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Ashish Gupta, ET Bureau, Aug 8, 2010, 04.34am IST


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A credit appraisal for a home loan is an important part of a loan eligibility evaluation process. The
appraisal is undertaken by a bank. Each bank has set its own parameters and standards for evaluating
the credit worth of a potential borrower. The eligibility for a loan that a person can avail of depends on his
creditworthiness.

A bank evaluates the repayment capacity of a borrower considering factors such as income, age,
qualifications , experience, employer , nature of business (if selfemployed ), security of tenure, tax history,
assets owned, additional sources of income, other loan obligations , investments etc.

Based on the parameters of the bank, the maximum loan eligibility is worked out. The final loan amount
sanctioned by the bank is according to the loan-tovalue (LTV) norms, instalment-to-income ratio (IIR)
norms and the fixed obligation to income ratio (FOIR) norms laid down by the bank.



This ratio is used to calculate the loan eligibility of a borrower and is generally expressed as a
percentage. This percentage denotes a portion of the borrower's monthly instalment on the home loan
taken. The percentage may vary from 33.33 to 40.

For example assume the IIR is fixed at 40 percent. Now, if the gross income is Rs 1 lakh per month,
according to the given IIR ratio, the borrower is eligible for a loan where the instalment does not exceed
Rs 40,000 per month (i.e. 40 percent of the gross monthly income).



Banks also use this ratio to calculate the loan amount that a person is eligible for on the total cost of the
property . There is an upper limit on the maximum loan amount that a person is eligible for irrespective of
the loan eligibility norms. The maximum amount of loan is pegged to the cost or value of the property.

The loan eligibility according to the other parameters may be higher, yet the loan amount can't exceed the
cost or value of the property. The ratio varies between 70 and 90 percent of the registered value of the
property.



A bank takes into account the instalments of all other loans previously availed of by the borrower,
including the home loan applied for. This ratio includes all the fixed obligations that the borrower is
supposed to pay regularly on a monthly basis. The fixed obligations do not include statutory deductions
from salary such as Provident Fund, professional tax and deductions for investments such as insurance .

For example, assume a borrower has an income of Rs 1 lakh per month. If he has a car loan instalment
of Rs 10,000 and a personal loan instalment of Rs 2,000 per month, and a proposed housing loan
instalment of Rs 20,000 per month, the FOIR is 32 percent, the eligibility is Rs 32,000 - all loan
instalments divided by the monthly income.
The bank may have a standard 30 percent of FOIR. So the total instalments the person can pay, as per
the bank's FOIR standard, would be Rs 30,000 per month. As he is already paying Rs 12,000 towards the
car and personal loans, he has Rs 18,000 left, and the loan will be calculated taking Rs 18,000 per month
as the housing loan repayment capacity. Accordingly, the housing loan amount is reduced.

Generally, the lowest of these three parameters is the amount of loan that a borrower is eligible for.

EMI EMI (equated monthly installment) is an unequal combination of two components - principal and
interest. This is the amount of money the borrower owes the lender every month, through the tenure of
the loan.

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Also called down payment, margin money is typically around 10-15 percent of your loan amount. The
bank does not disburse the entire cost of the property when you seek a home loan. It lends only around
85-90 percent of the project cost. The borrower is expected to bring in the remaining money. This is
referred to as down payment or margin money.

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Some people may need money to repair, renovate, remodel or extend their home. Banks offer home
improvement loans that you can use for making structural improvements, external and internal repairs,
flooring, painting, improving plumbing, electrical work etc.

   

A loan applicant can apply jointly for a loan with his spouse or parents. This way he can club the incomes.
This increases his loan eligibility.

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This policy offers insurance for household belongings against fire, malicious damage, burglary and
natural disasters like flood and earthquake. The householder's insurance policy is a comprehensive
package that protects the house and its various contents against a variety of risks. It is a single policy that
takes care of a number of contingencies.

    

Kavita Sriram, TNN, Feb 3, 2008, 05.44am IST

Times are fast changing. Remember when your father purchased a house? In all probability, it was when
he was close to retirement. It was possible to have saved enough money to buy a house only after years
of working.

Supplemented with his retirement money, he could have managed to purchase a house. Today, many
homeowners are young people in their thirties. Thanks to banks offering loans and increased earning
capacities, buying a house is no longer a distant dream.

Borrowers can live in the property, even when they are still repaying the loan. At the end of it, you have
an asset that has multiplied manifolds in value. Home loan enables you to do just that.
Banks give home loans for constructing a home or purchasing a ready-built house, flat or residential plot.
They even re-finance existing loans that borrowers may have availed from other banks. The loan amount
sanctioned to borrowers is based on age, salary, educational qualifications, credit history and previous
employment track record.

You can club the income of your spouse, in order to increase your loan eligibility. Typically, banks only
lend the amount where your monthly EMI outflow is 30 to 50 percent of your salary. Any amount greater
than this would make repayments towards the loan a burden and one may default.

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EMI stands for equated monthly installment. It comprises interest and principal components. EMI
repayments commence when you take a full disbursement of the loan amount. Pending final
disbursement, borrowers only pay interest on the amount disbursed. This is called the pre-EMI interest.

When a borrower makes EMI payments to the lender, during the initial years, a large chunk of money will
flow towards interest repayment. As the years roll by, the principal component increases.

If you do not own a house of your own, it is time you consider taking a home loan. Borrowers can also
avail tax benefits on both the principal and interest components of the loan. This makes it even more
lucrative.

    

Home loans usually come in three flavours - floating, fixed and hybrid. In case of a floating rate loan, the
interest rate fluctuates with the prevailing market rates. It is usually pegged against the bank's prime
lending rate.

This moves up or down depending on the movement of repo rates, inflation, cash reserve ratio and
liquidity in the system. Exposed to a host of external factors, a floating rate of interest is simply
unpredictable. But as much as 80 to 90 percent of the borrowers have opted for the floating rate.

Borrowers, who opt for the floating rate, intend to benefit from a fall in interest rates. If, on the contrary,
the rates go up, they have to pay out more money in the form of EMI to the lender.

They understand that interest rate fluctuations follow a cyclic pattern and are further lured in by the lower
cost of this loan. If you are taking a short-term loan, simply float. It is difficult to predict the interest rate
scenario over a long term.

Pure fixed rate loans, as the name implies, remain fixed for the entire tenure of the loan. Such a product
is offered by very few banks as interest rate on them is very high compared to floating rate loan. What
most lenders offer is fixed rate loans - fixed for a short tenure, say five years. So the rate remains fixed for
five years, after which the interest rate is reset to the value prevailing at that time.

Fixed rate is for borrowers who are anxious every time the rates climb up. Those who want predictability
and want to set aside fixed money towards their loan repayment can select fixed loans. Such borrowers
believe that the rates will travel northwards.

Before locking into a fixed rate, go through all the fine print to know how 'fixed' the product really is. If it
comes with a reset clause, it means the bank can at its own discretion increase your rate, though it is
called a fixed rate loan.
Between the fixed and floating rate option, investors have the hybrid loan alternative. It is a combination
of fixed and floating rate loan, where a borrower can decide how much he intends to lock under fixed and
how much he wants to expose to floating rates.

If you're unsure simply lock 50 percent of the loan under fixed and remaining under floating rate. This
innovative product gives more flexibility and option to the borrower.

With interest rates giving all indications of going southwards, it is time to consider investing in a house. A
home loan will help you realise your dream of owning a house.

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Kavita Sriram, TNN, Nov 11, 2007, 02.31am IST

Just when everyone thought that the real estate sector boom had saturated, things seem to be rolling
once again. New borrowers are offered lower rates and existing borrowers are waiting for their due rate
cuts. Fixed, float, monthly rests, yearly rests, fees, penalties, lender, rates -an applicant must decide on a
host of factors when it comes to home loans. Lenders also offer numerous flexible products that
applicants can opt for. Banks give home loans for constructing a home or purchasing a ready-built house,
flat or residential plot. They even re-finance existing loans that borrowers may have availed from other
banks.

The loan amount sanctioned to a borrower is based on his age, salary, educational qualifications, credit
history and previous employment track record. You can club the income of your spouse, in order to
increase your loan eligibility. Typically, banks only lend an amount where your monthly EMI outflow is 30
to 50 percent of your salary.

Any amount greater than this could make repayments towards the loan a burden. When a borrower
makes EMI payments to the lender, during the initial years, a large chunk of the money will flow towards
interest repayments. As the years roll by, the principal component increases. Step-up option The cost of
buying a house has gone up manifolds. It might be unaffordable to a large chunk of people, especially
those who have started earning recently. Step-up loan is a flexible and innovative product designed
specially for this segment of people.

A step-up loan is a kind of home loan, which offers varying EMIs spread over the loan's tenure. During the
initial years of the tenure of a step-up loan, the EMIs are small. This makes it affordable for the young
working population that has embarked on its career and holds tremendous growth prospects.

As the years roll by, the EMI outflow increases. It is assumed that the borrower will grow up the ladder,
get promotions and earn increments. Hence, though EMI increases with time, it will still appear affordable
for the borrower.

Since a step-up loan takes into account the future earning potential of the prospective borrower, it
increases his loan eligibility. He is lent a huge amount - much more than his current income. Hence, those
earning lesser income initially, can also afford a larger home with their loan. Step-down option If a
borrower is close to his retirement years and has a huge earning capacity, some lenders offer stepdown
loan products. Here, the rates are huge initially as the borrower can easily afford high EMI repayments.

Gradually, as the years roll by, the EMI installments come down. This is the step-down loan, where the
burden of EMIs comes down with time. Depending on your requirement and financial position, select a
product that best suits your needs.
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Kavita Sriram, TNN, Apr 8, 2006, 10.40am IST

Today's dream homes are no longer the four walls and a roof. Builders have built apartment complexes
and condominiums that give the residents' a resort-like lifestyle. A gymnasium,swimming pool,billiards
table, party halls, gardens, children's play area, round-theclock security, badminton and tennis courts, and
the list goes on.

The joys of companionship in community living, the feeling of security, reduced pollution within the
compound, doctors and daycare facilities at your doorstep, and other services - this is an unimaginable
array of benefits that today's home owner is bestowed with. Affordable interest rates, booming housing
sector and banks trying to woo customers, all seem to go in the favour of a potential investor. However,
houses with these facilities come with a hefty price tag that could mean decades of EMIs. To top it up are
the registration, legal and other home improvement expenses that cannot be simply overlooked.

So will your dream home remain a dream for the want of more funds? Hold on. There is some good news.
Some banks are experimenting with innovative schemes that could make you eligible for those expensive
abodes.

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Consider a scenario where you and your neighbour earned Rs 30,000 a month. If you and your neighbour
both approach a bank for a home loan,will both be sanctioned the same loan amount and pay the same
EMI? Not anymore. If you are young, work for a big company, have been in a steady job over the past
few years, have great potential to climb up the ladder and are expected to get greater pay hikes, then
some banks are willing to stretch your loan eligibility .

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It is a flexible innovative scheme conceived by housing finance companies (HFCs) that seems to meet
the borrowers' financial needs while re-evaluating his repayment capacity. People who embark on new
careers draw lesser incomes than their experienced counterparts.

However, as years roll by their salaries are sure to shoot up. So, when a young trainee engineer in a
software firm approaches a bank for a loan, his actual eligibility may be very less. However, keeping his
growth potential and future earnings potential in mind, some banks sanction him a bigger loan amount.
Wouldn't it be nice if the EMIs were less over the initial years and increased when the borrower's salary
increased? This is exactly what happens when you go in for a step-up loan option.

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This flexibility makes buying a home affordable rather than paying rent every month. The bank makes an
assumption of your annual salary increase and calculates your loan eligibility accordingly.You get a larger
amount of loan as compared to the loan under the normal housing loan. Further, repayment schedule is
linked to your expected growth in income. Step-up loans can be easily availed by young salaried
employees or professionals in the beginning stages of their careers and whose earnings potential are
bound to head northwards in years to come.

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Assume that you can work for another 10 years before contemplating retirement and your spouse has
another 15 years of service left. If you take a 15-year loan, then evidently your repayment capacity is
more in the initial years of loan tenure than in the final years. The years closer to retirement will be more
financially demanding for other purposes like medical expenses and so on. Step-down loans are aimed to
benefit borrowers who fall under this category. The loan is structured in such a way that the EMl is higher
during the initial years and subsequently decreases in the latter part proportionate to your reduced
income.

       

Kavita Sriram, ET Bureau, Aug 2, 2009, 06.16am IST

Vijay is a maintenance engineer with a private firm. His monthly take-home salary is around Rs 35,000.
With many public sector banks offering single-digit interest rates, Vijay feels this is the best time to invest
in his dream house. A two-bedroom house on the outskirts costs about Rs 16 lakhs. Will any banker lend
him this money? Is he eligible for a home loan of Rs 16 lakhs?

There are numerous factors that banks take into consideration when computing your loan eligibility. Age
of the applicant, his salary, repayment/credit history, savings, profession, location of property, health
condition and other debts have a direct bearing on the loan amount sanctioned. Some professions are
categorised as negative or risky by the lenders. People in such professions may find it difficult to get a
loan sanctioned. On the contrary, some jobs are considered more stable with lesser probability of default.
They are on the preferred list of most lenders.

It is imperative that the property an applicant wishes to purchase falls within the geographical limits as
defined by the bank. As a thumb rule, banks will lend to applicants who can set aside 40 percent of their

monthly income towards their home loan repayments. Based on this, an individual's loan eligibility is
calculated. It is assumed that a person who earns more can set aside more money towards his EMI
repayments.

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Most loan eligibility calculators available on the Internet are based on a formula. The home loan eligibility,
in lakhs, is arrived at by dividing the amount available for the loan repayment with the borrower by the
loan installment per lakh for the given tenure.

The simplest way to increase your loan eligibility is by increasing the loan tenure. Consider Vijay's case.
At 9 percent rate of interest and for a tenure of 10 years, banks will sanction him not more that Rs 12
lakhs. However, for a greater tenure of 20 years his loan amount shoots up to Rs 18 lakhs. However, the
longer the tenure of the loan, greater is the cost of borrowing.

Applying jointly, with your parent or spouse, increases your loan eligibility. The incomes of both applicants
are combined when computing the loan eligibility. You can almost double your loan eligibility with a joint
loan.

         

TNN, Jan 28, 2002, 01.19am IST


the eligibility of a housing loan is determined on the basis of borrower's repayment capacity, which, in
turn, depends upon his income and other factors such as age, qualifications, number of dependents,
stability and continuity of the income. besides the proposed owners in respect of which he is seeking
financial assistance will have to be co-applicants. however, all co-applicants need not be co-owners.
income of the spouse can also be clubbed if he/she has been made the co-applicant. the housing finance
company can consider all the income accruing to the applicant on a monthly basis, i.e. all the recurrent
credits (basic salary, hra, other allowances but not the lta and medical), any rental income that he is
getting and the savings in rent payment which might accrue to him on account of his moving from a
rented dwelling to self-occupied property. in short, the calculation will be as per the applicant's net cash
inflows, less expenses and commission for the salaried class, and as per his profit-and-loss account for
the self-employed or a private company (net profit + 2/3rd depreciation+ directors' remuneration). an
example: an individual has a salary of rs 3,00,000 p.a. taking all factors into consideration, an hfc decides
that the individual has an annual repayment capacity of 1/3 of his income, meaning rs 1,00,000. this
would work out to emi capacity of about rs 8300 per month. once the emi capacity of the person has been
estimated and the tenure of loan repayment is known, the hfc decides on the amount of the loan it can
provide to a person. this is done with the help of an emi table. in this case let's take the repayment
schedule as a period of 10 years. going by his emi capacity of rs 8300, this individual can go for a loan of
about rs.5 lakh for a period of 10 years. here the emi works out to rs 8145 per month at 14.5 per cent
compound interest rate on the annual, rest on a loan of rs 5 lakh. some hfcs have plain vanilla deals for
professionals such as cas, doctors, mbas and architects: it is 1-2 times the gross receipts. it also depends
on the purpose for which the house loan has been taken. it can be for purchase, construction, extension
or renovation of the house property. it is also dependent on the tenure that the person requires the loan
for.

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Vikas Agarwal, ET Bureau, Nov 22, 2009, 12.27am IST

One of the most attractive features of a housing loan is that it helps in reducing your income tax liability,
and thus makes it easier and cheaper to build a fixed asset. A housing loan makes you eligible for tax
rebates under Section 80C and Section 24 of the income tax regulations.

A joint housing loan comes with the twin benefit of increasing the overall loan eligibility and the income
tax rebate that can be claimed by both co-applicants individually under Section 80C and Section 24. The
mandate in claiming the income tax rebate is that the co-applicants of the housing loan should also co-
own the underlying residential property.

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A joint home loan can only be availed by a minimum of two and maximum of six applicants. A borrower
cannot take a joint home loan with just any person. In general, the lender defines the relationship
between co-borrowers eligible to take such a loan. A joint housing loan is given to married couples or
close blood relatives like parent and child.

Some banks allow brothers to take a joint home loan provided they will both be co-owners of the property.

Usually, banks insist that all co-owners of the home must be co-borrowers in a joint home loan. Generally,
friends or unmarried couples living together are not allowed to take joint housing loans.

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The ownership structure of the property is a very important factor in case of a joint loan. Ownership of the
house makes one eligible for the tax benefits. The tax benefits are applicable in ratio of ownership in the
property and therefore the ownership of property should be carefully decided keeping in mind the re-
payment capacity of both the borrowers.

In case a person is just a co-borrower of a loan and not a co-owner in the property, he cannot claim the
tax rebates. On the other hand, if the co-owners are equal owners of a property but if the share of the
loan is 2:1, the tax benefits can also be availed in the same ratio.

Usually, banks do not accept split EMI payments (two or more cheques for the same EMI). The EMI in
joint accounts can be made through a joint account owned by co-borrowers or by splitting EMIs in a
financial year in the proportion of loan share.

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The income tax benefits are applicable in proportion to the ownership structure. For example, if the
ownership in a property is 60:40, a loan of say Rs 50 lakhs will be split as Rs 30 lakhs and Rs 20 lakhs
respectively and this ratio will be applicable while calculating tax benefits on interest/principal repaid on
this loan.

Therefore, it is advisable for joint owners to procure an ownership sharing agreement stating the
ownership proportion on a stamp paper as legal proof of the ownership. The case for the housing loan
gets stronger in case of joint applicants. Banks consider the earning potential of co-borrowers and decide
on the eligibility of the loan. Therefore, the loan eligibility increases in case of joint loan account.

The joint account holders (owners of the property) can claim income tax benefits individually. The housing
loan benefits that fall under Section 80C and Section 24 of Income Tax Act make each borrower eligible
for a maximum deduction of Rs 1 lakh and Rs 1.5 lakhs associated to principal repayment and interest
payable on the home loan respectively.

For example, a husband and wife, both of whom are tax payers with independent income sources, get tax
deduction benefits, with respect to the same housing loan to the extent of the amount of loan taken in
their respective names. The maximum deduction in such a case would Rs 2 lakhs on the principal
repayment and Rs 3 lakhs on interest payment

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Ashish Gupta, ET Bureau, Aug 23, 2009, 04.15am IST

A host of factors affect the eligibility of a potential borrower. A bank has its own parameters and criteria to
determine the eligibility and quantum of housing loan. A borrower would do well by being aware of these
factors.

  

The application form provides information about the applicant. The information that is submitted in the
application form by the individual is verified from various primary and secondary sources - through
interview, calling up the employer, verifying from the bank's database etc. In case of wrong information
/inconsistencies, the loan application is liable to be rejected.
    

The financial position of the individual is an important determinant. The individual's financial profile is an
important consideration for the bank. The loan eligibility as well as repayment capacity depends on the
financial position of the borrower. The income level, net income, liabilities etc determine the amount of
loan a person is eligible for.

The requirements include a particular minimum income or a fixed source of income. The credit history of
the borrower also plays an important role. Usually, the lenders maintain a database of the borrower and
verify the credit history to check out previous repayment defaults, even from other lenders.

( 

The personal profile of the individual is also important. Banks take into account the personal profile of an
individual. These include factors like educational qualifications, profession, number of dependents, assets
owned, liabilities owed, savings history etc. A higher number of dependants or existing liabilities implies
lower repayment capacity.

)

It plays a major role in determining the earnings potential of an individual. In case a property is coowned,
the co-owner cannot be a minor. Also, the coowner cannot be above a certain age limit. The age limits
are set to minimise ownership disputes. The age limit also affects the tenure of the home loan and EMIs.

The applicant's retirement age is also considered. For example, if an applicant is 45 years of age and is
set to retire at 60 years, the maximum loan tenure available will be 15 years. Also, in case the bank has a
75-year age limit for a coapplicant, and if the applicant is 40 years old and the co-applicant is 60 years
old, the home loan will be sanctioned for a maximum period of 15 years only.

     

This also affects the eligibility. Certain areas are specified as being 'negative' in the books of some banks.
If an individual intends to buy a property in such an area, he will not be granted a loan. Banks have
specific norms with respect to a minimum area of the flat. This may be built-up area or carpet area. The
age of the property is also an important consideration in case of purchase of existing properties. Home
loans on resale properties are sanctioned only if they are less than 50 years old.

Banks conduct legal and technical appraisals of the property to see whether the title of the property is
clear, there are no ownership disputes, the property is free from any encumbrances etc. In case there are
any objections in these appraisals, the loan application is bound to be turned down.

Each bank has a list of pre-approved builders. Their credentials will be verified by the bank and as such
loans are easily available for their properties.

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Ashish Gupta, TNN, Dec 10, 2005, 03.46pm IST

In this era of keen competition and existence of many housing finance companies and banks, it is difficult
to imagine that your application for a housing loan may be rejected . But this is true. There may be cases
where a bank may be unwilling to lend. This may be the case if your case falls outside the purview of their
parameters (rather extended parameters).
Here are some reasons which may be the potential cause for such an action on the part of a bank:

Sound financials

First and foremost is the financial position of the borrower . On this depends the loan eligibility as well as
repayment capacity. The financial position of the borrower, his income level, net income, liabilities etc
determine the amount of loan he is eligible for. Any request for more than the eligible amount is bound to
be rejected. The individual's financial profile is an important consideration for a bank.

Requirement may be of a particular minimum income or a fixed and certain source of income. The credit
history of the borrower also plays a major part. Usually, these lenders maintain a database of borrowers
and verify the credit history to check out previous repayment defaults, even from other lenders.

Personal profile

Banks also take into account the personal profile of an individual . These include parameters such as
educational qualifications , profession, number of dependents, assets owned, liabilities, savings history
etc. A higher number of dependants or existing liabilities implies lower repayment capacity.

 
  )       "

Kavita Sriram, TNN, Oct 2, 2005, 11.38am IST

Acrucial process before your request for a home loan is actually sanctioned by any bank is the credit
appraisal process, which is a three-fold securitisation process that decides your loan eligibility. This is to
determine your loan repayment capability and with increasing loan applications, banks can definitely run
into credit risk when doling out lakhs of rupees to borrowers. Hence, evaluation of home loan applicants
becomes critical.

Financial appraisal

An important part of credit appraisal is financial appraisal, where the applicant's financial position is
reviewed. Past repayment records including defaulting, late payments, delinquencies and bankruptcies,
earnings potential including your spouse's, any outstanding debt, assets, liabilities, and stability of your
employment income comes under close scrutiny.

Financial stability of the borrower and the co-borrower is an important factor not only for credit appraisal
but also for increasing your creditworthiness. A housing finance company or bank sets a fixed upper limit
for the amount of money that can be sanctioned for a particular type of loan. Depending on the
creditworthiness of a customer, the amount of money sanctioned to him can be increased to a certain
degree.

Age is another factor that can also impact how much you will be sanctioned and speaks about your
repayment capacity. Those earning high salaries and carrying a professional degree with a bright growth
potential can definitely strike a great bargain. Age also matters when the tenure is quite long.

Technical appraisal
Apart from the financial appraisal, the technical appraisal is also an integral part of the credit appraisal
process. Here the validity for approvals for construction from local government bodies is verified.
Compliance with building laws, like restrictions on the number of floors or height of the building, is also
verified, and the property to be financed is valuated and its condition is checked. Technical appraisal
judges if the property to be financed is viable at all.

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, May 14, 2006, 11.29am IST

Most banks do not insist on a guarantor when giving home loans. A guarantor is equally liable to pay up
the loan in case you miss out on repayments . By seeking a guarantor, the lender tries to enforce a moral
check that prevents you from defaulting.

If you're a salaried individual with a good employment record and laudable debt repayment history, banks
are assured of your financial stability and credibility. In case one runs a small business with low profits ,
the banks are taking a risk.

To safeguard their interests in such circumstances, banks seek a guarantor who is legally bound to make
repayments in case of default. The bank seeks a guarantor in case the loan applicant does not live in the
same city in which he is purchasing the property. If the nature of his job is such that he will be constantly
transferred or could go abroad, the banks need a guarantor.

The same is the case for self-employed individuals who lack required professional qualifications. Absence
of a co-applicant for a loan sometimes calls for a guarantor. In most other cases, there is no personal
guarantor required as home is an investment to which people have emotional bonding.

And they are sure to go to any extent to keep it. Who can be a guarantor? Any friend or family member
can guarantee the loan. A guarantor has to fulfill the criteria relating to age and income of a normal
customer. The minimum income criteria vary from one housing finance company to another.

This is to ensure that since he is equally liable to pay the loan in case of default , he has to be financially
sound too like the loan applicant himself. Since a guarantor is liable to pay up in case the original home
loan borrower misses out on repayments to the lender, he needs to be extremely cautious.

Before agreeing to become a guarantor, it is imperative that he is doubly sure of the credibility of the
borrower. Suppose you are a guarantor for your friend's property. One fine day, you decide to go in for a
home loan yourself. Will it in any way interfere with your loan eligibility?

Being a guarantor for a huge loan, will definitely have an impact on what the banker perceives as your
repayment capacity. It significantly pulls down your loan eligibility and your capacity to borrow. By what
amount will a guarantor's own loan eligibility be affected?

Suppose you stand guarantor for your friend's home where the EMI is Rs 10,000. Assume you bring
home a pay packet of Rs 25,000.When computing your loan eligibility, the HFC will consider Rs 10,000
as your potential liability and deduct this amount from your income. The net result is that your earnings
will now be considered as Rs 15,000.
The bank will estimate that you can only pay an EMI of say 40 percent of this Rs 15,000 and sanction you
a proportionately lesser loan amount. It is of utmost importance to understand the legal consequences of
acting as a guarantor .

Before you actual sign on the dotted line, it is advisable to get an expert legal opinion on your rights and
liabilities. So should you stand as a guarantor to a relative or an acquaintance? Explore possible risks
involved. If the person seeking help is a trustworthy person and you're very sure he'll not default, probably
there is less risk.

However, turn down any request from persons whom you're unable to judge or are in doubt. Having to
bear the responsibility of someone else's financial burden is painful enough. And when it comes to home
loans, the burden could be a few lakh rupees. In extreme cases where you cannot decline, try to, at best,
limit the guarantee amount

!       

TNN, Aug 20, 2006, 02.06pm IST

BANGALORE: While assessing eligibility for a loan, any bank or housing finance company primarily looks
at two factors: the ability of the borrower to repay the loan, and the safety of the loan. The main concern
is whether the borrower would be able to repay the loan along with the interest as per the agreed time
schedule.

The methods adopted by banks to assess these abilities and capabilities of borrowers are many and
varied. They differ from bank to bank. A bank attempts to minimise its credit risk to the lowest possible
level.

In order to be eligible for a housing loan a number of factors are taken into account . Primary among them
is the income of the borrower . Apart from income, age, number of dependants, qualifications, assets and
liabilities , stability, continuity of employment/business , past repayment record etc are also considered to
assess the repayment capacity of the borrower.

However, there are a few ways to enhance the amount of loan eligibility. Banks recognise some
additional sources of income and will club them with your income, thereby enhancing the eligibility
amount of the loan.

In the case of a salaried person, if he has some additional sources of income, the bank may consider it.
The pre-condition is that the source of income should be somewhat regular in nature rather than being ad
hoc or one-time .

In case an applicant's spouse has an income source, the applicant should make him/her a co-applicant .
The additional income of the spouse can be included to enhance the applicant's loan eligibility.

In case there are any co-owners they must necessarily be co-applicants . If an applicant is staying with
his parents, the income of the parents can be clubbed subject to certain conditions.

In some cases, if an applicant can provide additional security, he can have his loan eligibility enhanced.
Additional security may include instruments like bonds, National Savings Certificates , fixed deposits, and
LIC policies. Generally, investments in shares are not considered for this purpose.
In case an applicant has already taken a loan from the bank in the recent past, the institution also
considers the repayment record of the individual. A good repayment record also enhances the eligibility of
the loan amount.

Many banks waive off the requirement of having a guarantor. However, if one can provide a financially
good guarantor, it will enhance the applicant's credibility with the bank and thereby the eligibility amount.

The final amount to be sanctioned will depend on the repayment capacity of the individual. This appraisal
only sets the maximum limit, which an individual can get as a loan. There are limits fixed for each
category of loan. The amount that an applicant will be ultimately entitled to is governed by this factor.

c  
       

Ashish Gupta, TNN, May 9, 2008, 07.34pm IST

In order to be eligible for a housing loan, a number of factors are taken into account. Primary among them
is the income of the borrower. Apart from income, the age, number of dependants, qualifications, assets
and liabilities, stability and continuity of employment /business, past repayment record etc are also
considered to assess the repayment capacity of the borrower.

There are a few ways to enhance your loan eligibility. The banks recognise some additional sources of
income and club them with your income, thereby enhancing the eligibility for the loan.

In the case of a salaried person, if he has some additional sources of income, they may be considered by
the bank. The pre-condition is that the source of income should be somewhat regular in nature.

In case the spouse has an income, he/she should be a co-applicant. The additional income of the spouse
will be included to enhance the applicant's loan eligibility. In case there are any co-owners they must
necessarily be co-applicants.

If an individual is staying with his parents, the income of the parents may be clubbed subject to certain
conditions. Some banks allow inclusion of the fiancee's income for sanctioning the loan along with the
applicant's income. However, the catch is that the disbursement of the loan is done only after the
applicant submits proof of his marriage.

In some cases, if the applicant can provide additional security, he may have his loan eligibility enhanced.
The additional security may include instruments like bonds, National Savings Certificates, fixed deposits
and LIC policies. Normally, an investment in shares is not considered for this purpose.

In case the applicant had taken a loan from a bank in the recent past, the bank also considers the
repayment record of the individual. A good repayment record also enhances the eligibility of the loan
amount.

Many banks waive off the requirement of having a guarantor. However, if one can provide a good
guarantor, it may enhance the applicant's credibility with the bank and thereby enhance the eligibility for
the loan.

The final amount to be sanctioned will depend on the repayment capacity of the individual. Of course, this
appraisal only sets the maximum limit which the individual can get as a loan. The amount that an
applicant will be ultimately entitled to will have to conform within the limits fixed for each category of loan.

While deciding on what incomes can be included in the eligibility criteria, the bank would consider the
certainty of these additional incomes and may include certain margin requirements as well - for example,
50 per cent of salary of spouse or 40 per cent of value of investments may only be eligible. The full
amount of the additional income may not be considered. Also, the bank would take into account the
additional expenses which may be incurred in earning the additional incomes.

(        

Kavita Sriram, ET Bureau, Dec 14, 2008, 04.55am IST

Borrowers who have availed short tenure loans often reel under extreme financial pressure. A huge
chunk of their monthly income goes towards home loan repayment. Job cuts and pay cuts are a common
phenomenon post global meltdown and cost of living has gone up owing to inflation.

In such a scenario, the borrower faces a serious financial crisis as home loan repayments are not his only
monthly commitments . How does a borrower plan a short tenure loan repayment effectively? Bear in
mind that your EMI outflow doesn't remain constant over the tenure of the loan. Be it floating or fixed (can
be reset by the lender), the EMI that you must dole out after 2 years may be quite high compared to what
you are paying today.

Keep a cushion for this increase. Sometimes, the borrower's salary may not increase at this rate and
managing finances becomes tedious. Home loan repayments form a large chunk of your salary. But this
is not your only commitment. Setting aside money for children's education, marriage and retirement
planning are crucial. One must start early for retirement planning and invest systematically.

Only then you can benefit from the power of compounding and earn larger return. When planning
finances do not overlook the need to save for emergencies such as hospitaliation and health care.
Anticipate greater money squeeze and desist from lavish expenditure. Avoid acquiring newer debts.
Newer debts could drag you into deeper financial crisis where meeting even regular monthly expenses
become a challenge. Avoid using credit cards.

Defaulting on credit card loans can prove very expensive. Pay off higher interest rate debts first. This way
your savings will be greater by decreasing first the debt that continues to grow at a faster rate due to the
higher rate of interest. If you do not make enough money to repay all debts, prioritise your debts.

Borrow as little as possible . This way your EMI burden will be less. If you feel it is difficult to make regular
EMI repayments , contact the lender. Explain to him your financial crisis. See if he can reduce your rate of
interest. Otherwise increasing the tenure of the loan is the simplest way out of the crisis. This way the EMI
comes down.

&       !ß


Kavita Sriram, TNN, Oct 28, 2007, 12.45pm IST

The lure of an interest rate that is lower than prevailing interest rates is drawing prospective borrowers to
banks. A home loan is a huge financial commitment for most borrowers that and it is bound to affect them
for decades.

With lenders vying with one another to expand their customer base in such times, it is very important for
new borrowers to understand what they are getting into. Before choosing an option, you must make clear
decisions on elements like repayment capacity, type of loan, and rates. Choosing the right tenure is one
another factor that a prospective borrower must decide before approaching a lender.

Ramesh takes a loan of Rs 30 lakhs. The rate of interest is pegged at 11 percent. If the repayment tenure
is one of six years, his net EMI outflow will come to around Rs 57,600. If the tenure were a longer 20
years, then for the same rate of 11 percent interest, his monthly EMI will come to around Rs 31,000.
Banks normally offer loans only to an extent where the borrower's monthly repayments are less than 35-
50 percent of their gross monthly salary.

Increasing home loan tenure increases an applicant's loan eligibility. However, very huge loans can make
repayments an unmanageable burden. In an ideal situation, it is better to opt for a short tenure and pay
off the commitment towards the home loan as soon as possible.

However, as in the case of Ramesh, when the tenure is shorter, the burden of EMI becomes greater.
Many borrowers may not be able to set aside such huge amounts towards a loan repayment as there will
be other financial commitments too. What is the maximum loan tenure that lenders offer? Most lenders
offer loans for a repayment time period of 20 years. Some banks are willing to give a 25-year loan too.

In case your loan eligibility is less, it makes sense to opt for a very long tenure loan. Otherwise, you
should remember that longer the tenure, there is more outflow from your pocket towards interest.
Suppose, an applicant is 50 years old and will retire in another 12 years, the bank will not give him a loan
for a tenure greater than 10 to 12 years.

The case may be different if the applicant is selfemployed or draws income from his business. He may be
eligible for a longer tenure loan as his period of employment will be longer. Short tenure home loans are
for people who can afford high monthly repayments towards the loan. Every borrower dreams of the day
when his loan is fully paid off and the house becomes completely his. If you want to be free of the burden
of the home loan, go for a short tenure one.

It is seen that most home loan borrowers tend to repay their loans fully within eight to 10 years. For others
who cannot afford to set aside big amounts every month towards a home loan, a 15 to 20 year loan is the
only option out. Take a long tenure with a no prepayment penalty option. This will ensure that you are not
penalised if you want to prepay the loan.

=      

Kavita Sriram, ET Bureau, Jan 4, 2009, 04.56am IST

For families living in rented homes, owning a house is a sweet and expensive dream. Wouldn't it be nice if
the dream turned true? For Prakash, this seems to be the right time to invest in a house. The current lull
in the market gives him a tremendous scope to haggle. Prakash has struck a bargain deal - a two
bedroom house with all amenities for Rs 30 lakhs. Now, Prakash faces a dilemma . Will he gain more tax
benefits if the tenure is short or if the tenure is long?
If the tenure of the loan is short, say 8-10 years, the borrower's monthly EMI burden is bound to be high.
Short tenure loans can be burdensome and might require the family to restrict themselves to a strict and
simple lifestyle. On the brighter side, he can clear his debts faster.

If the tenure of the loan is long say, 20 to 25 years, the borrower's monthly EMI burden drops down
considerably . Long-term loans are opted for by borrowers who seek to increase their loan eligibility. EMIs
appear more affordable though the cost of borrowing may work out to be expensive.

How they compare

At first glance Scenario II may appear enticing as the borrower can avail a huge tax deduction on the
interest component of the EMI. This is when you compare Rs 27 lakhs over a 20-year period against Rs
13 lakhs for a 10-year loan. However, your tax deduction is not the actual money you save. This is
assuming tax rates at the highest slab of 30 percent will be applicable.

In both the scenarios the borrower can claim upto Rs 1 lakh under Section 80C on the principal
repayments. However, this is only an opportunity. There are numerous other instruments under Section
80C like the PF that also come under this Rs 1 lakh cap. Not all borrowers can show their principal
repayments and investments in other Section 80C instruments fully under the Rs 1 lakh cap.

The interest or cost of borrowing a 20-year loan is almost double that of a 10-year loan. Hence, it is
unwise to indulge in a long tenure loan. The only exception is when you cannot afford high monthly EMIs
and have no option but to increase the tenure.

         

Kavita Sriram, ET Bureau, Aug 2, 2009, 05.57am IST

Home loan borrowers spend as much time debating on the right tenure as they do with repayment options
or interest rates. An ideal tenure depends on the age of the borrower, his income, job stability, retirement
plans and other debt obligations. In these times of uncertainties and increasing cost of essential
commodities, borrowers are more eager to clear their debts sooner.

   


    

Suppose a borrower takes a loan of Rs 20 lakhs for a tenure of 25 years. At a 10 percent interest rate, his
monthly EMI outflow comes to Rs 18,100. The EMI appears more affordable since the tenure is long.
However, borrowers must bear in mind that the longer the tenure, greater is the cost of borrowing.

A long tenure is chosen generally to enhance the loan eligibility of the borrower. A person close to his
retirement years will not be eligible for a long tenure loan, beyond his working years.

There is a lot of uncertainty associated with long tenure loans. The interest rates can fluctuate in either
ways and the inflation number could touch unanticipated highs. There is an unpredictability element
regarding the state of the economy too. Borrowers who have taken a long tenure loan must factor in
interest rate fluctuations and set aside a cushion for them.

=   
    

Some borrowers cannot bear the uncertainties of rate fluctuations. Such borrowers opt for short tenure
loans where they pay off their debts as soon as possible. Shorter tenure loans implies larger EMI outflow
month after month. While it may sound appealing to clear your loans faster, it can become difficult to set
aside a major chunk of the salary to repaying home loans alongside other routine monthly expenses.

Suppose a borrower takes a loan of Rs 20 lakhs for a tenure of five years. At a 10 percent interest rate,
his monthly EMI outflow comes to Rs 42,500. The EMI is huge because the tenure of the loan is very
small. Most borrowers may find it too difficult to manage huge EMI repayments.

   

  

Choose a tenure that suits your needs. If you cannot make huge EMI repayments, a 10 to 15-year loan
tenure could be ideal. Young borrowers must try to repay their home loan before they start saving for their
children's higher education. Older borrowers must ideally repay all their debts before they retire. Repaying
debt without a regular income is a tough job indeed.

Suppose a borrower who has taken a loan of Rs 20 lakhs for a tenure of 10 years. At a 10 percent
interest rate, his monthly EMI outflow comes to Rs 26,400. It is seen that most borrowers repay their
home loan in eight years. A tenure of 8-10 years would be ideal for a borrower who has not planned for
any immediate major expenses.

&       !ß

Kavita Sriram, ET Bureau, Nov 21, 2010, 03.00am IST


Tags:

EMI is the equated monthly installment that a borrower pays the lender every month. This monthly
payment or EMI goes towards both interest and principal components of the borrowed money.
Prospective homebuyers evaluate if the EMI towards the home loan is affordable and can be managed
comfortably without defaulting.

    !ß

EMI can be broken down into two components - interest and principal. During the initial years of a loan
tenure, it is mainly the interest payments that are being made while the principal repayments are much
less. Towards the end of the repayment tenure, a bulk of the repayment is made towards the principal
component.

)   !ß

Arriving at EMI EMI is calculated using a formula where loan amount, interest rate and loan period are
variables.

      !ß

If the EMI charged by the bank is large, the borrower may find it difficult to repay his debt. Hence, banks
lend only so much to ensure that home loan repayments do not exceed 40 percent of the borrower's
monthly income. A borrower's EMI outflow is directly dependent on principal amount, rate of interest and
loan tenure.

If the amount borrowed is high, EMI repayments are high. On the contrary, borrowing less ensures that
your EMI commitments are lesser. EMIs will remain constant for the entire loan repayment period, if
interest rates do not fluctuate. However, in case of floating rate loans, EMIs increase when interest rate
goes up and fall when interest rate comes down. Short tenure home loans are usually in the range of 5-8
years.

Shorter the tenure of the loan, greater will be the EMI due every month. If the tenure of the loan is short,
the borrower will be debtfree sooner. Some loan tenures could be as long as 25-30 years. A borrower's
monthly EMI outflow comes down significantly, in case of longer tenure. However, long tenure loans are
associated with higher cost of borrowing.

!ß   

The EMI remains constant only in the case of 'pure' fixed rate loans. Otherwise, it tends to fluctuate in
tandem with market pressures, inflation and the economy. Floating rate loans are exposed to interest rate
fluctuations. In case of step-up loans, the banks lend the borrower a much bigger loan today based on an
anticipated increase in their future income levels.

Here, EMI due to the lender is less initially and increases as the years go by. In case of step-down loan,
the EMI burden is high during the initial years and reduces as the years go by. Step-down loans are
designed for borrowers who are approaching their retirement age. Some lenders allow for accelerated
repayment.

Here, the borrowers can repay their loan faster by increasing the EMI dues. On getting a salary
increment, a bonus, an increase in disposable income or lump sum funds, the borrower can make partial
prepayment and bring down his EMI commitment considerably.

%   
 

Kavita Sriram, ET Bureau, Oct 12, 2008, 03.56am IST

Kumar purchased a two bedroom apartment for Rs 18 lakhs five years ago. He intends to purchase
another apartment for Rs 20 lakhs. His monthly gross taxable income is roughly around Rs 75,000. He
decides to rent out his second house.

What are the tax sops he is entitled to?

Kumar has found a lender who is willing to give him the huge loan amount. The loan amount for his first
house is Rs 18 lakhs. For a loan tenure of 15 years and interest rate of 13 percent, his monthly EMI
outflow comes to Rs 22,774 approximately . The loan amount for his second house is Rs 20 lakhs. For
loan tenure of 20 years and interest rate of 13 percent, his monthly EMI outflow comes to Rs 23,430
approximately.

The EMI calculated by the lender depends upon the loan amount, interest rate charged for the loan and
loan tenure. EMI is an uneven combination of the principal and interest components . During the initial
years, lenders collect more interest than principal but as the tenure approaches the end, the principal
component of the loan increases . In the beginning, a major portion of the EMI - as high as 90 percent -
goes in servicing the debt.
Tax benefits that come with home loans are a major reason why many people eagerly join the
bandwagon of homeowners. The principal repayment that borrowers make on their home loans is eligible
for income tax deduction under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1
lakh in case of a selfoccupied property.

Self-occupied property

Kumar's taxable income is Rs 9 lakhs. The principal component of the EMI that he repays to the lender
annually comes to around Rs 79,638. Kumar can deduct the home loan principal amount repaid from his
taxable income directly.

Therefore, his taxable income becomes Rs 9 lakhs minus Rs 79,638 - i.e. Rs 8.20 lakhs. He can invest in
other instruments mentioned under Section 80C and further reduce his taxable income by another Rs
20,000.

Homeowners can avail tax benefits on the interest component repaid under Section 24. Under Section 24
of the Income

Tax Act, the maximum amount of interest that can be deducted from your taxable income for a
selfoccupied property is Rs 1.5 lakhs. As a result, your taxable income decreases by that amount.

Suppose Kumar has repaid Rs 1.9 lakhs towards the interest component of the existing home loan in one
assessment year. Since there is a limit of Rs 1.5 lakhs, he can deduct this amount from his income.

Second property

For Kumar's second house, there are no benefits of principal deduction like in the self-occupied property.
Homeowners can, however, claim benefits for interest repayments of the home loan. There is no limit on
the interest repaid unlike the Rs 1.5 lakh limit under Section 24 for self-occupied property. The rental
income earned by the second property has to be shown as taxable salary with upto 30 percent deduction
on rental income allowed as deduction towards property tax and maintenance.

& 
           

Ashish Gupta, TNN, Nov 4, 2007, 03.30pm IST

A reset clause allows banks to review rates at the end of a certain number of years. The housing loan
agreements include a reset clause either explicitly or implicitly. The clauses are triggered during eras of
increasing interest rates.

Previously, loans carrying a fixed rate of interest were considered to be insulated from interest rate
vagaries. They were supposed to remain neutral to the market rates of interest. With the continuous
increases in the interest rates, this had entailed a loss for banks.

Many banks have introduced reset clause in their fixed home loan documents to effect a change in the
interest rate at a future date. Effectively, this makes the fixed rate loans equivalent to floating rate ones,
and nothing remains fixed in the strict sense of the word. The banks are under pressure to protect their
margins and need to review the pricing and product structure of loans.

Reset clauses enable the banks to revise the interest rates on the loans in case of certain circumstances.
The banks have the discretion to increase the interest rates in case the market rates of interest increase.
This is a hedge for the banks against interest rate increases at a future point.
The interest rates on fixed rate loans are higher than the floating rate loans. This is because of the fact
that there is an additional element of risk, which the bank has to bear. Normally, people opt for fixed rate
loans, when the interest rate is low. They wish to lock in the interest rates for the long term.

Initially, banks were offering these loans without any apprehensions of any drastic increases in interest
rates in the future. However, as the interest rates started increasing, trouble for banks started. So the
reset clauses were introduced. Effectively, this clause can convert a fixed rate loan into a floating rate
loan.

The interest rate reviews and hikes may be linked to various factors - the prime lending rate (PLR) of the
bank, the money market conditions, and so on. Moreover, the increases may apply to select borrowers -
loans above a certain amount or loans for above a certain tenure. The periodicity of review and increase
in the interest rates may be mentioned - once in a quarter or once in six months.

c     & %   

ET Bureau, Jul 13, 2008, 04.51am IST

Home loan interest rates have been increasing over the past few months. These increases have been
triggered by a number of factors . The Reserve Bank of India (RBI) has also been increasing the repo rate
and reverse repo rate, which has compounded the interest rate increase process. Interest rates on
housing loans are no exception.

Till now, loans carrying a fixed rate of interest were deemed to be insulated from interest rate movements.
They were supposed to remain neutral to the market movements. With the recent continuos increases in
the interest rates, this has entailed a loss for banks. Many banks are introducing a reset clause in their
fixed home loan documents to effect a change in the interest rate at a future date.

Some banks have set the reset clause as applicable at the end of certain number of years - usually two to
three. The reset clause allows banks to review rates at the end of certain time period.

Most banks have introduced these clauses in their home loan documents since the interest rates started
moving upwards. Effectively, this makes the fixed rate loans equivalent to floating rate ones and nothing
remains fixed in the strict sense of the word.

From the perspective of banks and financial institutions , such a step may be warranted as they no longer
have access to relatively cheap long-term lines of credit to offer long tenure fixed rate loans. For most
banks, the average tenure of deposits is less than four years, and if they lend for a longer period, their
cost of funds take a hit as also the yields. The interest rates have become volatile.

Because of the increasing volatility in the interest rates, the banks are not willing to take a view on where
interest rates are headed in the times to come. Banks are already under pressure to protect their margins.
All these factors have forced banks to review the pricing and product structure of loans.

Reset clauses enable the banks to revise the interest rates on loans in case of certain circumstances.
The banks have the discretion to increase the interest rates in case the market rates of interest increase.
This tends to hedge the banks against interest rate increases at a future point in time. However, this puts
the borrower in a disadvantageous position. The fixed rate of interest is in any case higher than the
floating rate.
The criteria that can trigger the rest clause are specified in the loan document. Reset clause exposes
fixed rate borrowers to changes in interest rates. The only difference vis-a-vis a floating rate loan is that
the interest rate changes don't happen that often.

&$       

Sangita Mehta, TNN, May 15, 2007, 03.20am IST

MUMBAI: Banks are inserting new clauses in home loan agreements to protect their books amid
hardening interest rates and rising defaults. These loan conditions will make life a little more difficult for
borrowers who are struggling to pay higher EMIs.

Some banks have stopped giving fixed rate loans beyond a few years, a few have set an early reset
clause whils others are insisting on a lock-in period during which a switch from fixed to floating rates (and
the other way round) isn't possible.

Borrowers who have taken home loans on floating rate have already seen it increase by three to four
percentage points in the past 18 months to around 11.5-12%. With rising rates, new borrowers are
looking at taking fixed rate loans, while the existing borrowers are thinking of a switch from floating to
fixed rate loans despite a higher rate. However, banks are designing loan documents to discourage this.

A fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a reset
clause will enable banks to charge a higher rate at the time of reset (if interest rates moves up).
Government-owned IDBI Bank and Union Bank do not provide fixed rate loans above five years. "The
fixed and floating rate concept is slowly losing its relevance. Over the past two occasions, we have not
raised interest rates for existing floating rate customers, which means loans have been at a fixed rate of
interest for them even as interest rates have moved up in the system," said MV Nair, Union Bank of India
chairman.

A number of other banks are offering a long-tenure fixed-rate option, but with a reset clause. Last month,
Bank of India reduced its reset option on fixed rate home loans from 10 years to five years. Justifying the
move to reduce the reset clause, D Krishnamurthy, general manager in charge of retail at Bank of India,
said, "In such a volatile interest rate scenario it is not advisable for the customer and the bank to go for a
fixed rate for a long time."

The country's largest bank ² State Bank of India ² with a home loan portfolio of almost Rs 38,000 crore,
which is 13% of its total credit, has a reset clause at the end of two years. Canara Bank and Punjab
National Bank have a reset option on fixed rate home loan at the end of five years; it is three years in the
case of Allahabad bank. PNB has recently inserted a lock-in clause in loan documents, wherein a
customer cannot switch from floating to fixed and fixed to floating within three years of taking a home
loan. "The move follows a requests from a number of big-ticket borrowers who were looking a switching
loans from floating to fixed rate due to rise in interest rates.

=     

Kavita Sriram, TNN, Nov 18, 2007, 05.15am IST

What is a home loan? Home loan refers to the funds the home buyer borrows from a bank or a home
finance institution to purchase a property, generally secured by a registered mortgage to the bank over
the property being purchased. It is very important for new borrowers to be familiar with certain often-used
jargon in the context of home loans. This will ensure that borrowers do not sign into something they are
unfamiliar with or have no idea about. Make sure you're familiar with these terms before you start
scouting for a suitable loan product for your needs.

(   l: The total amount of debt, excluding interest and late charges, remaining on a loan. Refinance:
Paying off an existing loan with the proceeds from a new loan.

      : The interest rate on these loans fluctuates periodically in response to changing
market conditions. As the interest rate fluctuates, your EMI re-payment will be adjusted up or down.
LTV/LCR: LTV is an acronym for the loan-tovalue ratio while LCR stands for the loan-to-cost ratio. They
are terms used by various lenders to determine the loan amount that a person is eligible for on the total
cost of the property.

+   
  : Rolling all your debts into one loan can help reduce your monthly loan
commitments.

)

!ß : The EMI payments in the form of post-dated cheques, paid out in advance at the time of
disbursement of loan.

ß    : Lenders only offer loans up to 80-85 percent of the value of the property. The balance
would have to be paid by the buyer, as a payment before he draws on the loan amount. This balance
amount is the down payment or margin money.

 %
       : When a borrower opts for a fixed rate of interest, the rate of interest remains fixed
over the tenure of the loan. An ideal option for situations when one expects the rates of interest to go up
in the future. The fixed rate option comes in various flavours like pure fixed, fixed for two years and so on.
Prepayment: Repaying the loan before the tenure of the loan.

(  Numerous penalties like prepayment penalty, late payment fees, cheque bounce penalty - the
fines are plenty. Read the fine prints on the loan documents to know all the fees and penalties. Sale
deed: The sale deed transfers the ownership of the property in exchange for a price paid or considered.
This document is required to be registered.

)   A written analysis of the estimated value of a property prepared by a qualified appraiser.

   : A title that is free of liens or legal questions as to ownership of the property.

    An asset that guarantees the repayment of a loan. The borrower might lose the asset if the
loan is not repaid according to the terms of the loan contract.

 
   : Monthly debt and housing payments divided by gross monthly income. It is also known
as obligations-toincome ratio.

!  A right of way giving persons other than the owner access to or over a property.

%  c  

As the Indian real estate market makes an upward swing, and investors opt for housing finance or home
loans, tax benefits obtained from them is a lucrative option. Customers availing of Home Loans can claim
a certain portion of the interest and principal that they pay towards the loan installments for reducing tax
liability. Resident Indians are eligible for certain tax benefits on principal and interest components of a
loan under the Income Tax Act, 1961. Moreover, an added tax benefits under Sec 80 C on repayment of
principal amount up to Rs. 1,00,000 p.a. can be availed that can further reduce your tax liability by about
Rs. 30,000 p.a.

Tax benefits can be claimed on both the principal and interest components of the home loan as per the
Income Tax Act, 1961. These deductions are available to assesses, who have taken a loan to either buy
or build a house, under Section 24(b). Interest on borrowed capital is deductible up to Rs 150,000 if the
following conditions are satisfied:

u Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.


u The acquisition/construction should be completed within 3 years from the end of the financial year
in which capital was borrowed.
u The person, extending the loan, certifies that such interest is payable in respect of the amount
advanced for acquisition or construction of the house
u A loan for refinance of the principle amount outstanding under an earlier loan taken for such
acquisition or construction.

If the conditions stated above are not fulfilled, then the interest on borrowed capital is deductible up to Rs
30,000 though the following conditions have to be satisfied:

u Capital is borrowed before April 1, 1999 for purchase, construction, reconstruction repairs or
renewal of a house property.
u Capital should be borrowed on or after April 1, 1999 for reconstruction, repairs or renewals of a
house property.
u If the capital is borrowed on or after April 1, 1999, but construction is not completed within 3 years
from the end of the year, in which capital is borrowed.

In addition to the above, principal repayment of the loan/capital borrowed is eligible for a deduction of up
to Rs 100,000 under Section 80C from assessment year 2006-07.

 
 
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1. Tax deductions can be claimed on housing loan interest payments, subject to an upper limit of Rs
150,000 for a financial year. Interest on the fresh loan can be claimed as a deduction, subject o
the stated upper limit.
2. An additional loan for extension/addition to the same house and the person's deductions on the
existing loan are less than Rs 150,000; he can claim further benefits from the additional loan
taken, subject to the upper limit of Rs 150,000 for a financial year.
3. Tax benefits under Section 24 and deduction under section 80C of the Income Tax Act can be
claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim
tax benefits for the same.
4. According to the Income Tax Act, only the person who has taken the loan can claim tax rebates.
5. The interest on home loans taken for repairs, renewals or reconstruction, also qualifies for the
deduction of Rs 150,000.
6. A husband and wife, both of whom are tax-payers with independent income sources, get tax
deduction benefits, with respect to the same housing loan; to the extent of the amount of loan
taken in their own respective name.
7. If a person buys a house and sells it within the same year/after 3 years, and if any profit is made,
then a capital gains tax liability arises on the same for which the individual is liable to pay short-
term capital gains tax since the sale took place in the same year. But, if the sale had taken place
after 3 years, then a long-term capital gains tax liability would have arisen.
8. If it is proved that the home loan is simply an arrangement between the loan-seeker and the
builder or with a third party for the purpose of claiming tax benefits, then tax benefits will not be
allowed and benefits, previously claimed, will be clubbed to the income and taxed accordingly.
9. Tax benefits on interest on housing loans are allowable only for the original loan and for a second
loan taken to repay the first loan and not for subsequent loans. This means that if you have
already availed of one loan to refinance the original loan and want to now avail a third loan to
refinance the second loan, tax rebate on interest payments will not be permissible. This is
because the Section 24 (1) only talks of the second loan and not of subsequent loans. Even if you
take the second loan at a rate of interest higher than the original loan, you will be eligible for a tax
rebate on the second loan

   refers to the replacement of an existing debt obligation with a debt obligation under different
terms. The most common consumer refinancing is for a home mortgage.

If the replacement of debt occurs under financial distress, it is also referred to as debt restructuring.

A loan (debt) can be refinanced for various reasons:

1. To take advantage of a better interest rate (which will result in either a reduced monthly payment
or a reduced term)
2. To consolidate other debt(s) into one loan (this will result in a longer term)
3. To reduce the monthly repayment amount (this will result in a longer term)
4. To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan)
5. To free up cash (this will result in a longer term)

Refinancing for reasons 2, 3, and 5 is usually undertaken by borrowers who are in financial difficulty in
order to reduce their monthly repayment obligations, with the penalty that they will remain in debt for
years longer.

In the context of personal (as opposed to corporate) finance, refinancing multiple debts makes
management of the debt easier. If high-interest debt, such as credit card debt, is consolidated into the
home mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longer
period.

For home mortgages in the United States, there may be tax advantages available with refinancing,
particularly if one does not pay Alternative Minimum Tax.

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Most fixed-term loans have penalty clauses ("call provisions") that are triggered by an early repayment of
the loan, in part or in full, as well as "closing" fees. There will also be transaction fees on the refinancing.
These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savings
generated through refinancing.
If the refinanced loan has lower monthly repayments or consolidates other debts for the same repayment,
it will result in a larger total interest cost over the life of the loan, and will result in the borrower remaining
in debt for many more years. Calculating the up-front, ongoing, and potentially variable costs of
refinancing is an important part of the decision on whether or not to refinance.

In some jurisdictions, varying by American state, refinanced mortgage loans are considered recourse
debt, meaning that the borrower is liable in case of default, while un-refinanced mortgages are non-
recourse debt.

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Refinancing lenders often require a percentage of the total loan amount as an upfront payment. Typically,
this amount is expressed in "points" (or "premiums"). 1 point = 1% of the total loan amount. More points
(i.e. a larger upfront payment) will usually result in a lower interest rate. Some lenders will offer to finance
parts of the loan themselves, thus generating so-called "negative points" (i.e. discounts).

Borrowers with this type of refinancing typically pay few upfront fees to get the new mortgage loan.[  
]
This type of refinance can be beneficial provided the prevailing market rate is lower than the
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borrower's existing rate by at least 1.5 percentage points.

However, what most lenders fail to disclose is that the money a borrower saves upfront is being collected
on the back end through what's called yield spread premium (YSP). Yield spread premiums are the cash
that a mortgage company receives for steering a borrower into a home loan with a higher interest rate.
The latter will even eventually lead to borrowers overpaying.

True No Closing Cost mortgages are usually not the best options. When the borrower pays out of pocket
for their closing costs, they are better able to understand all the costs associated with the loan. In most
cases, the borrower is also able to negotiate the fees for the appraisal and escrows down to a reasonable
cost. Sometimes, when wrapping closing costs into a loan, borrowers forget about the fees because they
are usually not coming into the loan with any money.

This type of refinance may not help lower the monthly payment or shorten mortgage periods. It can be
used for home improvement, credit cards, and other debt consolidation if the borrower qualifies with their
current home equity; they can refinance with a loan amount larger than their current mortgage and keep
the cash difference.