Flat Buyer's Guide - Chapter 5 Home Loan

Recent Belleza Blue case in Pune (2^nd Campa Cola like case in Maharashtra) where high court has asked the residents to vacate the illegally constructed 3 floors of the building, is quite a shock to all the flat buyers. 

I am working with one of the very few trust worthy real estate companies in India from past 6 years and thus thought of coming up with this guide for buyers of residential apartments.

I hope to cover all the necessary points / information so that technical or legal terms used in the real estate filed do not sound Greek to a lay flat buyer and he is not lost while speaking with the builder. **While doing so I have tried to furnish as accurate information as possible to best of my knowledge but e & oe (errors & omissions expected).

Index
Chapter	Synopsis
1. Basic concepts & definitions	Carpet, Built-up, Saleable etc areas & more
2. Units & Measurements	Sq. ft., Sq. Mtrs., Guntha, Acres, hectares etc & more
3. Legal Documents	Title & Search Report, NA, 7/12, PR, Blue Print, CC, Index – II, OC, POA etc
4. Material & Specifications	Tiles, Doors, Windows, Painting etc
5. Home Loan	Eligibility, EMI, Tenure, Loan Transfer etc
6. Government Duties & Taxes	Stamp Duty & registration, TDS, ST, VAT etc
7. Miscellaneous	RERA, Flat Inspection, Project Reviews etc

Chapter 5: Home Loan

1.     As far as you can; always go for a loan from well known banks like SBI, HDFC, Axis, ICICI, LIC etc. They are fair in their dealings (especially when it comes to interest rates), and they put up a through legal check on the project.

2.     Go for co-operative banks only if your loan eligibility is a problem with above stated well known banks. Avoid them even if you have an a/c with that bank since its inception as these co-operative banks start a home loan with rate of interest as low as any Public Sector Bank (say SBI) but increase it unjustifiably during the tenure of loan.

3.     If you are a regular salaried employee it’s better to completely avoid the micro housing finance companies, credit societies etc for home loans because they charge exorbitantly high interest rates and there is a scope of doubt on their legal checks.

4.     Your loan eligibility is decided on following factors:

a.     Your credit history - if you are regular in paying your credit card bills and loan installments of previously taken loans, none of your cheque is dishonored, you have not defaulted on income tax payments etc then you have a great credit rating.

b.     Present Earning - Generally, your loan amount is half of the combined per month take home salary of all the applicants in thousands multiplied by 1 Lakh.

i.e. if a per month take home salary of you, your spouse and a parent of yours (your house is registered in the name of all 3) is say Rs. 50 thousand then,

Your loan sanction amount = [(50 / 2) X 1 Lakh] = 25 Lakhs

Or to simplify,

Loan amount = [(50 thousand / 2 thousand) X 1 Lakh] = 25 Lakhs

No. of years of your service will also play an important role in this calculation. Higher the better.

c.      Cost of your property - As per the present RBI guidelines, banks can not sanction loans for more than 80% of the property cost (even though you are eligible for more loan as per your present earning and) provided you have already paid balanced 20% of the property cost. This 20% of the property cost is called as ‘own contribution’

i.e. if you are eligible for a loan of 25 Lakhs as per your present earning, and your property costs just Rs. 10 Lakhs, you will get loan of Rs. (10 Lakhs * 80% =) 8 Lakhs only and that too after you have paid Rs. 2 Lakhs to the builder.

5.     Tenure & Monthly installment:

a.     Generally, depending upon the no. of years of service left of the owner with highest income, bank sanctions loan with a maximum tenure of 20 years to 30 years.

b.     As a thumb rule for every lakh of rupees of a 20 years home loan, monthly installment works out to be one thousand rupees.

i.e. for a 20 years loan of Rs. 25 Lakh, you will end up paying Rs. 25 thousand as an EMI.

c.      Also, Higher the tenure::Lesser is a per month installment

But, Higher the tenure::Costlier is the loan

d.     At the end of 20 years of your home loan tenure, you end up paying double the cost of property.

e.     Thus it’s always better to pay off the loan as early as possible. This could be done by paying more than your monthly / yearly installment. The extra amount you have paid is deducted from the interest amount and thus proportionately reduces the interest component.

Few banks come up with a scheme that ‘pay so and so amount extra and get 0.05% reduction in your interest rate or so many months reduction in your total loan tenure’.  

f.       As per the present RBI guidelines, there is no penalty / charge / fees for preclosure (i.e. paying off your loan from your own funds, earlier than the sanctioned period).

g.     But there might be some charge or penalty, if you transfer your loan from present bank to another.

6.     Loan Transfer:

a.     Your EMI (Equated Monthly Installment) is a disproportionate combination of interest component and principal amount component.

i.e. in the initial years of your loan payment, interest component could be as high as 80% of the EMI which reduces with time and at the fag end of your tenure principal component will be much higher than the interest component. (Interest component is what banks earn out of home loan funding and thus they are obviously keen on recovering it as early as possible).

b.     Considering this, transfer of the home loan from one bank to another is advisable only if:

                                                                                i.            Still more than half of your loan tenure is left or

                                                                              ii.            There is a considerable difference in the interest rate (if there is not much of a difference in the rates then processing fee of the new bank will eat into the gains because of the rate difference).

7.     If you know the interest rate, you may find out your EMI for the desired amount of loan at: EMI Calculator

Here is some info from ET: HowToApplySwitchCloseHomeLoan

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