As you guys may be aware that I am heading Credit division in a MNC Bank. I have bought a house in Mumbai way back in 1997 obviously availing a loan. Since I have been on both the sides of table i.e. as a lender and as a borrower, I thought I should share my experiences and my ideas and give few tips on availing of a housing loan with this esteemed MS Community.
The following are tips:
- Identifying the Property: Make a independent judgement of the property keeping the mind the things very extensively covered by MS member- BLASTER in his Advice in June, 2003. Do not get carried away with the schemes like buy a property and get the cheapest EMI available from ICICI or HDFC or....... Also identify your repayment capacity.
After identifying the repayment capacity- check the loan availibility on the calculated repayment capacity and compare this with the cost of house+registration +stamp duty + brokerage (if any). While calculating the repayment capacity, among other expenses DO NOT forget to add the maintainance cost to be paid to the society. This will be a strain on your future cash flows.
- Interest Rates: Interest rate is paramount for making a decision of the lender. Check for the institution who provides with the best interest rate. Some corporates (employers) also have tie up with institutions to provide cheaper rate housing loans to their employees. Please make sure that the institutions translate the jargons into simple lay man’s language. At present the interest rates in India is quote low, thus in my opinion one should lock the loan at fixed interest rate. Check whether prepayment without penalty is allowed in fixed interest rate scenario.
Generally institutions do allow prepayment with a penalty in a fixed interest rate loan and prepayment without penalty in a variable interest rate loan. In Variable interest loans institutions do not lower the interest rate as much as if someone avails for a new loan. SURPRISED!!!, Yes this is a fact, all variable loans are a fixed percentage over the institution’s Prime Lending Rate (PLR-Benchmark Rate).
To make things clear here is an example: Suppose I take a loan of say INR 1 mio at variable interest rate of 8% p.a. The Agreement will be such that this 8% interest rate is arrived as 7.75% (PLR) + 0.25% (Margin). If the interest rates after 1 year falls and your friends may borrow at 7% p.a. from the same institution. But the same institution will be charging me 7.50% p.a. (a reduction of only 0.50%)....when you check with the institution...they claim that their PLR has come down from 7.75% to 7.25%, which then a margin of 0.25% added, the interest rate works out to 7.25% (PLR) + 0.25%= 7.50%. Thus it is very wise to go for a fixed rate loan, even if the prepayment is only allowed with a penalty.
Tenor of the Loan: There is no fixed rule to the tenor of the loan. Needless to mention the shorter the tenor higher the EMI and vice versa. But one obvious thing is to take into account that one’s income in the years to come will increase, thus if the outflow towards the loan is 50% of the Net income today will be 20% or even lesser of the Net income 10 years down the line.
Monthly/ Annual rests: In a monthly rest the interest for each month is calculated on the reduced principal i.e. after deduction of the repayment in the previous month. Whereas in an annual rest the interest of each month is calculated on the same principal for each year and subsequently reduced in the next year. Though there is a marginal concession of interest, if opted for annual rest, it is prudent to opt for a monthly rest.
Others: Choose a lender who apart from being competitively better in the above conditions, should also be able to give efficient and good service. The most important of the services is the interest deduction certificate provided by the institution once a year for claiming Tax deduction.
Nevertheless base your decisions on the most critical factor which is understanding of how the EMI works. EMI works on the principal that : when your installments begin: repayment will be More towards Interest component and Less towards Principal component, the total EMI remaining constant. This ratio, as the loan progresses will change and towards the end of the loan you be paying More towards the Principal Component and Less towards the Interest Component still the EMI being constant.
I guess I will stop here. If you have any questions/queries, please revert. I will be more than happy to assist you. Also let me have your comments.
Regards
Vijay