Marketing and management of financial

services project on

Recent trends in
home loans in India
SEC-C

PGDM (2008-10)

Submitted By:
Submitted To:
Aditi Khanna (FT-08-778)
Prof. Anand Rai
Deepshikha Mahajan (FT-08-642)
Hitali Makkar(FT-08-657)
Kanika Anand (FT-08-667)
Kratika Bhaskar (FT-08-671)

ACKNOWLEDGEMENT

With profound sense of gratitude and regard, we

express our sincere thanks to our guide and
mentor Prof. ANAND RAI for his valuable guidance
and the confidence he instilled in us, that helped
us in the successful completion of this project
report. Without his help, this project would have
been a distant affair.
His thorough understanding of the subject and
professional guidance was indeed of immense help
to us. His motivation and constant mentoring has
helped us in the completion of the project.
Mutual understanding and co-operation between
the group members is highly appreciated.
 Index

Topics
1. Introduction

2. Lock in facility by banks

3. Steps to find out the best lender for you

4. Some important terms

5. Comparing different lenders

6. Refinancing

7. Recent trends of home loans

8. Role of banks

9. Interest market in 2009

10.Home loans in india

11.Reserve bank of india

12.New RBI Directives

13.Repayment option

14.Development financial institution

15.Prime lending rate

INTRODUCTION
Currently, the leading cause of boom in India’s financial system is that an
individual can easily obtain loans at interest rates. There are a number of
banks, which provide loan and credit and against all. Government also
motivates people to obtain loans for specific purposes. The government
encourages people to obtain housing loans by providing tax advantages.

The banking structure in India is very important. Commercial banks in the

country can be classified in to scheduled banks and contingencies. The
commercial banks are included in the Second Schedule of the Reserve Bank
of India (RBI) Act, 1934. Only those banks are included in the calendar which
meet the criteria established under the Law of empty Article 42 (6) (a).
Banks in India are classified as public sector banks, private sector banks and
foreign banks. The private sector banks are still classified under the old
private sector banks and new private sector banks.

The banking structure in India is simply superb and to obtain bank loans in
India is easier. Bank loans in India are offered by all banks, whether private
or public banks. The bank loans in India are in great shape because they
offer all types of loans. The loans are an important part of our lives. When we
build a new house or if we want to go for higher education or if you want to
buy a vehicle and other expensive products, it requires an enormous amount
of money and that's when bank loans in India come to our aid. The India
Bank loans scheme allow customers or people to borrow money from banks
which are essentially short term in nature. The Indian systems of bank loans
provide home loans, personal loans, mortgages, loans and education. If you
are planning a trip abroad, or if you want to buy a share in the property
market, systems of loans are available for these purposes.

Home Loans
Bank loans in India are several types. One of the most common types is
home loans offered by banks. Everyone dreams of owning his own land and
property one day and to turn this dream into reality is what the system of
home loans do in India. Real estate in India is currently one of the hottest
investments options in Asia. Prior to five years, the real estate segment in
India was neither organized nor were there too many large institutions in the
construction industry. But now with an organized finance sector and with the
increase in transparency levels, it has become easier to create financing
vehicles.

The decrease in housing loan interest rates and an increase of disposable

income has contributed largely to an increased demand in the residential
segment. In spite of a rise in home loans interest rates and qualitative
sanctions being levied by the RBI on banks, buying interest has not waned
because home loans are still cheaper than ten years ago.
As the realty prices in India skyrockets, housing complexes mushrooming and
city landscapes becoming unrecognizable, the growth across all real estate
segments and experts estimate that demand will remain steady at the
currently high levels because of the improving economic environment and
the real estate sector is expected to grow 30% every year. This rising
property prices encourage banks and financial institutions to lend more with
the increase in collateral values. Although the home loan providers have
hiked their rates twice in less than three months, home loans continue to be
nearly 45 per cent cheaper than what they were in early 2001. Because if
statistics are referred to, the interest rates which now range between 9-10
per cent, are still much lower than what they were ten years ago, at 16-17
per cent.

Thus it is very important to go through the main features offered by these

Indian banks for home loans. Housing loans offered by banks are of different
types.
 • Home Purchase Loans
• Home Construction Loans
• Home Improvement Loans
• Home Extension Loans
• Home Conversion Loans
• Land Purchase Loans
• Stamp Duty Loans
• Bridge Loans
• Balance Transfer Loans
• Refinance Loans
• Loans to NRIs

Home Purchase Loans:

This is the basic home loan for the purchase of a new home.

Home Construction Loans:

This loan is available for the construction of a new home on a said property.
The documents that are required in such a case are slightly different from
the ones you submit for a normal Housing Loan. If you have purchased this
plot within a period of one year before you started construction of your
house, most HFCs will include the land cost as a component, to value the
total cost of the property. In cases where the period from the date of
purchase of land to the date of application has exceeded a year, the land
cost will not be included in the total cost of property while calculating
eligibility.

Home Improvement Loans:

These loans are given for implementing repair works and renovations in a
home that has already been purchased, for external works like structural
repairs, waterproofing or internal work like tiling and flooring, plumbing,
electrical work, painting, etc. One can avail of such a loan facility of a home
improvement loan, after obtaining the requisite approvals from the relevant
building authority.

Home Extension Loans:

An extension loan is one which helps you to meet the expenses of any
alteration to the existing building like extension/ modification of an existing
home; for example addition of an extra room etc. One can avail of such a
loan facility of a home extension loan, after obtaining the requisite approvals
from the relevant municipal corporation.

Home Conversion Loans:

This is available for those who have financed the present home with a home
loan and wish to purchase and move to another home for which some extra
funds are required. Through a home conversion loan, the existing loan is
transferred to the new home including the extra amount required,
eliminating the need for pre-payment of the previous loan.

Land Purchase Loans:

This loan is available for purchase of land for both home construction or
investment purposes

Stamp Duty Loans:

This loan is sanctioned to pay the stamp duty amount that needs to be paid
on the purchase of property.

Bridge Loans:
Bridge Loans are designed for people who wish to sell the existing home and
purchase another. The bridge loan helps finance the new home, until a buyer
is found for the old home.

Balance-Transfer Loans:
Balance Transfer is the transfer of the balance of an existing home loan that
you availed at a higher rate of interest (ROI) to either the same HFC or
another HFC at the current ROI a lower rate of interest.

Re-finance Loans:
Refinance loans are taken in case when a loan for your house from a HFI at a
particular ROI you have taken drops over the years and you stand to lose. In
such cases you may opt to swap your loan. This could be done from either
the same HFI or another HFI at the current rates of interest, which is lower.

NRI Home Loans:

This is tailored for the requirements of Non-Resident Indians who wish to
build or buy a home or property in India. The HFCs offer attractive housing
finance plans for NRI investors with suitable repayment options.

On would be entitled for home loans in the range of Rs 5 lakh to a maximum

of Rs 1 crore, based on the repayment capacity, previous credit history and
the cost of the property. The bank may provide a maximum of 85% of the
cost of the property or the cost of construction as applicable and 75% of the
cost of land in case of purchase of land. The repayment capacity is
calculated taking into account factors such as:

• Age
• Income/Salary
• Qualifications
• Dependant/(s)
• Assets/Liabilities
• Credit History
• Stability / continuity of your employment/business
 • Income of co-applicant/(s)

Taking home loans these days has become simpler. With the RBI regularly
bring down interest rates; taking home loans have become extremely easy.
Housing loans which were 16.5% to 18% a few years ago fell by 11.5% to
13%. With interest rates going down, people increasingly number apply to
take these loans. Some of the leading banks offering home loans in India,
including ICICI Bank, IDBI Bank, HDFC Bank State Bank, Bank of Baroda,
Kotak Bank, SBI, Standard Chartered Bank and Axis Bank.

INTEREST RATES PROVIDED BY VARIOUS BANKS

Loan Period EMI / Lakh EMI / Lakh
Finance Institution Fixed Floating
(in years) (INR) (INR)

Up to 5 9.00 2076 8.00 2028

6 to 10 9.25 1230 8.25 1227

Bank of Baroda
11 to 15 9.50 1044 8.25 970

16 to 20 9.50 932 8.50 868

Up to 5 9.50 2100 8.75 2064

6 to 10 9.75 1300 9.25 1280

State Bank Of India
11 to 15 - - 9.25 1029

16 to 20 - - 9.75 949

Up to 5 11 2175 9.50 2101

6 to 10 11 1375 9.50 1294

HDFC
11 to 15 11 1137 9.50 1045

16 to 20 11 1033 9.50 933

 Up to 5 10.75 2162 9.50 2101

6 to 10 10.75 1364 9.50 1294

ICICI Bank
11 to 15 10.75 721 9.50 1045

16 to 20 10.75 1016 9.50 933

Up to 5 10.50 2149 9.50 2100

6 to 10 11 1373 9.50 1294

LIC Housing Finance
11 to 15 11 1137 9.50 1044

16 to 20 11 1032 9.50 932

Up to 5 9.00 2076 10.50 2150

6 to 10 9.00 1267 10.50 1350

PNB Housing Finance
11 to 15 9.25 1030 10.50 1106

16 to 20 9.50 933 10.50 999

The above table illustrates the comparison between the interest rates from
various Housing Finance Companies and banks.

It can be seen that if one wishes to go for floating loans, the bank which
gives the best deal as far as the interest rate is concerned is HDFC followed
by PNB Housing Finance with the lower rates.

As you know, there are quite a few hidden prices involved as well,
so ,one needs be very vigilant while approaching a bank for a loan,
because, the best rate may not be the best deal always.

Lock-in facility by banks

A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain
interest rate and a certain number of points for you, usually for a specified period of time, while
your loan application is processed. (Points are additional charges imposed by the lender that are
usually prepaid by the consumer at settlement but can sometimes be financed by adding them to
the mortgage amount. One point equals one percent of the loan amount.) Depending upon the
lender, you may be able to lock in the interest rate and number of points that you will be charged
when you file your application, during processing of the loan, when the loan is approved, or later.
A lock-in that is given when you apply for a loan may be useful because it’s likely to take your
lender several weeks or longer to prepare, document, and evaluate your loan application. During
that time, the cost of mortgages may change. But if your interest rate and points are locked in,
you should be protected against increases while your application is processed. This protection
could affect whether you can afford the mortgage. However, a locked-in rate could also prevent
you from taking advantage of price decreases, unless your lender is willing to lock in a lower
rate that becomes available during this period.

It is important to recognize that a lock-in is not the same as a loan commitment, although some
loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make
you a loan in a specific amount at some future time. Generally, you will receive the lender’s
commitment only after your loan application has been approved. This commitment usually will
state the loan terms that have been approved (including loan amount), how long the commitment
is valid, and the lender’s conditions for making the lSoan such as receipt of a satisfactory title
insurance policy protecting the lender.

Oral or written lock-in agreement?

Some lenders have preprinted forms that set out the exact terms of the lock-in agreement. Others
may only make an oral lock-in promise on the telephone or at the time of application. Oral
agreements can be very difficult to prove in the event of a dispute.

It is wise to obtain written, rather than verbal, lock-in agreements to make sure that you fully
understand how your lender’s lock-ins and loan commitments work and to have a tangible record
of your arrangements with the lender. This record may be useful in the event of a dispute.

Charges of a lock-in
Lenders may charge you a fee for locking in the rate of interest and number of points for your
mortgage. Some lenders may charge you a fee up-front, and may not refund it if you withdraw
your application, if your credit is denied, or if you do not close the loan. Others might charge the
fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction
of a percentage point added to the rate you lock in. The amount of the fee and how it is charged
will vary among lenders and may depend on the length of the lock-in period.

Types of lock-in
Locked-In Interest Rate--Locked-In Points: Under this option, the lender lets
you lock in both the interest rate and points quoted to you. This option may be
considered to be a true lock-in because your mortgage terms should not increase above
the interest rate and points that you’ve agreed upon even if market conditions change.

Locked-in Interest Rate--Floating Points. Under this option, the lender lets
you lock in the interest rate, while permitting or requiring the points to rise and fall (float)
with changes in market conditions. If market interest rates drop during the lock-in
period, the points may also fall. If they rise, the points may increase. Even if you float
your points, your lender may allow you to lock-in the points at some time before
settlement at whatever level is then current. (For instance, say you’ve locked in a 10½
percent interest rate, but not the 3 points that went with that rate. A month later, the
market interest rate remains the same, but the points the lender charges for that rate
have dropped to 2½. With your lender’s agreement, you could then lock in the lower 2½
points.) If you float your points and market interest rates increase by the time of
settlement, the lender may charge a greater number of points for a loan at the rate
you’ve locked in. In this case, the benefit you might have had by locking in your rate
may be lost because you’ll have to pay more in up-front costs.

Floating Interest Rate--Floating Points. Under this option, the lender lets you lock in
the interest rate and the points at some time after application but before settlement. If you
think that rates will remain level or even go down, you may want to wait on locking in a
particular rate and points. If rates go up, you should expect to be charged the higher rate.

Because practices vary, you may want to ask your lender whether there are other options
available to you.

Duration of a lock-in
Usually the lender will promise to hold a certain interest rate and number of points for a given
number of days, and to get these terms you must settle on the loan within that time period. Lock-
ins of 30 to 60 days are common. But some lenders may offer a lock-in for only a short period of
time (for example, 7 days after your loan is approved) while some others might offer longer lock-
ins (up to 120 days). Lenders that charge a lock-in fee may charge a higher fee for the longer
lock-in period. Usually, the longer the period, the greater the fee.

The lock-in period should be long enough to allow for settlement, and any other contingencies
imposed by the lender, before the lock-in expires. Before deciding on the length of the lock-in to
ask for, you should find out the average time for processing loans in your area and ask your
lender to estimate (in writing, if possible) the time needed to process your loan. You’ll also want
to take into account any factors that might delay your settlement. These may include delays that
you can anticipate in providing materials about your financial condition and, in case you are
purchasing a new house, unanticipated construction delays. Finally, ask for a lock-in with as few
contingencies as possible.

Expiry of the lock-in period

If you don’t settle within the lock-in period, you might lose the interest rate and the number of
points you had locked in. This could happen if there are delays in processing whether they are
caused by you, others involved in the settlement process, or the lender. For example, your loan
approval could be delayed if the lender has to wait for any documents from you or from others
such as employers, appraisers, termite inspectors, builders, and individuals selling the home. On
occasion, lenders are themselves the cause of processing delays, particularly when loan demand
is heavy. This sometimes happens when interest rates fall suddenly.

If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and
points. If market conditions have caused interest rates to rise, most lenders will charge you more
for your loan. One reason why some lenders may be unable to offer the lock-in rate after the
period expires is that they can no longer sell the loan to investors at the lock-in rate. (When
lenders lock in loan terms for borrowers, they often have an agreement with investors to buy
these loans based on the lock-in terms. That agreement may expire around the same time that the
lock-in expires and the lender may be unable to afford to offer the same terms if market rates
have increased.) Lenders who intend to keep the loans they make may have more flexibility in
those cases where settlement is not reached before the lock-in expires.

Steps to find out the best lender for you

1. Compare fees as well as interest rates
Comparing loans based on their annual percentage rate (APR) is a good place to start, but it's
not enough. In the case of a mortgage, to get a more accurate breakdown of costs, ask the
various lenders for a formal "good faith estimate" of all the fees you'll incur with your loan -- this
is a standard form lenders must provide you that is more detailed than the overview you'll get
with an offer. Also, ask about potential charges that may not appear on that list, such as
prepayment penalties. You're not just comparing numbers here: determine how honest and
upfront you feel the lender is being, and don't use a lender that you feel is evading your
questions.

2. Consider your individual circumstances

Bigger lenders aren't necessarily better than smaller ones, especially if you have unusual
circumstances. For example, some lenders specialize in loans for people with poor credit, while
others may have more options for those with small down payments. If you have special
borrowing needs, look for a lender with experience working with people in similar situations.

3. Look at the range of loan types available

There are more loan options available than ever before, so take advantage of all that choice.
Look for a lender who offers a wide variety of loan types, from conventional fixed-rate and
adjustable-rate to newer ones such as hybrid ARMs and option ARMs. Your lender should be
able to match you with a mortgage that's right for your financial situation and risk tolerance.

4. Evaluate the level of customer service

When you're comparing offers, ask each lender about their policy regarding locking in their
quoted rates and see whether there is a fee. Also, ask them to amend one of the terms (such as
a payment cap) and see how willingly they agree. You're looking for flexibility and
responsiveness. And also note how well they listen to you. If you ask for a 30-year fixed-rate
mortgage, they ought to present that as an option, not push you toward something different,
such as an interest-only loan. If you're not getting good service from a lender who is competing
for your business, you're not likely to get it after you've agreed to work with them.

5. Check out the lender's reputation

Word of mouth is important in every business, including the loan market. If you've never worked
with a particular lender, you'll want to find out the opinion of people who have.

Some important terms

Purchase Points
Purchase points, also known as a "buy-down" or "discount points," are an up-front fee paid to
the lender at closing to buy-down or lower your interest rate over the life of the loan. Each point
 is equal to one percent of your total loan amount. If you have a $100,000 loan, one point would
equal $1,000. The more points you buy, the lower your interest rate, but the more money you'll
need at closing.

How do you decide whether you should buy points and if so, how many? Well, the decision
should be based on how long you plan on living in your home and what you can afford to pay
each month toward your mortgage. If you plan on living in your home for more than five years,
it's probably a good idea to purchase points. The longer you live in your home, the more you can
save on interest over the life of the loan.

Interest Rate
When you get a mortgage, you are charged an interest rate.this is the rate which the lender
charges you for using their money to buy a home. It determines how much your monthly
payments will be. Generally speaking, the higher the interest rate, the higher your monthly
payment.

Mortgage interest rates change constantly.daily, even hourly. If you speak to a lender and are
quoted a specific interest rate, that's not to say you'll necessarily get that rate when you close on
your loan. Not unless you formally lock-in that rate with the lender.locking in an interest rate will
guarantee you get your loan with a particular interest rate. Lenders will allow you to lock in for
15, 45 or 60 days. But the longer you lock in, the more expensive it will be, since it's more of a
risk to lenders.

Fees
There are always fees associated with getting a mortgage, these fees cover the cost of
processing and underwriting the loan. These fees can include charges for ensuring the title to
the home is free and clear; paying for a land survey; or paying for a home appraisal which gives
you the estimated value of the property (lenders require an appraisal to close on your
mortgage).

Deciding which mortgage to get may depend on what each lender does because different
lenders may charge different amounts. Some may charge lesser closing fees to lure you in, but
may charge you a higher interest rate, which means you may pay more in the long run. But
everyone has different needs.you may or may not be able to afford to pay more at closing and
are willing to pay more over the long term.

Before it comes time to close, do your homework, make sure there are no hidden fees, and ask
your lender lots of questions so that you understand all the costs involved with your mortgage.

How to Compare Loans among Different

Lenders?
Comparing loans of different lenders is often the most difficult part of
mortgage shopping.
Firstly, it is important to keep in mind that mortgage packages consist of
more than interest rates. They consist of a quoted rate, points and closing
costs.

Points are an up-front fee paid to the lender at closing. Each point equals one
percent of the loan amount. Points are charged, or paid, to lower or increase
the rate on the loan. Most lenders will allow you to choose amongst a variety
of rate and point combinations for the same loan product. Therefore, when
comparing rates of different lenders, make sure you compare also the
associated points. Closing costs typically consist of loan related fees, title
and escrow charges, government recording and transfer charges and can
add thousands of dollars to the cost of your loan. When comparing lenders it
is important to compare loan related fees (i.e. the fees which lenders charge
to process, approve and make the mortgage loan), since the other fees are
typically independent of the lender.

Secondly, when comparing loans of different lenders you need to thoroughly

investigate and compare all loan features: maximum LTV, mortgage
insurance payments (if any), credit and cash reserve requirements,
qualifying ratios, etc.

Thirdly, for each loan you are comparing find out the lock-in period, during
which the interest rate and points quoted to you will be guaranteed. Lock-ins
of 30, 45 and 60 days are common. Some lenders may offer a lock-in for only
a short period of time (15 days, for example). Usually, the longer the lock-in
period, the higher the price of loan. The lock-in period should be long enough
to allow for settlement before lock-in expires.

Finally, make sure that you are comparing the interest rates on the same
day. Rates change daily, if not a couple of times a day.

So, what is the best way to compare loans among different lenders?

First of all when you compare different lenders you should compare loan
products of the same type (e.g. 30-year fixed). It does not make sense to
compare different types of loan programs (e.g. 30-year fixed vs. 15-year
fixed).

To compare loan products of the same type among different lenders:

1. Fix all lenders at one interest rate and lock-in period.

You have to compare different lenders on the same rate (e.g. 6.5%) and lock-
in period, otherwise you will be comparing apples and oranges.
Most lenders can offer you a variety of rate and point combinations for the
same loan product and allow you to choose the lock-in period.

2. Add up the total lender fees for that rate including points and loan related
fees. There are a number of different fees paid in connection with loan, and
some lenders have different names for them. One lender might offer to
waive one fee and then add another one. So when comparing loans of
different lenders you should look at the total sum of ALL loan related fees.
These fees can include processing and underwriting fee, mortgage insurance
premium, appraisal fee, the cost of a credit report, tax service fee,
application, commitment, wire transfer fee, etc. Points can include discount
and origination points and have to be converted into dollar amounts.

3. The lender that has lower lender fees has a cheaper loan than the lender
with higher fees.

Example:

For a loan amount of 200,000 on a 30 year fixed rate mortgage:

Lender A is offering you a rate of 6.375% with 0 points, 6.25% with 0.5
points, and 6.125% with 1 points. He also charges $450 in loan related fees.

Lender B offers you 6.25% on the same loan with 0.375 points, 6.125% with
0.875 points, and 6.000% with 1.375 points and charges $680 in loan related
fees.

Both lenders are quoting rates on a 45 day lock. Which lender has the better
deal?
 Lender A Lender B

Rate Rate

Points Points

6.125 6.000

1.000 1.375

30-Year Fixed Rate

6.250 Mortgage 6.125

0.500 0.875
Loan Amount:
$200,000

6.375 Lock-in Period: 45 days 6.250

0.000 0.375

Loan Fees: Loan Fees:

$450 $680

To get an interest rate of 6.125% lender A would charge you:

$450 + 1.000% * $200,000 = $450 + $2,000 = $2,450

and lender B would charge you:

$680 + 0.875% * $200,000 = $680 + $1,750 = $2,430

So lender B probably has the better deal.

REFINANCING
Refinancing means repaying an existing home loan before its tenure with the
money from a new loan taken under new terms and conditions.
Reasons Why People Go for 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. Changing from an adjustable-rate mortgage to a fixed-rate mortgage

If you have an adjustable-rate mortgage, or ARM, your monthly payments
will change as the interest rate changes. With this kind of mortgage, your
payments could increase or decrease.
You may find yourself uncomfortable with the prospect that your mortgage
payments could go up. In this case, you may want to consider switching to a
fixed-rate mortgage to give yourself some peace of mind by having a steady
interest rate and monthly payment. You also might prefer a fixed-rate
mortgage if you think interest rates will be increasing in the future.
Tip: If your monthly payment on a fixed-rate loan includes escrow amounts
for taxes and insurance, your payment each month could change over time
due to changes in property taxes, insurance, or community association fees.

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.

5. Getting cash out from the equity built up in your home

Home equity is the money -value difference between the balance you owe on
your mortgage and the value of your property. When you refinance for an
amount greater than what you owe on your home, you can receive the
difference in a cash payment (this is called a cash-out refinancing). You
might choose to do this, for example, if you need cash to make home
improvements or pay for a child’s education.
Remember, though, that when you take out equity, you own less of your
home. It will take time to build your equity back up. This means that if you
need to sell your home, you will not put as much money in your pocket after
the sale.
If you are considering a cash-out refinancing, think about other alternatives
as well. You could shop for a home equity loan or home equity line of credit
instead. Compare a home equity loan with a cash-out refinancing to see
which is a better deal for you
What is “no-cost” refinancing?
Lenders often define “no-cost” refinancing differently, so be sure to ask
about the specific terms offered by each lender. Basically, there are two ways
to avoid paying up-front fees. The first is an arrangement in which the lender
covers the closing costs, but charges you a higher interest rate.

Are you eligible to refinance?

Determining your eligibility for refinancing is similar to the approval process

that you went through with your first mortgage. Your lender will consider
your income and assets, credit
score, other debts, the current value of the property, and the amount you
want to borrow. If your credit score has improved, you may be able to get a
loan at a lower rate. On the other hand, if your credit score is lower now than
when you got your current mortgage, you may have to pay a higher interest
rate on a new loan.
Lenders will look at the amount of the loan you request and the value of your
home, determined from an appraisal. If the loanto- value (LTV) ratio does not
fall within their lending guidelines, they may not be willing to make a loan, or
may offer you a loan with less-favorable terms than you already have. If
housing prices fall, your home may not be worth as much as you owe on the
mortgage. Even if home prices stay the same, if you have a loan that
includes negative amortization (when your monthly payment is less than the
interest you owe, the unpaid interest is added to the amount you owe), you
may owe more on your mortgage than you originally borrowed. If this is the
case, it could be difficult for you to refinance.

Things to be kept in mind before going for Refinancing

Refinancing your home mortgage can come with some great perks. If you do
it with no money out of pocket, you can skip one to three mortgage
payments. You can save money on your payment or pay off your entire
mortgage faster when you have better terms. Here are a few things to pay
attention to when you refinance your mortgage loan, to make sure that you
don’t overlook anything that you might regret, or that can cause you
problems later:

1. Compare loans before deciding

Shop around and compare all the terms that different lenders offer—both
interest rates and costs. Remember, shopping, comparing, and negotiating
can save you thousands of dollars. Lenders are required by federal law to
provide a “good faith estimate” within three days of receiving your loan
application. You can ask your lender for an estimate of the closing costs for
the loan. The estimate should give you a detailed approximation of all costs
involved in closing. Review these documents carefully and compare these
costs with those for other loans. You can also ask for a copy of the HUD-1
settlement cost form one day before you are due to sign the final documents.
Tip: If you want to make sure the interest rate your lender offers you is the
rate you get when you close the loan, ask about a mortgage lock-in (also
called a rate lock or rate commitment). Any lock-in promise should be in
writing. Make sure your lender explains any costs or obligations before you
sign.

2. Take care of the additional costs involved

3. Apply for a pre-approval to many different lenders to make sure you are
getting the lowest rate possible. When you do this, make sure that with the
initial pre-approval application, the lender is not pulling your credit history.
You will want to reserve your credit pull for the lender that you are most
likely to work with. You can decide that after you have gone through the
preliminary pre-approval process with a few lenders. Each time your credit is
pulled, it docks your credit score just a little. If you have too many inquiries,
it could keep you from refinancing your mortgage loan with the lowest rate
possible. When you pre-apply for home mortgage loans online, most lenders
or mortgage service companies will not initially pull your credit. Check for
information about this on their website. They will usually tell you whether or
not they are going to pull your credit. Also, if on the application you do not
give them your social security number, they cannot pull your credit. If, on the
application, they ask you to describe your credit, they are probably not
pulling your credit.

4. When evaluating different lender offers, in the mortgage loan pre-approval

process, pay closest attention to the interest rates they are offering & the
closing costs. These are the two biggest factors that will help you figure out
which lender is right for you. If one of these two factors is too high, it could
offset the benefit of refinancing for you.

5. Get your interest rate and closing costs in writing as soon as you decide
on a lender to work with. Get your lender to give you a commitment in
advance of all of the costs that will be involved with your loan. Find out if the
refinance loan you are getting has a pre-payment penalty as well.
Sometimes lenders will leave out important information like this, if they think
it might scare you away from refinancing with them.

6. Make sure that your original mortgage does not have a pre-payment
penalty or early payoff penalty of any kind. Sometimes people will get into
their mortgage with the mortgage having a pre-payment penalty and they
will not even know about it. Pre-payment penalties usually range from 6
months to 3 years with a penalty for an early payoff. The penalty is usually
about the amount of 6 months worth of your mortgage loan interest, but this
varies. You would have to be able to have some significant payment and
interest savings on your refinance loan to justify refinancing a mortgage loan
with a pre-payment penalty.

What Is a Mortgage Prepayment Penalty?

A prepayment penalty is a provision of your contract with the lender that
states that in the event you pay off the loan entirely, you will pay a penalty.
Penalties are usually expressed as a percent of the outstanding balance at
time of prepayment, or a specified number of months of interest.

Usually, prepayment penalties decline or disappear with the passage of time.

Seldom do they apply after the fifth year. Partial prepayments of up to 20%
of the balance usually are allowed in any one year without a penalty. A
penalty that applies to a home sale as well as a refinancing, is a "hard"
penalty; if it applies only to a refinancing, it is a "soft" penalty.
 Recent trends of home loan in India

In order to understand the recent trends we need to know or understand

various factors. These factors play vital role in Indian home loan market.
These include interest rate on which banks provide home loan, tax rebate on
home loan and its impact. Apart from this to understand the recent trend we
need to compare the trends of home loan of different years. Here we have
compared the interest and other market trends of year 2009 with 2007-08.
This kind of comparison gives the result which helps us to understand the
trends of market of any industry. Apart from the impact of present and past
economic ups and down also affect the trends. Today the US slowdown is the
major issue which has affected almost all the industry. So we have also
discussed this issue in terms to define trend of home loan market in India.

Impact of slowdown on home loan market

in India

The fear of a recession looms over the United States. And as the clinch goes,
whenever the US sneezes, the world catches a cold. This is evident from the
way the Indian markets crashed taking a cue from a probable recession in
the US and a global economic slowdown. U.S slowdown has affected almost
all sectors not only in US but to all over the world. Indian economy has also
been affected by this slowdown because India is a growing country and
almost in all sectors various multinational companies have major
contribution. So the role of this slowdown is a major issue to be discussed
while talking about Home Loan Market in India.

Bankers who were earlier falling over each other to dole out home loans,
even for soft furnishings, have suddenly become choosy. Banks like SBI, ICICI
Bank, UTI Bank, IDBI Bank and leading mortgage firm HDFC are now
apparently making a conscious attempt to curb their aggression in the home
loan market.
Situation is like that if a customer who recently approached a private sector
bank for a home loan of about Rs 10 lakh for a tenure of 15 years found, to
his shock, that the eventual loan disbursement was just Rs 5 lakh.
Most bankers aren't willing to confirm any slowdown in their home loan
portfolio. On record, they attribute the marginal dip in home loan
disbursements to the recent hike in interest rate.

Privately, however, they have a different story to tell. "The slowdown in the
home loan market for select players like ICICI Bank was evident from January.
ICICI Bank's average home loan disbursement in a month is around Rs 2,500
crore in a month, which has come down to almost Rs 2,000 crore in March,"
said a private sector banker. ICICI Bank officials denied any slowdown in their
home loan portfolio and they say that the recent dip in interest rates has had
some impact on disbursals. However, in absolute terms, it is still low. Even
this slowdown the deposit growth for the sector as a whole is around 17%,
while credit is growing at almost 28%, forcing banks to become selective.
Institutions now charge a floating rate of 8 to 8.25 per cent on home loans
above Rs 20 lakh. Initial estimates by bankers suggest that the increase in
rate for home loans and other segments would be around 25-50 basis points
(0.25% to 0.5%). Even as the provisioning requirement has gone up around
60 basis points, the hike in interest rates may be lower as the impact would
be felt for the first year. It would also depend on how well capitalized the
banks are as the rise in provisioning and risk weightage would affect the
return on equity for banks. Weaker banks and banks with a large portfolio of
these loans are likely to be more affected and may hike rates first.

Home loan growth of disbursals were at 20 per cent in 2007-08 according to

a study by the credit rating agency CRISIL, a Standard & Poor’s company.
This rate is lower than the 30 per cent annual increase seen in the past three
years, but in absolute terms represents a substantial expansion. The slower
growth reflects the impact of rising property prices and interest.

Role of banks
The high level of competition being witnessed by the Indian home loan
market is evident from the fact that a slash in interest rates by one company
is emulated by its competitors. ICICI Bank and SBI are the leaders in the
home loan segment among banks, while HDFC and LIC Housing Finance are
front runners among HFCs.
On the rate cut war, FICCI said, ‘‘The advantage banks have in terms of
access to cheaper funds over HFCs has helped them in reducing interest
rates on loans.’’

The FICCI survey also maintained that most of the housing loans were in the
region of Rs 5-10 lakh, with tenure of 10-15 years.

The lack of long-term funds was the main constraint for the housing sector.
‘‘The sector also continues to be hit by a lack of foreclosure norms for HFCs.

Interest and market trends in year 2009

Home loan interest rates, especially on new home loan accounts, started
softening from the beginning of this year when the Reserve Bank of India
(RBI) announced sharp cuts in the repo rate and cash reserve ratio (CRR).
The RBI started slashing the key policy rates since October last year, after
taking into account the worsening liquidity situation of banks here. The
central bank has reduced its key policy interest rates (repo and reverse repo)
and reserve ratio (CRR) four times in the last six months.

The cut in the repo rate meant commercial banks would have funds available
at a lower cost. On the other hand, the cut in the CRR meant banks would
have to keep less money with the RBI and hence they had more money to
lend. Analysts believe that interest rates have not yet bottomed out and
there will be further cuts in borrowing rates over the next few months.
While the interest rate cut expectation is a thing of the past, the question is
will it go back to the old levels of 7-8 percent which contributed to a property
boom? Consensus is already building up for the fact that we are headed
towards a low interest rate regime in the coming couple of years, in line with
global trends. In the case of the domestic economy, the trigger for low
interest rates has already happened on the deposit front with banks reducing
the rate by 1-2 percent in the last few weeks. Now, the deposit rate has
come down to single digit even with respect to long term deposits (on 3-5
years) and that would mean banks have access to cheaper funds. With
inflation too sliding down at a rapid pace, there is hope for continuance of a
cheaper rate regime.

Following in State Bank of India’s (SBI’s) footsteps, other state-run banks

may also come out with scheme offering home loan at a fixed rate of 8%.
The Indian Banks’ Association (IBA) would review the response of borrowers
towards the SBI scheme after three weeks and if it finds that there has been
a good response, other banks will follow suit.
Last week, SBI had announced that it would offer home loans at a flat rate of
8% to all borrowers and would freeze this rate for one year. The chairman of
one of the major banks, who asked not to be named, said SBI can afford to
lend at such cheap rate as it has one of the best current and savings account
(CASA) deposit ratio. CASA deposits are the cheapest source of funds for a
bank and a high CASA deposit ratio brings down their average cost of funds.
This in turn helps the bank in offering cheaper credit while maintaining their
net interest margin (NIM). NIM is the difference between the rates at which
banks borrow and lend.
State-owned banks started cutting their home loan rates after country's
largest lender; State Bank of India froze its new home loan rates at eight per
cent for one year recently. In that:
• Public-sector lender, Central Bank of India has frozen lending rates on
new housing loans up to Rs 20 lakh at eight per cent for a period of
one year.
• Citibank said that it will lower its home loan rates by 50 basis points.
• HSBC, which has considerably scaled down lending activity, refused to
comment on its future course of action saying it did not make forward
looking statements.
• Despite repeated monetary policy measures initiated by the Reserve
Bank of India to step up credit flow, foreign banks and private players,
such as ICICI Bank, have not lowered lending rates.

In all we can say that The interest rates of home loans are expected to go down
even further according to analysts who foresee a cut down in the rates by
the RBI in the wake of the decision taken by US Federal Reserve to cut its
rates by a significant margin.

Interest rate and market trends of last

two years

In early 2007 the Reserve Bank’s (RBI) quarterly reviewed on 31st July of the
monetary policy, analysts felt that the moderate inflation can put a break on
the interest rate hikes and may $even result into a cut in the prevailing home
loan rates in India. There might be some activity to reduce the liquidity—a
hike in the cash reserve ratio (CRR) is a possibility.

Many bankers had of the opinion that the interest rates in the country has
peaked and there were indications that the central bank might not be
hawkish that time and more so with inflation falling from over 6% in April to
4.27% for the week ended July 7.

Weakening in the interest rates was scheduled and this is predicted to be

more market-led than regulator-driven. The policy will be substantially intact
and the interest rates will soften with deposit rates reducing to single-digits.
The Reserve Bank of India (RBI) raised CRR by 50 basis points to 7%. But
most of the leading banks and Housing Finance Companies (HFCs) were not
expecting to increase the lending rates, including home loan rates, to go up.

At the same time, there was very little to no chance that the banks will lower
the home loans rates. This news comes as something unexpected for a large
number of borrowers who had expected the interest rates to come down
after the revision of the credit policy.

Customers were skeptical that a hike in CRR may result in an increase in the
EMI especially when the floating rates on home loans in India has increased
by 400 basis points from 7.5-8% to 11.5-12% over the past two years.
Depending on the absorptive capacity of the banks and HFCs, it had be
decided later whether there would be an increase in the rates.
The decrease in the home loan rates that was expected would now be
deferred.
Just a year back the home loan interest rates were as low as never before
with easy pay-back options and flexible EMIs.

However, since the Reserve Bank of India had drawn the liquidity from the
system with two consecutive CRR hikes (cash reserve ratio), cheap loans
seem to have died an early death.
The tendency that is taking course now is completely anti-consumer and pro-
capitalist—low rates on deposit while sky rocketing interest rates on loans.
The present act has heaped the interest burden on the customers and the
restriction is put on the ECBs (external commercial borrowings) by the
government.
The interest rates on home loans, which were as low as 6.5 per cent just a
year ago were now towering at 11.25 per cent in 2007-08.

Then in September the lowering of interest rates on home loans had brought
some cheer among the homemakers with house loan seekers. Experts said
during past some months the growth rate of housing sector in India, was
sluggish due to rise in interest rates and other restrictions by Reserve Bank
of India while tightening its credit policy. The housing and realty sectors, had
felt the heat of high interest rates.

Last year Housing Development and Finance Corp (HDFC), the leader in the
home loan
market, and ICICI Bank, the largest private sector bank in India, both
announced raising home loan rates for existing as well as new customers by
as much as 75 basis points (100 basis points=1%). Both the entities also
announced raising deposit rates. The hike in interest rates as well as deposit
rates for HDFC was effective July 1 while for ICICI Bank it was June 30.

Tax rebate on home loan

Tax rebate on home loans means that you can save significant part of your
tax liability if you have taken a home loan. It works in following manner:
Interest paid on the home loan
As per Sec 24(b) of the Income Tax Act, 1961 a deduction up to Rs. 150,000
can be claimed. This deduction is claimed towards the total interest that we
pay on the home loan towards purchase or construction of house property
while computing the income from house property.

The interest payable before you acquire home or start the construction work
would be deductible in five equal annual installments commencing from the
year in which the house has been acquired or constructed.

In case of self- occupied property, this deduction is allowed only for one such
self - occupied property. The interest towards home loan taken for purchase,
construction, repairs, renewal or reconstruction of house property is eligible
for deduction under section 24(b).

As per the newly introduced Sections 80C read with section 80CCE of the
Income Tax Act, 1961 the principal repayment up to Rs. 100,000 on your
home loan will be allowed as a deduction from the gross total income subject
to fulfillment of prescribed conditions. Let us consider a hypothetical
example.

Your taxable Income: Rs 5,50,000

Principal repayment for the same year: Rs 1,10,000 and Interest payable for
the year: Rs 1,60,000

Total Deductions allowed: Rs 2,50,000 (Rs 1,50,000 towards interest payable

& Rs 1,00,000 for principal repayment of the loan)

Thus, your taxable income will reduce to Rs 3,00,000 ( Rs 5,50,000 - Rs

2,50,000 ).
 HOME LOAN IN INDIA
Whether you are Non Resident Indian or Resident of India, and you are
thinking to start your journey of buying a new house, looking to move to a
new house, investing in property or are looking forward to refinance,
Consider answering these questions to yourself:

Which type of home loan should I prefer?

Will it be the best scheme that will be fitting my budget?

Can any insurance plan cover for an unpaid monthly due?

These are just a dash of the questions to be answered when considering

taking the plunge…into the loan journey. The different home loan types are
hereby presented to you to make your journey that more smoother or step
by step, safer and comfortable. Yet, Got a fix on fixed rate or variable rates,
offset accounts, lines of credit or bridging loans!!

With so many real estates sites coming up in Indian market, finding an ideal
house isn't that big a issue nowadays, when you can virtually see all across
the home you need to purchase by the various real estate simulation
programs and videos available, but you still need to purchase it, right? To
really say "own" it. A home loan, also popularly identified as a mortgage, is
an easier financial option to own a house. Once you've decided to endeavor
on a home loan, there are so many things that you need to be informed with.
Not only is it going to be an emotional experience, it is also going to be a
very informative monetary journey, as you will be dealing with the whole
caboodle of the mortgage process along the way. There are thousands of
home loan companies waiting to provide you with your financial needs. Part
of the success of this whole financial move is partly in your hands, the
greater part relies on the efficiency of your chosen mortgage company.

HOME LOAN INTEREST RATES

The following table illustrates the comparison between the interest rates
from various Housing Finance Companies and banks.

As is apparent from the table, one can get the best fixed loans deals for a
period of 0-20 years from the “Bank of India”, expect of course, when the
loan period is between 6-10years, where Punjab National Bank would let you
have the best deal as far as the percentage of interest is concerned. Again, if
one wishes to go for floating loans, the bank which gives the best deal as far
as the interest rate is concerned is HDFC followed by PNB Housing Finance
with the lower rates.

As you know, there are quite a few hidden prices involved as well, so, please
be very vigilant while approaching a bank for a loan, because, the best rate
may not be the best deal always.

THE RESERVE BANK OF INDIA (RBI)

It has in the latest directive asked the Indian banks to be more "fair and
transparent" while signing their agreements with the consumers. This has
come following complaints from various consumer sections regarding home
loans.

Households should get credit counseling before signing any loan agreement.
In such case, banks should give credit counseling to customer before giving a
loan. Any non-governmental organization can also give independent credit
counseling to small borrowers.

Consumers often complain of not receiving benefits of falling interest rates

as banks tie their floating rate loans with its PLR and even when rates fall,
the banks kept the PLR unchanged. But when interest rates are hiked, the
banks increase the benchmark rate, thus making customers pay a higher
rate and consequently increase the number of EMIs too. The RBI has asked
the banks to mend rules for the same.

Individual borrowers should ask for the exact tenure and EMI while taking a
fixed rate loan. The RBI has also resolved to look into all consumer
complaints if it is bought to the regulator's notice.

The IRDA (insurance regulator) has powers to take action against banks if a
customer feels cheated while buying an insurance product. On its regulatory
role, the RBI is trying to maintain a balance between the extent of freedom
granted to the banks and the objectives of governance.

RBI has made it mandatory for all banks - including private and foreign banks
- to offer a passbook to their customers with the address and telephone
number of the nearest branch.
Customers have often been harassed by banks' call centers where there is no
accountability of the query made. The "do not call" registry has also been
flouted by banks as customers are bombarded with unnecessary product
offerings. The RBI has directed the Indian Banks' Association to come out
with a single "do not call" registry or when a customer adds his name to a
single bank registry it should then stop unsolicited calls from all banks.

On rising credit card frauds and wrong statements given by the banks, the
RBI has asked the customers to approach the ombudsman to redress their
problems. This way the RBI feels would inculcate more consumer friendly
practices among Indian banks.

HOME LOAN ELIGIBILITY FOR INDIAN

RESIDENTS

It depends upon the repayment capacity of the loan applicant. The maximum
loan that can be sanctioned varies with the banks and other housing finance
companies (HFC) and generally, the maximum loan amount granted is 80 to
85% of the cost of your home. Home loan eligibility corresponding to
repayment option is based on the following factors. Even though, the
eligibility criteria may vary according to the HFCs regulations.

Home loan Eligibility Criteria

Age
21 Years
(Minimum)

Age
58(salaried)
(Maximum)

60(Public
limited/Government
Employees)

65 (self employed)

Qualificatio Graduation
n

Stable source of
Income income and saving
history

Number of
Dependents dependents, assets,
liabilities

Other
income Spouse's income
sources

As home loan rates increase, the loan eligibility for a borrower becomes
stiffer. In such a scenario, some home loan borrowers might have to re-
evaluate their options (in terms of loan amount) on account of the new
eligibility criteria. Home loan eligibility can be enhanced by:

i) Increasing the Home loan tenure

One of the basic process of enhancing the home loan eligibility is by opting
for a higher tenure. This is so because the EMI, which an individual has to
pay, starts to decline as the tenure increases while the interest rate as well
as the principal amount remains the same. What changes though, is the net
interest outgo, which rises with a rise in tenure. And since the individual is
paying a lower EMI now, his 'ability to pay' and therefore his loan eligibility
automatically increase.

ii) Repaying other outstanding loans

There might be adverse effect on home loan eligibility for individuals with
outstanding loans like car loans or personal loans. Industry standards
suggest that existing loans with over 12 unpaid installments are taken into
account while computing the home loan borrower's eligibility. In such a
scenario, individuals have the option of prepaying in part/full their existing
loans. This will ensure that their eligibility for the home loan purpose is
unaffected.

iii) Clubbing of incomes

Home loan eligibility can also be enhanced by clubbing incomes of spouse,
children (son or daughter) staying with the applicant and having regular
income and even earning parents (father or mother) living with the applicant.
The eligibility in such cases, will be calculated on the clubbed income of both
the applicants enhancing the individual's eligibility to the extent of the co-
applicant's income.

iv) Step-up loan

Individuals can also enhance their loan eligibility by opting for step-up loans.
A step-up loan is a loan wherein an individual pays a lower EMI during the
initial years and the same is enhanced during the rest of the loan tenure.
HFCs usually consider the lower EMI of the initial years to calculate his loan
eligibility while the initial lower EMI helps increase the individual's 'capacity
to borrow'.

v) Perks
Salaried individuals must ensure that variable sources of income like
performance-linked pay among others are taken into consideration while
computing their income. This in turn will imply that the loan amounts they
are eligible for stand enhanced as well.

However, potential investors and borrowers must work out solutions best
suited for their profile after speaking to their home loan consultant and only
then consider acting on the options discussed. Because, increasing loan
eligibility can have an impact on other aspects of their financial planning.

NEW RBI DIRECTIVES FOR HOME LOAN

The Reserve Bank of India (RBI) has in the latest directive asked the Indian
banks to be more "fair and transparent" while signing their agreements with
the consumers. This has come following complaints from various consumer
sections regarding home loans.

Households should get credit counseling before signing any loan agreement.
In such case, banks should give credit counseling to customer before giving a
loan. Any non-governmental organization can also give independent credit
counseling to small borrowers.
Consumers often complain of not receiving benefits of falling interest rates
as banks tie their floating rate loans with its PLR and even when rates fall,
the banks kept the PLR unchanged. But when interest rates are hiked, the
banks increase the benchmark rate, thus making customers pay a higher
rate and consequently increase the number of EMIs too. The RBI has asked
the banks to mend rules for the same.

Individual borrowers should ask for the exact tenure and EMI while taking a
fixed rate loan. The RBI has also resolved to look into all consumer
complaints if it is bought to the regulator's notice.

The IRDA (insurance regulator) has powers to take action against banks if a
customer feels cheated while buying an insurance product. On its regulatory
role, the RBI is trying to maintain a balance between the extent of freedom
granted to the banks and the objectives of governance.

RBI has made it mandatory for all banks - including private and foreign banks
- to offer a passbook to their customers with the address and telephone
number of the nearest branch.

Customers have often been harassed by banks' call centers where there is no
accountability of the query made. The "do not call" registry has also been
flouted by banks as customers are bombarded with unnecessary product
offerings. The RBI has directed the Indian Banks' Association to come out
with a single "do not call" registry or when a customer adds his name to a
single bank registry it should then stop unsolicited calls from all banks.

On rising credit card frauds and wrong statements given by the banks, the
RBI has asked the customers to approach the ombudsman to redress their
problems. This way the RBI feels would inculcate more consumer friendly
practices among Indian banks.

REPAYMENT OPTIONS
Every housing finance companies or banks have customized repayment
options to suit every individual's requirement and also repaying capacity with
some tax benefits. They have thereby come up with more flexible and
Multiple Repayment Option. A few among them are.
Step-up Repayment Facility
The objective of step-up repayment is to provide the borrower with a
repayment schedule, which is linked to expected growth in income. It not
only helps a customer get a larger amount of loan as compared to the loan
under the normal housing loan; but the customer can avail of a higher
amount of loan and pay lower EMIs in the initial years, which is subsequently
accelerated proportionately with the assumed increase in his income.

Flexible Loan installments Plan

This repayment option offers a customized solution to suit the needs of
customers whose repayment capacity is likely to alter during the term of the
loan. In cases when a borrower is nearing retirement, the loan is structured
in such a way that the EMI is higher during the initial years and subsequently
decreases in the latter part proportionate to the reduced income of the
customer. This option helps such customers combine the incomes and take a
long term home loan where in the installment reduces upon retirement of the
borrower.

Tranche Based EMI

Customers purchasing an under construction property, need to pay interest
(on the loan amount drawn based on level of construction) till the property is
ready. Tranche Based EMI is a special facility offered by some banks to help
customer save this interest. Customers can fix the installments they wish to
pay till the property is ready. The minimum amount payable is the interest on
the loan amount drawn. Anything over and above the interest paid by the
customer goes towards principal repayment. The customer benefits by
starting EMI and hence repays the loan faster.

Accelerated Repayment Scheme :-

Accelerated Repayment Scheme offers you a great opportunity to repay the

loan faster by increasing the EMI. Whenever you get an increment, increase
in your disposable income or have lump sum funds for loan prepayment, you
can benefit by - Increase in EMI means faster loan repayment, saving of
interest because of faster loan repayment or invest lump sum funds rather
than use it for loan prepayment. The return from the investments also gives
you the comfort of paying the increased EMI.

Balloon Payment
Balloon Payment is an augmentation tool offered by the financial institutions,
which helps in increasing the loan eligibility of the customer without
increasing the EMI by assigning securities like National Savings Certificate
(NSC), LIC policies etc. The present value of the maturity amount of assigned
securities is combined with the loan amount to arrive at the enhanced loan
eligibility. Under this facility, the EMI is calculated on the net loan amount
(i.e. total loan less the present value of the maturity value of the securities).

HOME LOANS TENURE

Home loan tenures fixed by RBI are available up to a term of 15 years. Some
financial institutions have home loan tenures in the range extending up to
20, 25 and 30 years if the applicant fulfils certain criteria. However, you
cannot opt for a term that extends beyond your attaining retirement age or
60 years of age (whichever is earlier):

Self-
Salarie
Type of Employ
d
Property ed

15 10
Residential
years years

10 10
Plot of Land
years years
 Against
15 10
Existing Plot
years years
of Land

DOCUMENTATION
Documentation refers to the specific documents to be submitted by Resident
Indians as they apply for home loan. These documents are very much
necessary for the financial institutions to avoid any dispute and uncertainty.
The documents to be provided by the resident Indians include income proof,
property documents and personal identification documents, etc. which of
course varies based on the borrowers financial status and the type of loan
you want to avail. And of course every resident Indian should follow some
eligibility criteria before apply Home Loans in India.

However, there are some standard documents made mandatory for a loan
applicant to produce such as the loan applicant's profile, earning life of the
applicant and present financial status proof etc.

The Applicant's Profile refers to the bio-data of the applicant, mentioning his
address, age, family background and detail information.

The Earning Life of the Applicants' proof clarifies the capability of the loan
payment.

The Present Financial status gives the present capability of handling the own
contribution and other expenditures. This includes the mortgage to be
deposited against the loan amount.

HOME LOAN TYPES

Owning a piece of land or property is a lifetime dream for every individual.
There are many home loans provider in the market to make your dream
come true. But before you opt for any home loan provider, you need to
consider certain factors related to property that you are interested in buying
and also about the salient features offered by a home loan provider and also
study some Home Loans and Home Insurance FAQs which helps in applying a
Home Loan in India.

And the most important thing is you should know about each and every term
related with Home Loans before applying for a Loan. It is always advisable to
consult a home loan expert or consultant before applying for a home loan or
purchasing a property.

You can take different types of home loans like Bridge Loans, Home
construction Loans, Home Equity Loans, Home Extension Loans, Home
Improvement Loans, Land Purchase Loans etc for different schemes available
in the market. There are different types of home loans tailored to meet your
needs.

Home Purchase Loans: These are the basic forms of home loans used for
purchasing of a new home.

Home Improvement Loans: These loans are given for implementing repair
works, healing and renovations in a home that has already been purchased.

Home Construction Loans: These loans are available for the construction of a
new home.

Home Extension Loans: These loans are given for expanding or extending an
existing home. For eg: addition of an extra room etc.

Home Conversion Loans: These loans are available for those who have
financed the present home with a home loan and wish to purchase and move
to another home for which some extra funds are required. Through home
conversion loan, the existing loan is transferred to the new home including
the extra amount required, eliminating the need of pre-payment of the
previous loan.

Land Purchase Loans: These loans are available for purchasing land for both
construction and investment purposes.

Bridge Loans: Bridge loans are designed for people who wish to sell the
existing home and purchase another one. The bridge loans help finance the
new home, until a buyer is found for the home.
DEVELOPMENT FUND INSTIUTIONS(DFI’S)

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

It credit functions include providing credit to agriculture, small and village
and cottage industries through banks by way of refinance facilities to
commercial banks, RRBs, Coop Banks, Land Development Banks and other
Financial Institutions like KVIC. Its developmental functions are co-ordination
of various institutions, acting as agent of Govt. and RBI, providing training
and research facilities. The regulatory functions include inspection of RRBs
and Coop Banks, receipt of returns and making of recommendations for
opening new branches.

EXPORT IMPORT BANK OF INDIA

It undertakes following kind of functions:

-direct finance to exporter of goods.

-direct finance to software exports and consultancy services.
-finance for overseas joint ventures and turnkey construction project
-finance for import and export of machinery and equipment on lease basis
-finance for deferred payment facility
-issue of guarantees
-multi-currency financing facility to project exporters.
-export bills re-discounting
-refinance to commercial banks in India.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

Its functions include:

-administration of SIDF and NEF for development and equity support to small
and tiny industry.
-providing working capital through single window scheme
-providing refinance support to banks/development finance institutions.
-undertaking direct financing of SSI units.
-coordination of functions of various institutions engaged in finance to SSI
and tiny units.

NATIONAL HOUSING BANK (NHB)

Its functions are:
-promotion and development of housing finance institutions.
-refinance to banks and other housing finance institutions for credit facilities
granted by them for housing.
-inspection of books of accounts of housing finance institutions
-technical, administrative and advisory assistance to housing finance
institutions.
-providing underwriting and guarantee facilities to housing finance
institutions.
-arranging financing and resources for institutions engaged in housing
facilities.
-advising Central and other govt. in the matter of housing and housing
finance.
-collection and publication of information and data relating to housing
finance.
-maintaining control over corporate housing finance institutions.

INDUSTRIAL INVESTMENT BANK OF INDIA (formerly IRBI)

Its earlier functions were to provide finance for industrial rehabilitation and
revival of sick industrial units by way of rationalization, expansion,
diversification and modernization and also to co-ordinate the work of other
institutions for this purpose. agricultural and rural requirements.

INDUSTRIAL FINANCE CORPORATION OF INDIA Ltd (IFCI)

Its functions include:

-direct financial support (by way of rupee term loans as well as foreign
currency loans) to industrial units for undertaking new projects, expansion,
modernization, diversification etc.
-subscription and underwriting of public issues of shares and debentures.
-guaranteeing of foreign currency loans and also deferred payment
guarantees.
-merchant banking, leasing and equipment finance.

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

(ICICI)

It functions include:
-assistance to industrial undertakings for new projects, expansion,
modernization, diversification etc. in the shape of rupee loans or foreign
currency loans.
-Subscription and underwriting of capital issues
-Guaranteeing the payment for credits.
-Merchant banking, equipment leasing and project counseling.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

Its functions include:

-direct loans (rupee as well as foreign currency) to industrial undertakings as
defined in the Act to finance their new projects, expansion, modernization
etc.
-soft loans for various purposes including modernization and under
equipment finance scheme
-underwriting and direct subscription to shares/debentures of the industrial
companies.
-sanction of foreign currency loans for import of equipment or capital goods.
-short term working capital loans to the corporate for meeting their working
capital requirement.

Of late, with the reforms in the financial sector, IDBI has taken steps to re-
shape its role from a development finance institution to a commercial
institution. It has floated its own bank IDBI Bank as also a Mutual Fund.
 Prime lending Rate
This is the benchmark interest rate on the basis of which financial institutions
decide the interest rates on the various loan products.

Cash Reserve Ratio (CRR)

It is the percentage of cash deposits that banks need to keep with the RBI on
an everyday basis. Increasing the CRR also means banks have lesser money
to lend. The RBI adjusts the CRR to change the amount of liquidity in the
financial system, which helps to keep the inflation within reasonable limits.
Also, when CRR is increased, the interest rates also increase as the amount
of liquidity in the financial system decreases. RBI has made frequent CRR
cuts in the recent past to inject liquidity into the financial system. This is
expected to impact the interest rates bunched with other favorable aspects
for home loan applicants.

Repo Rate

This is the interest rate at which RBI lends money to the banks whenever
they need to borrow funds from the RBI. When the repo rate decreases its
good news for the banks as they can avail more funds at a lower interest rate
and vice versa.

Reverse Repo Rate

This means just the opposite! Here, the RBI borrows funds from the banks
and when the Reverse Repo Rate increases banks are very happy to lend
money to RBI because of the attractive interest rates RBI offers to obtain the
loans.

SLR (Statutory Liquidity Ratio) Rate

Every commercial bank needs to maintain a certain amount of funds in some

form, which includes cash, gold, government bonds etc. before they can
provide credit to its customers. This measure helps RBI have a control over
the bank’s credit expansion, keeping it realistic.

The collective impact of all these rates influence the liquidity in the financial
system and lead to an increase or decrease in PLR, which in turn affects loan
lending rates.