opportunity to balance the debt or loan with your salary or business income. The lender gives you a source of fund which can be used to buy the house of your dreams by just asking you to arrange 15-20% of the total cost of house on the date of purchase and then charges you interest over the amount of loan. You need to repay interest and principal over the tenure of loan. The interest and principal are clubbed together into a recurring amount called instalment. You pay monthly instalments for next 180-240 months.
Any individual who has a regular source of income can apply and avail the home loan from banks of lending institutions. The lender will assess the proposal and will let the borrower know whether or not he/she meets the standards of the assessment and accordingly, sanction the amount of loan to be disbursed. In case of joint application to the home loan, the lender will assess the creditworthiness of both the applicants and sanction the amount as per their joint credit eligibility. In home loan, your credit score plays a very important role as it the report card of your credit performance of your credit life so far. In addition to the credit score, there are several factors considered by the lender while assessing your loan proposal. Remember, the lender is in the business of lending the money and, unless the lender has a reason to believe that the borrower will not repay the loan on time, the lender has a business interest in extending you a home loan.
The amount of loan is decided on the basis your monthly disposable income-either from salary, business or any other source of income. Generally, the lender considers 50% of your income as a disposable income provided you do not have any other running loan. Let’s say your income is Rs 100,000 and you do not have any other obligation, then, lender will consider Rs 50,000 as your net disposable income. Based on this disposable income along with the tenure, interest & principal amount of the loan, your EMI will be decided. Your EMI will be less than or equal to Rs 50,000. Please note that there are several other factors that are considered while sanctioning the amount of loan.
The tenure of loan is decided both by borrower and the lender as per their respective convenience. A borrower with a surplus cash may want a shorter tenure so that he would not have to pay extra interest for additional years. Similarly, a borrower with a tight cash flow situation may prefer a longer tenure for the loan as he would want a small EMI. A lender would generally prefer a long tenure so that he would enjoy a nice interest income over the loan disbursed. He would prefer a long tenure on good creditworthiness and short tenure on poor creditworthiness. A lender may want to extend a loan only till the active earning year of the borrower. In other words, the borrower will not sanction the loan for tenure which may include the years in which the borrower is retired or does not have any source of income. For example, a salaried person, aged 50, will get loan sanctioned for 10 years as he may retire after the age of 60. Similarly, a salaried person, aged 30, may get the loan sanctioned for 25 years. Typically, the loan tenure ranges from 5 years to 25 years.
Rate of interest is a percentage of amount which a lender charges on the amount lent to the borrower for the purchase of house property. It is the income received by the lender from the borrower. Generally, rate of interest ranges from 8.5% to 13%, depending on the credit profile of the borrower, tenure of the loan, type of loan i.e. fixed loan or floating loan, amount borrowed, type of house property & disposable value of property. The home loan is pegged at MCLR i.e. Marginal Costs of Fund based Lending Rate. What is MCLR? How does it affect rate of interest on Home Loan? MCLR has been introduced by the RBI on 1st April 2016 replacing BPLR. The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend. It is an internal benchmark or reference rate for the bank. The marginal cost of fund is based on the cost of • short-term borrowing rates i.e. repo rates, and • long-term borrowing rates. Return on net worth is an important factor in determining MCLR. It is calculated after considering the lending rates on all kinds of accounts viz. current, savings, and term deposit accounts. MCLR affects the loans with floating rate of interest. The rate of interest increases or decreases with the increase of decrease of MCLR. MCLR ensures that the lenders pass on the change in rate of interest to the consumers, effectively. MCLR does not have any affect on fixed rate loans i.e. loans for which the rates have been fixed for the entire tenure of the loan. How much EMI should I fix for my home loan? Ideally, one should fix EMI based on his monthly disposable income. Deposable income means net monthly receipt after adjusting recurring and regular monthly cash outflows. In addition to monthly recurring expenses, one should set aside additional money for contingencies or unforeseen expenses. In other words, one should take unplanned, irregular and sudden expenses or cash outflows into account before finalizing the disposable cash available for EMI payments. Generally, borrowers set aside 50%-60% of the income for planned and unplanned expenses. This leaves around 40%-50% of the income which is available for EMI. EMI cannot be defaulted at any cost and should carefully be planned so as to ensure uninterrupted, regular and timely payment towards outstanding loan. A careful planning in the beginning saves all the trouble in the later years of loan tenure. Financial discipline will keep your credit score high and will ensure your future cost of borrowing is at a lower rate.
Banks charge a processing fee at the time of disbursement of the loan. Processing fee varies from bank to bank and client to client. If a client has a good credit score, then banks at he time lowers processing fee as a low risk reward. Processing fee ranges from 0.5% to 2.0%. At the time of sanctioning of home loan, banks execute lots of documents, spends many man-hours and spends time & money in processing your loan request. To cover these costs, banks charge processing fees.
EMI, which means Equal Monthly Instalments, is decided by the bank at the time of sanction of loan proposal. The EMI is fixed after taking several factors into consideration viz. Type of property, quantum of loan, tenure, credit profile of the borrower & rate of interest. EMI consists of both- Principal & Interest amount. In the early years of loan tenure, interest component is higher than principal component in an EMI. As the loan repayment progresses, interest component starts reducing and principal amount starts increasing. If you decide to repay the loan, then do so in early years of loan tenure as the EMI comprises mainly of interest. It would be unwise to prepay the loan in the later years of the loan tenure as the majority of interest component has already been recovered by the bank in early years of the loan. In the later years, mainly the principal amount remains unpaid.
“Life is about timing.” -Carl Lewis A very common question comes in the mind of a borrower-To prepay the loan or not to prepay the loan? Should the borrower pay the money upfront and feel the squeeze immediately? Or should the borrower spread out his cash out flows over a decade which in turn will give him access to surplus cash. Floating Rate Loan As per the RBI guidelines, lenders cannot levy pre-payment charges or penalty on home loan where the rate of interest is floating. Fixed Rate Loan If you prepay the home loan before a minimum period (6-12 months), then NBFCs, Banks, Housing Loan companies levy a prepayment penalty. Lender levies a pre-payment penalty based on the number of instalments that has already paid and the number of instalments remaining unpaid at the time of pre-payment. Generally, pre-payment penalty levied is between 1% to 4%. If you pay within one year of taking the loan, then the pre-payment penalty is high. However, of you pay pre-payment penalty after minimum lock-in period, then, you will be charged a very nominal pre-payment penalty. A borrower can choose to prepay a part of the loan or the full amount of outstanding loan. The borrower can prepay after the lock-in period or within the lock-in period. The borrower can also prepay his outstanding loan in monthly, quarterly, semi-annually, annually or as a one-time payment. The loan should be prepaid during the early years of loan when the interest component is high in EMI. However, the loan should be prepaid after the lock-in period has expired so that you can avoid the prepayment penalty. The decision to prepay the loan depends on rate of interest, amount of loan and tenure of the loan. The outlook of rate of interest in near future or distant future also affects the pattern of your cash flow.
An expert knows all the answers - if you ask the right questions. -Levi Strauss You can apply for a home loan through Banksutra as we will ensure that you will get the best deal. Generally, a borrower concentrates only on rate of interest and prepayment penalty. What a borrower forgets is that there are several other important factors to be considered while taking a home loan. For example, borrowers do not understand the importance of choosing between fixed and floating rates of interest. If the outlook of future of rate of interest is bleak, then one should choose floating rate of interest. However, of the inflation in India is increasing steadily or there is financial uncertainty, then, the lender is likely to increase the rate of interest in near future. In such circumstances, it will be better to opt for fixed rate of interest. Similarly, we can guide you, based on your cash flows, to decide the tenure of your loan. It is better to take loan for a longer tenure rather than defaulting the loan during a short tenured loan. There are many other hidden factors who snowball into big issues over the period of time. Experience of team Banksutra will save you from the hassles of negotiating such terms & conditions. Apply through Banksutra and get an unbiased and sound advice.
One of the great disadvantages of hurry is that it takes such a long time.” ― G.K. Chesterton, All Things Considered Since we understand the importance of a long-term loan, we invest in time to give you a money-saving advice. Home loan, generally, runs for 15-25 years which is a very long time. Home loan is your long-term partner which may make your life comfortable or miserable. That is why we provide responsible advice keeping your best interest in mind. We take around three weeks to fully process your home loan. We will collect the documents from you and will inform you about the sanction of loan within a week. After you are satisfied with the terms and conditions of the sanction letter, we will get the loan disbursed. One a lighter note- A loan may last longer than a marriage. So chose wisely.
Let us tell you the timelines about the process of sanction & disbursement of home loan:
1st -2nd Day
Preliminary Assessment of your proposal.
We will send you the list of the most suited lenders.
We will inform you about lenders’ preliminary feedback.
We will pick-up the documents from you.
We will submit the same to the shortlisted lender(s).
4th ,5th Day
We will let you know whether or not the lender has any further query.
If no query is pending, we will send you a in-principal sanction letter.
The lender will complete verification of the borrower & property.
The lender will complete verification of all the documents submitted by you.
The lender will check the valuation and legal title of the property.
The lender will check the credentials of the guarantor, if any.
Banksutra will let you know about the discrepancies in the documents, if any.
In case of any discrepancy, wherever possible, Banksutra will help you to resolve such discrepancy.
After finalizing the terms and conditions with you and the lender, we will issue the final sanction letter.
Loan will be disbursed.
In an unfortunate event, a borrower may fail to pay the EMI on due date. If this trend of not paying EMIs continue, then borrower will have defaulted the loan and will be termed as a defaulter. Generally, a borrower defaults out of compulsion where his cash inflows are not sufficient to pay EMI of the loan. In some rare cases, borrowers default voluntarily. To the lender, it does not matter whether a borrower a has defaulted willfully or involuntarily. It becomes imperative for the lender to recover the outstanding amount of loan and associated charges. Lender will try to persuade or apply pressure on the existing borrower to recover the outstanding amount of loan. Lender will consider the amount of loan already paid by the borrower till the date of default. The lender will also try to ascertain the reason of insufficient cash flow of the borrower which triggered the event of default. The lender will assess whether the reasons for default are temporary or permanent in nature. If the reasons of default are temporary in nature, then lender will try to reschedule the loan in a way that it becomes feasible for the borrower to restart paying the EMI. The lender may do so by reducing the quantum of EMI by extending the tenure of loan. However, if the causes of default are permanent in nature or lender does not see the possibility of regular cash inflow in near or distant future, then the lender may initiate the process of recovery of outstanding loan via auction of property.
If you are a willful defaulter then the lender, after having exhausted all the channels to recover outstanding loan amount, can auction the property. In such circumstances, you may lose your house. Before that the lender will give you an option to restructure your loan by lowering the EMI to the level where you can comfortably restart paying the EMI regularly. If you fail to do so even after restructuring, then the lender may classify the outstanding as NPA and initiate the process of auction of house.
If you, god forbid, die prematurely, before the loan is being paid off fully, then your legal heir will inherit the house as well as the loan. Bank, after assessing the legal heir, will make the legal heir as new borrower. The Bank will treat the legal heir as any regular borrower and all the obligations of a regular borrower will have to be discharged by the legal heir. However, if the legal heir is incapable to assume the loan obligations, then, lender will ask the legal heir to make a lump sum payment to clear the outstanding amount of loan. In case, legal heir, fails to make such payment, then the lender will treat this event as an event of default and will initiate the process of recovering the outstanding amount of loan via auction of the property.