Objectives

1. To determine home loans and its type available in market

2. To analyse Indian home loan market and its growing trends.

3. To determine different banks providing home loans and its structure.

4. To analyse modus operandi of home loans.

5. To analyse different steps in getting home loans.

6. To determine impact on budget 2005.

Home loans

Table of Contents
Topic No. TOPICS Page No.

SECTION I
1. 2. 3.

1.

1. 2.

Executive Summary Introduction Types of Home loans SECTION II Indian Home loan market SECTION III Companies providing Home loans
Housing loan rates

23 45 69

11 14

16 - 30 31 - 32

SECTION IV
1. 2. 3. 4. 5. 6. 7. 1. 2. 3.

Loan process Why to take a home loan? Choosing a loan Choosing a Housing finance company Steps involved in getting a home loan When to refinance loan Impact of budget of 2005 on Home loan SECTION V Survey analysis Conclusion Bibliography

34 - 35 36 37 42 43 44 - 45 46 47 49 51 60 61 62

Section I

Executive summary

Roti, kapada aur makaan has been the guiding light for mankind since time immemorial. Throughout the world to own a house has been one of the cherished dreams. The economic reforms over the past few years have led to a significant decline in the housing finance interest rates. The southward movement in interest rates, together with tax sops associated with home loans, has made opting for a housing loan almost a must when one thinks of buying a house. So when India's richest man and software major Wipro's chairman Azim Premji wanted to build a house (a palatial farmhouse, to be precise), even he went for a housing loan. Premji draws an annual salary of Rs 2.4 crore and he is estimated to be worth nearly Rs 40,000 crores.

True, personal incomes are going northward these days, but so are the expenses. And home loan is the only option for a majority of home-dreamers. Home loan is

the only route that a common man can take to fulfill his dream. And then there are those who want to buy their own home, are eligible for home loans, but can't arrange for the down-payment part, which comes out to be at least 15 per cent of the property value. More than often, this small percentage runs into Lakhs and this is no small amount for a common man Thankfully, banks and housing finance companies (HFCs) are more-than-ever ready to happily finance your dreams no matter whether you are Premji or just another common man. With the ensuing cutthroat competition in the housing finance market, banks and HFCs are always going that extra mile to lure potential customers. While, the lowering of interest rates and hefty discounts are likely to have reached their optimum levels, there are charting new territories to expand their reach. The latest carrot on offer is 100 per cent or more financing or zero down-payment loans for your dream home.

Introduction
Definition
1. A "home loan" is a credit to a consumer for the purchase or transformation of the private immovable property he owns or aims to acquire secured either by a mortgage on immovable property or by a surety commonly used in a Member State for that purpose.

2. A home loan requires you to pledge your home as the lender's security for repayment of your loan. The lender agrees to hold the title or deed to your property until you have paid back your loan plus interest.

Thus in the simplest terms home loan is the loan taken from any financial institution for the purchase of newly home by paying interest as agreed during the deal. Thus the rate of interest depends on the bank as also it differs from banks to banks. Some banks may charge higher price where as some banks charge low price.

Typically, banks and HFCs offer up to 85 per cent of the property cost as housing loans. The total cost of the property include various charges as acceptable to the HFCs, such as agreement value of the property, stamp duty and registration charges, society transfer charges, garage charges for parking cars, electricity and water connection charges, as well as cost of additional furnishings done by the developer or builder, for which an amenities agreement has been entered into between the customer and developer that has been duly stamped and registered.

However, there are selected banks that offer 100 per cent or even more financing for your dream home without any extra efforts from your side. You just need to ask the representatives of these banks or their authorized agents for these offers.

On standard home loan products, Citibank claims to offer home loans up to 90 per cent of the property value, the highest from any bank. Lately, Citibank has come up with a new home loan product that it calls "zero down payment loan .

According to a loan calculator provided by the bank on its website, a person with monthly income of Rs 30,000 is eligible for a dream home for up to Rs 16,28,372 with a 15-year loan under this zero down payment plan. Incidentally, the loan amount is same under the bank's standard home loan plan on similar metrics, according to the web-based calculator

ICICI Bank , a major player in the housing finance market, also offers "Special 100 per cent funding for select properties, claims the bank's website. However, the bank offers only 85 per cent of the property cost as home loans under its standard plans. The bank sources admit, however, that 100 per cent financing is considered in special cases.

Types of Home Loans

The type of loan depends on
1) Purpose of loan 2) Nature of the loan (Term Loan or Overdraft) 3) Nature of interest (Floating or Fixed) 4) Interest rates (Daily, Monthly, Quarterly, Semi-Annually or Annually Reducing Balance)

1. Purpose of loan
Loan from banks and Housing Finance Companies (HFC) can be taken for the following reasons

Construction of Property Purchase of Property Site Loans Extension of Property Repairs and Maintenance of Property

2. Nature of the loan Most of the HFCs offer term loans; banks offer both Term loan and Overdraft facilities . In case of Term Loans, the loan amount is fixed and interest is charged on the whole loan amount. You should opt for a term loan when you want to make a fixed installment payment for the property. An ideal situation for term loan would be buying of an under construction or ready property where the loan amount you will opt for is known in advance. Overdraft facility is preferred where the amount required is not determinable.

Example
When the loan is taken for repairs and maintenance.

a. Term Loan
Pros a. The period of term loan can go up to 30 years. b. Once the loan is disbursed there is no yearly review

Cons a. In case of earlier payment, pre-payment charges are levied. b. A fixed liability is created every month this takes away flexibility. c. Interest is charged on full amount of loan though it may not be utilized

b.Overdraft Facility
Pros a. Interest is charged only on the amount drawn. b. There is no fixed liability every month. c. The loan can be repaid earlier without any pre-payment charges Cons a. The loan facility is restricted to one year. It may be renewed after bank reviews the facility. b. There is a commitment charge involved, and if the loan facility is not availed a commitment fee is will be charged. c. The interest rate is higher than interest charged on term loan.

3. Nature of Interest a. Fixed Rate Plan

In fixed rate plans, the rate of interest remains the same through the tenure of the plan.

b. Flexible Rate Plan

In the flexible or floating rate plan, the interest rate is pegged to the bank's retail prime lending rate (RPLR), and varies with fluctuations in the RPLR. Since the risk of such fluctuations is borne by the borrower, flexible rate plans quote lower interest rates as compared with fixed rate plans. 4.

Interest Rate
Interest Rate can be defined as the principal outstanding on the date, which is considered to calculate the interest.

Example
When we say Monthly Reducing Balance, it would mean that interest is calculated on the principal outstanding at end of every month after taking into consideration payment of the EMI. As a result, for a loan of an identical amount, tenure and interest rate, the EMIs for monthly rests are lower than they are for a plan with annual rests

If you take a loan for Rs. 1,00,000 for 5 years your monthly installment will work out as follows:

Reducing 10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00% Balance 2142.51 2167.05 2191.76 2216.64 2241.68 2266.90 2292.27 2317.82 2149.39 2174.24 2199.26 2224.44 2249.79 2275.31 2300.98 2326.83

Daily Monthly

Quarterly 2163.57 2189.06 2214.71 2240.52 2266.50 2292.63 2318.92 2345.37 Semi2184.69 2211.13 2237.72 2264.47 2291.36 2318.41 2345.61 2372.96 Annually Annually 2226.46 2254.75 2283.18 2311.75 2340.45 2369.29 2398.26 2427.36

Lets say, Bank A is offering you a loan at 14% rate of interest, annually reducing and Bank B is offering you a 15% monthly reducing. You may first look at the lower interest rate and may be tempted to select Bank A. But your monthly installment in case of Bank A would be Rs. 2427.36 as against monthly installment to Bank B of Rs. 2378.99. Your loss over the period of 5 years would have been Rs. 2902.

Section II

10

Indian home loan market

The housing sector plays an important role in the economic development of the country. Every rupee invested in housing adds 78 paise to the GDP. Over 269 industries are directly or indirectly dependent on the housing sector .

There is an estimated shortage of 20 million housing units in the country with an estimated investment requirement of over Rs 1500 billion. In this context it is important to note that the organized housing finance industry barely accounts for 30% of the home loans disbursed in the country.

The last few years have seen the home loans market growing at a CAGR of over 30 percent. The growth has been mainly fuelled by certain fiscal, social and regulatory drivers as follows:

1. Changes in demographic profile including increase in the rate of household, Formation due to structural shift from joint family system to nuclear family.

2. Ever increasing middle class, migration of population and increasing urbanization resulting in acute shortage of housing units.

3. Increase in disposable income levels due to decrease in marginal tax rates and increase in total income levels.

4. Aggressive lending by banks to the housing sector due to lower credit offtake by the corporate sector, attractive spread and lower non performing assets.

11

Growth trends
The Indian housing finance industry has grown by leaps and bounds in past few years. Total home loan disbursements by banks and housing finance companies (HFCs) has risen from Rs. 29359. 29 crores in 2001- 2002 to Rs. 51672.7 crores in 2002 2003 witnessing a phenomenal growth of 76 % during this period.

Home loan disbursements (in Rs. Crores) Year HFCs Banks Total Growth over previous year %

2000 - 01 2001 02 2002 03

12637.85

9787.24

22425.09

13.70

14614.44

14744.85

29359.29

30.72

17832.17

33840.53

51672.7

76.00

Source: National housing bank

The robust growth experienced by the industry in the last few years has been triggered by the number of factors as given below:

1. Tax rebates on housing loan announced in the recent budgets. 2. Lowering of real estate prices to affordable levels. 3. Greater amount of professionalism being exhibited by developers and builders who are today acquiring clearer titles and are doing more timely completion of projects.

12

4. Slashing of interest rates on home loans: fixed interest calculated on an annual rest basis for a loan of Rs. 5 Lakhs and tenure of 15 years has fallen from 16 % in 1997 to 10.5 % in 2005. This declining trend is expected in the coming years.

16 % 10.5

1997

2005

In the recent development, foreign bank has announced 6 % rate of interest for housing loans during the first year of the life of the loan and 6.5 % during the second year. The rate will be pegged at 50 basis point above the housing PLR in the subsequent years. This development bring into light the aggressive strategies used by foreign banks to woo retail consumers and to grab a share of this growing mar

13

The impact that lower interest rates have been had on home loan disbursements can be seen from the following graph

60000 50000 40000

14. 50 51672.7 14.00 13.50 13.00

30000
22425.09

29359.29 12.50 12.00 11.50 11.00 1999 2000 2000 01 2001 02 2002 - 03 19723.36

20000 10000 0

Thus the Indian home loan market is growing at an extreme pace

14

Section III

15

Companies providing home loans

There are various banks available that provide home loans are as follows:

ICICI

Introduction
ICICI Home Finance Company Limited was incorporated on May 28, 1999 as 100% subsidiary of ICICI Personal Financial Services Limited (ICICI PFS). ICICI Home Finance Company Limited, was set up with the objective of providing long term housing loans to individuals and corporate. The Company was registered on March 30, 2000 with National Housing Bank (NHB) under National Housing Bank Act, 1987 in terms of Housing Finance Companies (NHB) Directions, 1989. With effect from May 3, 2002, ICICI Home Finance has become a 100% subsidiary of ICICI Bank Limited.

Overview:
ICICI Home Loans are at present available to customers in 150 cities/towns across the country. Loans are offered for purchase of new homes, purchase of resale homes and home improvement. Besides, the company also offers loans for commercial property and loans against existing property. The loans are offered for tenors up to 30 years. The company has also introduced several customer

16

friendly services such as 'door-step' service, 'know your loan on phone' facility and 'ICICI Home Search' - free property brokerage services.

The current ICICI Home Loan rates are as follows:

Adjustable rate Home Loans

Tenure (Yrs) 1-5 Home Loans 6-20

New Rate (% per annum) 10.50 11.00

Fixed rate Home Loans Tenure (Yrs)

1-5

New Rate (% per annum)

11.00 11.50 11.50 12.00

Home Loans

6-10 10-20 21-30

17

HDFC

Buying a property requires a complete knowledge of real estate and in todays complex financial market it is difficult to choose the appropriate home loan company. HDFC Bank brings home loans at your doorstep. With over 25 years of experience, a dedicated team of experts and a complete package to meet your housing finance needs, ever eager to guide you with a basket of value added products and services. Thats why HDFC says, any one can offer you housing finance, but only the most experienced can guide you completely.

18

Citi Bank

The Citibank Home Loan. No hassles now. No surprises later. You'll find the Citibank Home Loan hassle free all the way right from the application stage to the time you pay your last installment

Interest Rate Chart (Floating Rates)

Salaried Tenure (Years) Upto 5 10 15 20 Interest Rate (p.a.) 7.25% 7.25% 7.25% 7.25% Self Employed Interest Rate (p.a.) 7.50% 7.50% 7.50% -

19

Eligibility Criteria Salaried

Age Limit Loan Amount (Rs.) Min Max Min Max Gross 25 yrs 58 yrs 2.1 Lakhs 2 Cr. 1 Lakhs Min Max Min Max Net Business Income

Self Employed
25 yrs 65 yrs 2.1 lakhs 2 Cr. 85,000/-

Income p.a. (Rs.)

Minimum Work Experience

2 yrs

3 yrs

Other Charges
MoF Charges Admin Charges Pre-Payment Guarantor Processing Charge Yes Nil Nil Nil 0.50%

Other types of home loans by Citi Bank:

1. Citi home pre approval 2. Refinance 3. Buy out of loan 4. Buy out with enhancement 5. Top up 6. Property power 7. Cross sales (for Citibank cardholders only)

20

IDBI

Buying a home of one's own is every individual's first stop in life. Which is precisely why, IDBI bank have pulled out all the stops to sew together a home loan product that has flexibility as its very foundation. They have created a product that is competitively benchmarked, that is amply affordable and one that is customer-sensitive. Only because when it comes to buying a house, the first thing you need to do is to feel at home with your bank.

IDBI bank offers you only Floating rate home loans. Under the floating rate option, interest rate varies from time to time, increase or decrease as applicable.

Interest Rate Chart (Floating Rates)

Tenure (Years)
Upto 5 10 15 20

Salaried Interest Rate (p.a.)

7.50% 7.50% 7.50% 7.50%

Self Employed Interest Rate (p.a.)

7.75% 7.75% 7.75% -

21

Eligibility criteria
The bank will decide the loan amount based on your repayment capacity taking into consideration factors such as your income,age,qualifications, number of dependants, spouse's income, assets, liabilities, savings history, stability and continuity of occupation etc. however, the maximum loan amount shall not exceed 85 per cent of the cost of property which includes costs of property which includes costs towards registration, stamp duties, amenities, utilities as applicable.

Eligibility Criteria
Age Limit Loan Amount (Rs.) Min Max Min Max Income p.a. (Rs.) Minimum Work Experience Gross Salaried 24 yrs 58 yrs 2 Lakhs 3 Cr. 1.20 Lakhs 2 yrs Self Employed Min 24 yrs Max 65 yrs Min Max Net Income 2 Lakhs 3 Cr. 1.00 Lakh 2 yrs

Other Charges
MOF Charges Admin Charges (upfront) Pre-Payment (floating) Guarantor Processing Charge NIL NIL NIL NIL 0.75%

22

Types of loan available:

1. Constructing a house 2. Buying a ready house 3. Refinance of existing home loans

23

Standard Chartered

Standard chartered home loan offers you variety, flexibility and great savings. And its hassle-free.

F lexible interest rates

You can choose between fixed and floating rates of interest. You can also shift between the two options during the loan period

Interest Rate Chart (Floating Rates) Salaried

Interest (p.a.) 7.50% 7.50% 7.50% 7.50%

Interest Rate Chart (Floating Rates) Self Employed

Interest (p.a.) 7.50% 7.50% 7.50% -

Tenure (Years) 5 10 15 20

Tenure (Years) 5 10 15 20 NIL NIL NIL NIL 0.50-1%

Other Charges
MOF Charges Admin Charges (upfront) Pre-Payment (floating) Guarantor Processing Charge

24

Options to suit your need

Amount and Tenure
Only Loans for Homes offers you the options and flexibility to choose the loan that's just right for you. Consider the 85% finance options for construction renovation and extension. Or the largest loan amount of Rs 1 crore. And a loan period of up to 15 years. A look at the table will tell you how much you can benefit from Loans for Homes.

Loan

Loan to Value (up to)

85% 85% 85% 85%

Upper Limit of Loan (Rs)

1 crores 25 Lakhs 1 crores 1 crores

Max. Tenure of Loan (Yrs)

20 15 15 20

Self - construction Home renovation Home extension Home Buying

Eligibility criteria

Eligibility Criteria
Salaried Age Limit Loan Amount (Rs.) Min Max Min Max Income p.a. (Rs.) Gross 23 yrs 58 yrs 6 Lakhs No Limit Min Max Min Max Self Employed 23 yrs 65 yrs 6 Lakhs No Limit

1.32 Lakhs Net Income 1 Lakhs (p.a.) 3 yrs 3 yrs

Minimum Work Experience

25

Conditions
1. Finance up to maximum of 85% of the price of property or the cost of construction is provided. 2. Applicant should be buying a house and must be residing with in the city limits of areas where Standard Chartered operates.

Types of loans by standard chartered

Standard Chartered Grindlays offers the worlds most complete home loan for Homes.

You can avail of a loan for any of the following purposes: 1) Buying a home under construction 2) Purchasing a constructed home 3) Constructing a home on a plot of land owned by you or your spouse 4) Extending your existing home 5) Renovating your existing home

Loan Repayment Determining Repayment Capacity

Repayment capacity is assessed by considering age, income, assets, liabilities and employment.

Repayment of Loa n
Repayment of loan will be in Equated Monthly Installments (EMIs), comprising principal and the interest. The (EMIs) will commence from the month following full disbursement. The EMIs are payable every month and the date of payment depend on the date of final disbursement. Postdated cheque towards the EMIs will be collected at the time of disbursement.

26

UTI

UTI also provides in a most comprehensive manner, which are as follow:

Interest Rate Chart (Floating Rates)

Salaried Self Employed Tenure (Years) Interest Rates (p.a.) Interest Rates (p.a.) Upto 5 7.50% 7.50% 10 7.50% 7.50% 15 7.50% 7.50% 20 7.50% 7.50%

Fees and charges

1. Processing fee up to 1% of the loan amount
2.

No other expenses (e.g. legal charges, stamp duty) will be charged

27

Eligibility criteria Eligibility Criteria

Age Limit Loan Amount (Rs.) Min Max Min Max Salaried 24 yrs 58 yrs 1 Lakh 50 Lakhs 90,000 3 yrs Self Employed Min 24 yrs Max 65 yrs Min 1 Lakhs Max 50 Lakhs Net 1.50 Lakhs Income 3 yrs

Income p.a. (Rs.) Gross Minimum Work Experience

28

Kotak Mahindra Bank

The interest rates and eligibility criteria for Kotak Mahindra home loan are as n follows:

Interest Rate Chart (Floating Rates)

Tenure (Years) 3-5 10 15 20 Salaried Interest Rate (p.a.) 7.50% 7.50% 7.50% 7.50% Self Employed Interest Rate (p.a.) 7.50% 7.50% 7.50%

Eligibility criteria Eligibility Criteria

Age Limit Loan Amount (Rs.) Income p.a. (Rs.) Minimum Work Experience Min Max Min Max Gross Salaried 21 yrs 58 yrs 5 Lakhs 2 Cr. 1.50 Lakh 2 yrs Self Employed Min 21 yrs Max 65 yrs Min 5 Lakhs Max 2 Cr. Net Income 1.50 Lakhs 3 yrs

Other Charges
MOF Charges Admin Charges (upfront) Pre-Payment Guarantor Processing Charge NIL NIL NIL NIL 0.50-0.75%

29

Comparison of home loans

CATEGO RY AGE LIMI T 25-58 yrs TENUR E INTEREST RATES PROC * ESSIN G FIXE FLOATIN FEES D G 7.50% 7.25% 0.50% SelfEmployed STANDAR D CHARTER ED BANK Salaried 25-65 yrs 23-58 yrs 23-65 yrs 24-58 yrs 1-15 yrs 5-20 yrs 7.75% 7.75% 7.50% 7.50% 0.505-15 yrs 7.75% 7.50% 1.00%

BANK

Salaried CITIBANK

1-20 yrs

SelfEmployed

Salaried IDBI BANK SelfEmployed Salaried UTI BANK SelfEmployed KOTAK MAHINDR A BANK Salaried

1-20 yrs

N.A

7.50% 0.75%

24-65 yrs 24-58 yrs 24-65 yrs 21-58 yrs

1-15 yrs 1-20 yrs 1-20 yrs 3-20 yrs

N.A 9.75% 9.75% N.A

7.75% 7.50% 1% 7.50% 7.50% 0.50%

SelfEmployed

21-65 yrs

3-15 yrs

N.A

7.50%

0.75%

30

Housing Loans Rates

With the RBI reducing the Bank rate, the housing sector of late witnessed the loan rates nose-diving by 50 basis points. Also, ICICI has become the first player in this sector to announce a housing loan for a 30-year period. While this will increase the end cost of the house, it will facilitate people to plan their house over a longer duration. With the rates moving southwards diving and the repayment period going northside, it is now easy for you to buy that dream house you thought of all along Interest rate for public sector HFCs

Less Rs10,001 Rs25,001 Rs50,001 Rs70,001 Rs1.5 Rs2.01 Rs3.01 Rs5.01 Rs8.01 Rs10.01 Rs. 15 L L L SLABS than to to to to L to L to L to L to to to & Above Rs10,000 Rs25,000 Rs50,000 Rs70,000 Rs1.5 L Rs3 L Rs8 L Rs10 L Rs15 L Rs2 L Rs5 L
PUBLIC SECTOR HFCs BOB Housing Finance Can Fin Homes Cent Bank Home Corp bank Homes GIC Housing Finance^ HUDCO Niwas^ Ind Bank Housing LIC Housing Finance$ PNB Housing Finance SBI Home Finance+ Vibank Housing Fin 12 12 12 12.75/13 12.75/13 12.75/13 12.75/13 12.75/13 12.75/13 12.75/13 13.25/13.5 13.25/13.5

13.25 12.25

13.25 12.25

13.25 12.25

13.25 12.25

13.25 12.25

13.25 12.25

13.25 13

13.25 13

13.25 13

13.25 13

13.25 14

13.25 14

13.5

13.5

13.5

13.5

13.5

13.5

13.5

13.5

13.5

13.5

13.5

13.5

11.75

11.75

13.25

13.25

13.25

13.25

13.25

13.25

13.25

13.25

13.25

13.25

11.5 12

11.5 12

11.5 12

12.75 13.5

12.75 13.5

12.75 13.5

13 13.5

13 13.5

13 14

13 14

13 15

13 15

12

12

13

13

13

13

13

13

13

13

13

13

13

13

13

13

13

13

13

13

13.5

13

13

13

13

13

13

13

13

13

13

13

13.25

12.25

12.25

12.25

13

13

13

13

13

13

13

13.5

14

31

HUDCO, GIC Housing Finance charges interest on a monthly rest basis $ LIC Housing Finance's rates are for tenure upto 15 years. It charges 14 per cent interest for terms between 16 and 20 years. + For amounts between Rs 5.01 lakh and Rs 10 lakh, SBI Home charges 15 per cent for up to five years, 15.5 per cent for upto 10 years and 16.5 per cent for above 10 years. For loans above Rs 10 lakh, it charges 15 per cent for up to 5 years, 15.5 per cent for up to 10 years, and 16.5 per cent for over ten years # HDFC will charge a fixed rate of 13.25 % on all loan slabs and 12.75 % floating rate for all slabs too @ For HSBC, first figure for tenure 1-7 yrs, second for tenure 8-15 yrs. Floating rate at PLR where PLR for 1-7 yrs: 15.5% and for 8-15 yrs:14.2%

* Includes Interest Tax. Source Indiainfoli ne survey

32

Section IV

33

Loan process Invest in a Home...Dont just buy it!

Many of us buy a Home to put a shelter over our headsbut only a few realize that real estate is an excellent way to save for the future. Most of us save money for the future through depositing money in a Bank or Company Fixed Deposit while others invest in gold. Several others invest in a home / real estate while a few adventurous types (really very few!) invest in a business or buy shares of companies Historical evidence has shown that over a long period of time (25- 30 years) the cumulative wealth of those who invested in real estate and those who invested in a good business (or bought shares of good businesses), multiplied several fold compared to the rest. Just look at the Rahejas, Hiranandanis, Birlas, Tatas and the Ambanis for validation. Both real estate and business investments gave returns to the investor that were much higher than the rate of increase in prices of goods and therefore multiplied wealth. You have often heard people say, "A Rupee today can buy goods worth o nly Ten Paise 20 years ago ". In India, studies over the last 20 years show that returns given by investments in Fixed deposits and gold are so low that we can buy less goods with this wealth today than we could have with the original investment In India, historical evidence also shows that both real estate and shares have given compounded return of over 20% p.a. over a 15-20 year holding period. Fixed Deposits and investments in gold have given returns of 5-8% p.a over the last 20 years while prices of goods have risen at over 10% p.a in the same period

34

If you carefully choose the location of your property, you can be a multi millionaire when you retire at 65! Remember that land is a limited commodity (there is only so much of it that you can buy!). If you happen to buy land in a fast growing location, you can be sure that the price of this land will be bid up over time. Land in Bombay has appreciated in value far in excess of that in Pune instead of land in Patna, you would have had at least 5 Mercedes Benz cars parked around your palace today. There are several instances of people who start Investing in a Home with a small investment of Rs.3-5 lacs. Having chosen the home wisely, they are in a position to sell the home after a few years at over Rs. 15 lacs and then buy a new home at another strategic location. This "trading" continues to compound wealth at an ever increasing rate.

E xam ple
Assume that you are 30 years old today and you have invested Rs. 5 lakhs in a home. If real estate prices move up in line with the long term average rate of about 20% p.a compounded, then at the age of 60 you will have Rs. 12 crores. However, prices of goods will also move up in this period (say at the rate of 10% p.a). You would still have added to your NET Wealth as you can now buy an equivalent of Rs. 68 lakhs worth of goods (at the higher prices) with the money.

35

Why take a loan to invest in a Home?

Besides the obvious answer that goes because I cannot afford to buy a shelter over my head outright", there are several other reasons why a Home Loan makes sense from a long term Savings perspective. Your grandfather may have told you Son, dont take any loans, they are only trouble" but this is no longer true in the New World. You may have also heard the saying that "Wealth begets Wealth". However, great many of us cannot put up that initial capital to kick-start the wealth creation process. Assume that you have identified a Gemstone that can be bought for about Rs. 2 lacs today but would be worth Rs. 31 lacs in 15 years (a compounded return of 20% over the 15 year period). You would have grabbed the offer but for the fact that you have a bank balance of just Rs. 50,000. A friend comes along and offers to loan you Rs. 1.5 lacs but at an interest of 10%. You will immediately buy the Gemstone as you calculate that the return from the investment in the Gemstone is far higher than the interest cost that you have to pay your friend. We put the same principle to work for you while taking a housing loan. Just substitute "Home" instead of "Gemstone" and " Housing Finance Company" in place of "Friend in the previous example and you will see why. The long term average return in investing in a home is about 20% p.a. while the average cost of borrowing funds in the market today is about 10% p.a. (after considering all tax breaks). As long as the cost of financing the home is less than about 20% it makes sense to borrow and buy. There is one key difference howeveryou can live in the Home as well!

36

Choosing a Loan

There are several features of a Home loan that you must consider based on an analysis of your specific needs.

How much can you afford?

As the investment in a home does not yield any monthly income, (unless you have rented out the home) your ability to repay the loan depends entirely on your salary or regular income from a stable business. Finance companies would normally give you a loan to the extent that your monthly repayments are less than 35-50% of your gross monthly salary. AbodesIndia.com gives you the ability to find the Maximum loan that you can afford among the companies in the database.

How much must you leverage?

Having found a Rs. 10 lac property that you want to buy, you must decide how much of the cost can be funded by a loan. Normally Housing Finance Companies will loan you about 80-85% of the property value. You need to make a minimum down payment of 15-20% of the property value. Please also remember that you have to normally bear the following fixed costs before your loan is disbursed: 1. Processing and administrative fee (1.5-2% both included) 2. Legal fees 3. Stamp duty charges (for resold property) 4. Property insurance premium 5. Accident insurance premium Make sure that you have an asset base that is easily converted to cash (e.g. cash in a Bank FD etc.) to cover all charges including down payment.

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As the value of the loan amount increases, the interest rate charged usually also increases. You may feel tempted to take a smaller loan by funding the large down payment (the difference between the value of the property and the loan you have applied for), by withdrawals from other investments. If your investments are in Fixed Deposits that are giving you about 11% p.a (about 7.4% p.a. after tax) and the effective post tax cost of you Home Loan is 10% (about 15% before tax) then this is a good idea. However, if you expect to make over 20% p.a. (about 13.5% post tax) by investing in shares or in a business, then you must borrow as much as you can on the Home Loan and not withdraw money from your other investments.

Another important consideration is your tax bracket and the extent of using available tax breaks. The tax breaks are directly related to the level of interest and principal repayments made each year, with an over all upper limit. You may not qualify for the full tax break if your loan is relatively small. Also remember that the government is keen to give more concessions to the housing sector and the overall cap on tax breaks will go up in the future. It is prudent to lock into a large loan today rather than a smaller one.

If you have identified other profitable avenues of savings that are expected to give you 15-20% returns p.a, you can use the Home Loan as a way of getting a cheap loan. In this case borrow up to the limit of 80-85% of the property value rather than withdraw cash from the other savings to make the down payment on the loan.

What is the tenure of the loan?

Loans are usually for a maximum period of 15 years (which may go upto 20 years in some cases). Longer tenure loans have smaller monthly installments. You can still get a large loan on a relatively small monthly salary by choosing to take a longer period loan. However, longer period loans maybe more expensive (higher rate of interest) even though the monthly installment payment is lower. Convenience always comes at a cost!

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Statistical evidence also shows that most people take a longer tenure loan of 1015 years but end up prepaying the same in 5-6 years. This happens because salaries invariably improve with time. There are two costs that could have been avoided through better planning. The first is the Prepayment penalty of 1-2 % and the second is the higher interest rates quoted on longer tenure loan (especially over 20 years). In this example, both costs could have been avoided by taking just a 5-6 year loan. Further, if you intend to sell the home after about 510 years, take a 5-10 year loan only. There is no point paying a higher interest rate for a longer tenure loan of 15-20 years, if you intend to PREPAY the loan in 5-10 years.

How will interest rates move?

Till recently you did not have to make this decision as all loans were given on a FIXED RATE basis. This means that the interest rate is fixed for the full tenure of the loan and so is your monthly repayment amount. Life was simple. You could easily plan for the future as your cash flows each monthly after the loan repayments were very predictable. However, interest rates in the economy, changes depending on the demand and supply of money. When industry is booming and everyone needs money to do business, interest rates move up and vice versa. Home loan customers became unhappy about having to pay a very high interest rate that they were locked into, when rates subsequently fell. For the customers convenience, FLOATING RATE loans were recently introduced. The interest rate on these loans changed every time the interest rate in the financial system changed. The monthly installment falls if interest rate in the economy falls (HSBC home loan product). With other companies the monthly installment amount was kept fixed but the tenure of the loan reduces if interest rates in the economy falls (e.g. HDFC floating rate loans). Normally, floating interest rates are quoted in the form of "PLR plus premium". The PLR (Prime Lending Rate) varies from company to company and changes as frequently as once in 3 months.

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Example
A floating rate quote of PLR+0.5% means that interest rate on the loan will change from 14.5% to 15.5% if PLR goes up from 14% to 15%. Also a PLR +0.5% quote from one bank is very different from a PLR +0.5% quote from another as the PLR levels for each may differ.

In a floating rate loan, the customer gains if interest rates fall, but will take a severe beating if interest rates rise. In order to reduce this disadvantage of the floating rate loan some progressive banks like HSBC have introduced a HYBRID LOAN. In this case a person can decide to fix the interest rate on his loan for periods of 1, 2 or 3 years on a long tenure loan and subsequently decide to float his loan.

Example
You can take a 15 year loan specifying that you will have a fixed interest rate for the first 3 years, after which you have the option to convert to a floating rate loan. If you think that interest rates are about to fall them you will opt for a floating rate loan after 3 years. If interest rates were to rise during the 3-year period you are fully protected as you had locked in a rate for 3 years.

You will want to stay on with a Floating rate loan as long as you feel that interest rates are expected to fall further. The moment you expect interest rates to start rising, switch immediately to a fixed rate loan. As these changes never happen overnight, you will have enough time to make the move provided you watch interest rates carefully.

This additional flexibility can be capitalized to substantially lower the cost of the loan, often saving as much as 50% of the total interest you may have paid on a simple Fixed rate loan. Butthere is a cost the trouble of tracking interest rates and taking a forward looking view on interest rates.

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Are there any prepayment penalties?

Each monthly installment consists of a portion that goes towards repaying the original loan principal and the balance going towards interest on the outstanding loan. If you pay anything over the amount that would go towards principal repayment, the excess amount is construed to be a loan prepayment. Most Housing Finance companies charge a fee of 1-2% on the amount being prepaid. This can be a big disadvantage in several cases. 1. Your earning capacity will normally increase with age and a prepayment fee deters you from completely retiring your debt before time. 2. Your ability to refinance the loan if interest rates subsequently fall gets constrained 3. You may want to sell the home during the tenure of the loan and you find prepayment costs are an unnecessary burden. If you may need to do any of the above, choose a loan with no prepayment fees.

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The Total Effective Interest Rate (TEIR) versus the EMI comparisons
It is very important for you to understand the total cost of the loan and try to minimize this cost to the extent possible. As home loans are of a long duration even a 0.5% difference in interest rates can cost you a lot of money over time.

Example
If you had taken a taken a 15 year loan of Rs. 5 lacs at 15% p.a you would have paid Rs. 31000 less than a 15 year loan of Rs 5 lacs for 15.5%. Most of us compare the cost of the loan by comparing the EMIs (Equated Monthly Installments). This can be misleading as you are ignoring the "time value of money" which means that you need to look at when the EMI is being paid. This is because the value of One Rupee today is vastly different from the value of a Rupee 10 years ago. Using a Discounted Cash flow Model that calculates the Effective interest cost depending on when the EMI amounts are being paid solves this problem.

Thus these are the most important factors to be considered while planning for a home loan.

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Choosing a Housing Finance Company

Remember that you are entering into a long-term relationship with the lender when you take a home loan. Choose a flexible home loan product that gives you the leeway to switch between fixed and floating rates at no additional cost. For short-term loans (less than 5 years) and for small loan amounts (less than Rs. 5 lacs); the Total Effective interest rates can vary widely between Finance Companies. However, for the more common, long tenure loans the interest rate differences between companies are small. In that case, Companies that have lower documentation requirements and those who are able to better customize the loan must be approached. Responsiveness to queries and the average speed in processing loan applications are the criteria used to judge service standards. Home Loan Companies quotes interest rates based Daily/Annual/Monthly rest. This can be confusing for customers. Abodes India.com simplifies this by calculating all quoted interest rates on a common basis. For comparison purposes all interest rates quotes are converted into an effective Monthly Rest basis. That quote on a (M.R) Monthly Rest basis normally provides the lowest cost loans A member of hidden costs needs to be explored. Most Companies doesnt pay for the technical valuation report of the property other insists on a registered Mortgage that will increase costs of taking the loan. But one of the most expensive hidden costs takes the form of a prepayment penalty. Avoid Housing Companies that charge these penalties if you hope to retire the loan before are full period (or sell the home). Though people take a 1015 year loan, improving cash inflows (from a bonus or job promotion) invariably results in prepayment of the loan in 5-7 years.

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Steps involved in getting a home loan

1. Submit an Application form along with relevant documents The finance company will process your application to check your loan eligibility based on your income and personal profile. Usually an up front (non refundable fee) of about 0.5-1% of the loan amount must be paid before processing begins. 2. Verification of the property and supporting documents A company representative may visit the property as well as your residence to vary information submitted in your application form. Further, a property valuation maybe carried out by the company to determine the maximum amount they are willing to lend you. Any references submitted by you in the Application Form may also be contacted. You may be personally interviewed and any further clarifications in the documents submitted maybe sought. 3. Sanction of the loan A sanction letter is issued which you will have to sign. This letter will contain the amount and the terms of the loan. Some companies specify the period for which the loan sanction is valid. You will have to pay a Commitment fee (normally 1% of the unutilized loan amount) if you do not draw on the ENTIRE sanctioned amount before that period.

4. Submission of the original Property documents and signing the loan Agreement
You will be required to leave the title deed of the property with the company as a security for the loan. You will be required to go to the companys office to execute the legal loan papers.

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5. Disbursal of the Loan Cheque You can draw the loan in parts depending on the stage of construction of the building. Until such time that the entire sanctioned amount is NOT drawn, you will pay a simple interest on the Actual Amount drawn (without any principal repayments). The EMI payments will commence only after the entire Sanctioned Loan Amount is drawn

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When to refinance a Loan.

Refinancing means repaying an existing home loan before its tenure with the money from a new loan taken under new terms and conditions. The following circumstances may trigger refinancing: 1. Interest rates in the economy have fallen and it makes sense to retire the old high cost fixed rate loan with a new fixed rate loan at the lower rate. You can do this provided rates have fallen enough to cover your prepayment penalty and the up front costs of initiating a new loan (like processing fee, administrative fee etc.). 2. If you plan to sell the home during the tenure of the original loan you will need to terminate the loan borrowing the remaining principal amount against the home equity or from the potential buyer. 3. Switch from a Fixed rate loan to a more flexible Floating rate / Hybrid product You may want to switch from a Floating rate loan to a fixed rate loan if interest rates start to move up. 4. You can lower your monthly installment payments by extending the tenure of the new loan. In order to improve your monthly cash flows you can prepay an existing loan with 5 years to go by taking a new 15-year loan for the remaining principal amount.

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Impact of budget 2005 on home loan

That the sweeping tax reforms proposals in Budget 2005 will leave most taxpayers better off is by now universally known. But one trickle-down beneficial effect of these proposals for homebuyers has gone largely unnoticed. As a consequence of the proposed changes, home loans have overnight become much more tax-efficient. Significantly, its not only those who now propose to take a home loan who will benefit even those who are years into the repayment will stand to gain. A look at how these proposals impact the tax efficiency of your home loanand strategies to make them even better.

The roots of these changes can be traced to two significant Budget 2005 proposals:

1. Home loan interest payments up to Rs 1.5 lakh per person per year will continue to qualify for a deduction under Section 24 2. Investments up to Rs 1 lakh in qualifying instruments will qualify for a deduction under Section 80C. The qualifying instruments are the same as those that until now qualified for a rebate under Section88, except that the sub-limits that existed earlier will no longer apply. The one that is of relevance to homebuyers is the repayment of principal; up to Rs 20,000 qualified for the Section 88 rebate, but now that the limits have been removed, principal repayments up to the entire Rs 1 lakh will qualify for the Section 80C deduction. And, significantly, even those with taxable incomes over Rs 5 lakh can claim the deduction.

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To understand just how beneficial these proposals are, lets assume that we are planning to take a Rs 35 lakh home loan for 15 years at 7.5 per cent, the prevailing rate on a floating loan. Our EMI will work out to about Rs 32,450. Since we are paying interest only on the amount outstanding at the end of each month, the principal and interest components of our EMI vary each month. In the above case, till the 69th month, the interest component will account for a higher proportion of your EMI. Over the tenure of the loan, the share of the interest payment comes down, and the principal repayment accounts for a higher percentage of your EMI

Indicatively, in the first year we will pay about Rs 2.58 lakh as interest, and about Rs 1.31 lakh as principal repayment. Then Under the earlier tax regime, our interest payments up to Rs 1.5 lakh a year would have qualified for the deduction under Section 24. But of the Rs 1.31 lakh we have repaid towards the principal, only Rs 20,000 would have qualified for the Section 88 rebate In other words, since interest payments do not typically exceed the Rs 1.5 lakh limit beyond Year 10 or so, the juiciest tax breaks on our home loan have by then been had. From then on, the breaks progressively get thinner.

Now. As a consequence of the budget proposals, we will still be able to claim a deduction of only up to Rs 1.5 lakh on the interest payment under Section 24. But now up to Rs 1 lakh of our principal repayment qualifies for a deduction under Section 80C. In the 30 per cent tax slab, that straightaway translates into a tax saving of Rs 30,000 in the first year.

We will make that additional tax saving not only in the first year of your loan, but during the entire tenure. Consider this: In Year 2, your interest payment adds up to about Rs 2.48lakh, and principal repayments to about Rs 1.41 lakh. The qualifying amount for tax breaks: Rs 1.5 lakh on the interest and Rs 1 lakh on the principal. The net additional tax saving: Rs 30,000.

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Likewise, in the above case, we can maximize our tax savings (Rs 1.5 lakh on interest payments; Rs 1 lakh on principal repayments) upto Year 9. Beyond that stage, our interest payouts during each year dip below Rs 1.5lakh. But significantly, the principal repayments (which add up to Rs 2.39 lakh in Year 9) will continue to qualify for the Section 80C deduction up to the Rs 1 lakh limit. The same is the case right up to Year 15, when our loan is fully repaid. Existing borrowers too gain. What this means is that its not just those who will now take a home loan who gain. Even if we had taken a home loan some years ago, and are in, say, the sixth year of repayment, we will stand to make the additional tax saving to the extent of Rs 30,000 every year Thats a saving of Rs 2,500 a month. In other words, our EMI is effectively lower to that extent.

All these calculations, of course, make one critical assumption: that the Budget 2005 proposals for tax breaks on home loans will continue going forward. Theres no certainty of thatbut it can be said with near-certainty that of all the tax breaks that are targeted for withdrawal, those on home loans will be the last to go.

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Section V

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Survey analysis

Survey objective
Basic objective of the survey was to survey assess the performance ICICI and HDFC banks in the home loan sector.

Survey methodology
Survey was conducted among 80 correspondents, both male and female, who are customers of the either of these banks and have taken loans from these banks 1 or more than a - year back.

Survey results are explained with the help of graphs and diagrams.

Note: the respondents were the customers of either ICICI or HDFC

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1. From which bank have you taken loan?

ICICI HDFC

The results are as follows:

. 62 % 38 % HDFC

ICICI

62 % of the respondent who were interviewed had taken loan from HDFC bank where as the 38 % of the respondent has taken loan from ICICI. These shows that loan taken from HDFC is comparatively higher than ICICI.

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2. Which loan have you taken?

Home loan Vehicle loan Mortgage loan Others

Home loan Vehicle loan Mortgage loan Others

74 %

18 % 6% 2%

Our figures reveals that the necessity of the Makan is still on the top of the chart while vehicle loans and mortgage loans follows them.

Thus it shows that home loans still ruling the market with intensive competition.

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3. From where you get informed about home loan?

Newspaper Agent Bank Magazine
Bank Magazine Newspaper Agent

56 % 32 %

10 % 2%

It is correctly said, that advertisement plays a crucial role in selling the products and the banks are also understanding it, thus 56 % of our respondents said that they got informed about home loan through newspapers whereas 32 % of our respondents said that they got informed through their Agents so it can be said that word of mouth also plays a huge role. Thus 10 % of the people have learnt from bank and 2 % of people have learnt from magazine.
Note: These figures are exclusively for ICICI and HDFC

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4. What is the tenure for your payment?

2 5 years 5 10 years 10 15 years 15 20 years

15 20 years 10 15 years 5 10 years 2 5 years

71 %

18 %

6%

5%

Our figure reveals that 71 % of the respondents have taken loan for 15 to 20 years where as 18 % of our respondents have taken loan for 10 to 15 years whereas 6 % of our respondents have taken loan for 5 to 10 years. Whereas 5 % of our respondents have taken loan for 2 to 5 years.

From this it concluded that most of ICICI as well as HDFC correspondents have option for long-term loans.

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5. Did you submit all the documents you submitted?

100 %

Yes

100 % of our respondents said that they have submitted all the documents.

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6. Are you satisfied with the loan you purchased?

98 %

Yes 2% No

98 % of our respondent said that they were satisfied with the loan whereas 2 % of our respondent said that they were not because they have to stick to the rules of the company and have to pay installments on time and if the installments not paid in time they have to suffer from penalty charges.

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7. Will you refinance your loan?

86 %

Yes

14 %

No

86 % of our respondents said that they will refinance their loan whereas 14 % of our respondent said that they will not refinance it. This reveals that both ICICI as well as HDFC is more likely to have major market share of home loans.

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8. Will you refinance your loan?

86 %

Yes

14 %

No

86 % of our respondents said that they will refinance their loan whereas 14 % of our respondent said that they will not refinance it. They this reveals that both ICICI as well as HDFC is more likely to have major market share of home loans.

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Conclusion of the survey:

Thus from the survey we can conclude that both of the companies have performed well and also have bright future in the loan market The competition is definitely going to rise with increasing market share as well as new players coming in but, proper strategy applied at the time will help the company to prosper whereas on the other hand they have to retain their old customer as well, which will bring goodwill and reputation for them .

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Conclusion
This industry is witnessing a boom at present boosted by generous budget sops and rock bottle real estate prices.The demand is a result of genuine individual needs for housing. Thus, the housing finance industry is on good ground and has interesting prospects ahead. Home loans are operative over longer time periods like 15-20 years and taking a call on interest rates over such tenures would be a difficult proposition. However what loan seekers must do is, make choices in tune with their risk appetites and profiles. If an unwavering liability is what suits your profile, then fixed rate home loans should be the natural choice. On the other hand, if you can handle risks and are willing to go the extra mile to benefit from any further fall in interest rates, floating rate home loans will be best suited for you. Either ways ensure that you have understood the implication of `fixed/floating rates' as defined by HFCs, since this has undergone some change in 2004. Another important area going forward will be the need to make informed choices. Loan seekers can no longer afford to be oblivious to the necessity in their home loan agreements. Various clauses in the agreement can have a significant bearing on your liabilities; ensure that you have a thorough understanding of what the agreement entails and that there are no unpleasant surprises.

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Bibliography

Books
1. Finance & investment 2. Close to home 3. Home loans - John Downes -vandana shiva -Times publication

Reports
1. National housing finance report 2. Report on home loans by GOI

News Pap ers

1. Times of India 2. Economics times 3. Free press journal 4. Business standard

I nternet
1. www.thinkglink.com/ article.asp?Title=When_To_Refinance.htm&ID=723 2. www.hdfc.com 3. my.countrywide.com/ 4. www.homeloans.va.gov 5. hsbc.co.in/in/personal/loans/homeloan2.htm 6. www.apnaloan.com/ 7. www.indiainfoline.com/pefi/apply/hlon/ibnk/ 8. www.icicibank.com/pfsuser/ loans/homeloans/hlhomepage

Places visited
1. Indian Merchant Chambers (churchgate)

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