Buying your dream house

Written by Abhay Rao | Updated: Jun 1 2009, 05:19am hrs
The minute one thinks of taking a housing loan, the options available and the points to keep in mind always seem to jump at you faster then you can process them or jot them down. It is a daunting task, and is considered the most important purchase ever made by a person. While wanting a loan to purchase an apartment is a small facet of housing loans, the overall gambit of loans available for housing is quite extensive. (A detailed list has been provided in the tables.)

While the credit culture is yet to catch up in India, it has come a long way for the housing loan market itself, which is currently valued at Rs 1,25,000 crore and has been growing at 18% year-on-year since 1999, except for last year where growth was only 7-8%. However, the over market outlook within the industry is still strong, with projections indicating the total disbursement of funds could be in the range of Rs 2,00,000 crore by 2012.

Harsh Vardhan Roongta, CEO, ApnaPaisa Pvt Ltd, told FE, When one is going in for a housing loan, the first thing one should look out for is if the lender can give you the amount of loan money required to buy the house they want. The second thing as per me is one needs to check if the property they wish to purchase is acceptable and documentation sufficient to procure the loan. This is essential, as in the case of old buildings or under construction buildings, one may not get the loan since the property or area falls under a high risk or non-approved category. With under construction buildings one can get a loan only if the builder is pre-approved via the bank as having a stable enough track record. After all of this is done, one should then look at the rates. Rates are broadly categorised as interest rates and other charges applicable. These charges could include stamp duty charges, legal charges on taking a mortgage, prepayment charges, etc. When one looks at interest rates purely, the fixed rate option seems to me a lot more expensive and hence a semi fixed or fully floating option is a better bet. Say Canara bank recently launched a scheme wherein for loans up to 30 lakh, they would charge 8.25% for the first year and 9.25% for the next four years, after which it varies as per the basis points. Some people may prefer such semi fixed and semi floating rates in comparison to floating rates, which currently charge approximately 9.5% interest for 20 years. People have their own preferences when it comes to rates and hence there is no one rate that is better for all. The irony in the system in India is that while one ideally selects a home first and then looks at financing options, with many properties being non-fundable one should keep this aspect in mind too while selecting a house.

Interest rates

Home loans are available on a fixed rate of interest and floating rate of interest. In fixed rate loans, the interest rate remains fixed over the life of the loan, irrespective of the interest rates in the open market. The plus point of fixed rate loans is that they remain steady over the years, making at least one aspect of your monthly cash flow predictable. But the flip side is that the lenders charge a higher rate of interest for fixed-rate loans because if interest rates shoot up, they lose the opportunity to make more money on the funds they are lending. In floating rate loans, the rate of interest changes according to a set formula, as interest rates fluctuate in the open market. The plus point is that lenders charge a lower rate for such loans because you are taking on some of the interest-rate risk. The downside is that interest rates may rise anytime and you can end up paying more than fixed rate loans.

Ashok just turned 30 and is working as a senior marketing executive with a MNC. He wants to buy a house and requires a loan of Rs 50 lakh, which he plans to pay back over a 20 year period with a floating interest rate. The rate that HDFC quotes is the most common rate available and is followed by all state banks, Indian Bank, Bank of India, Vijaya Bank, Allhabad Bank and a few others. Other companies have a slightly higher interest rate and hence higher EMIs as well. Amongst these, almost all the banks offer up to 85% of the total cost incurred to buy a house. Reliance, which offers interest rates on the higher side, has the advantage of offering up to 90% of the total cost incurred.

Ashok, now having done some research, knows the interest rates charged and EMI it would cost to take the loan. The first and most important thing needed is to see if the EMI charges can be afforded by him. As a thumb rule, the maximum EMI one should maintain is 40% of the monthly income, in which case a maximum of Rs 24,000 can be spent by Ashok as EMI.

Many people fall into the trap of deciding their EMI based on the rise in salary they are expecting. This can lead to problems and it is advisable to rework the EMI with the bank or housing finance company, once you do have a higher monthly income and you feel you can afford to spend more money towards the loan repayment.

Tips

Always choose the lender after finalising the property: Shopping for the home loan comes after identifying the property. While most banks offer finance for ready to move in properties, some banks lend for a property that is being self constructed or a property under construction. Finalise your property first and shortlist the financing options thereafter.

Make sure you fit in the eligibility criteria: Banks follow different criteria to calculate loan eligibility. In case loan eligibility based on your income is an issue, you should talk to different banks to find out which bank can provide you with the maximum amount. There is also an option of clubbing yours and your spouses income to increase your loan eligibility.

Be prepared to lose the processing fee: Banks charge a processing fee to get any loan application on roll. The fee is around 0.50% to 1.00% of the total loan amount. Paying the processing fee does not ensure the clearance of the application but that your application will be seen. Moreover, the processing fee is non-refundable. Whether your loan is sanctioned for a higher or lower rate, you will not get the processing fee back. Never trust verbal promises made by any bank representative. Get everything in writing.

Research the lenders interest rate trend: When choosing between fixed and floating interest rates, in case of the fixed home loan rate, rate of interest does not remain fixed for the entire tenure but for a certain period of time. The lender has a right to arbitrarily change the rate further. On the other hand, if you are opting for the floating rate loan, be sure to check whether the rates of your chosen lender had floated down over the last couple of years.

Do not get rushed: Never hasten the shopping process. The cost of your loan largely depends on how you negotiate. Home loan lenders primarily take your income and personal profile into consideration. Other points you should take into account are processing fee, legal charges, pre-payment charges, valuation fees, and other hidden costs.

Hidden costs

Some of the other costs that one may incur, which are usually not that apparent and should be considered, include any processing or administrative fees of any nature, commitment fees though this is rarely charged nowadays, legal fees payable to the lender or to the legal consultants of the lender and technical or valuation charges payable to the lender or to his technical consultant.

The two most important costs that one may incur include stamp duty on creation of mortgage and prepayment charges. Some banks charge stamp duty whilst other banks normally just have a clause that requires this to be paid in the event the state government actually charges this amount. The escape route for non-payment of this duty are progressively being eliminated and the fact that the consumer carries the liability to pay this duty in the future if demanded by the state government along with interest and penalties in the future. So, this should not really be used by a consumer to eliminate a lender just because he is paying this stamp duty to the government. Prepayment charges are the biggest charge that most consumers miss taking into account. More than 50% of consumers will prepay their home loans and will incur this cost. A loan can be prepaid in part or in full at any given point of time. You can prepay a loan even when it is only partly disbursed. Most banks have an upper limit on the number of times a person can prepay his loan in a year as well as on the minimum amount you can prepay each time. Until recently, banks charged a penalty for part or full prepayment.

Increased competition has forced most banks to allow partial prepayment at nil charge. Most banks charge a prepayment charge if you make full repayment and ask for release of your property documents.

Finding your dream home is only the first step, and, while turning your dream into reality, the most important step of all is research, research and some more research, so that before you begin your property dealings, youre as well equipped as you can get.