Nonetheless, the demand for home loans will continue to be strong, if property prices stay stable. Besides, with the increasing number of housing finance companies and banks that are in the fray, the buyer has a wider choice and can opt for the best deal.

On account of various factors influencing the industry, such as increased urbanisation, favourable demographics, rising levels of disposable income, government tax incentives and improved levels of housing construction activity, the housing finance industry in India has definitely seen an uptake. Several banks and housing finance companies (HFCs) include the cost of registration, stamp duty, society charges and other associated costs while sanctioning loans to differentiate and make home loan products more attractive. Also, housing financial institutions are resorting to offering free addons such as life insurance, credit cards and consumer loans at reduced rates for furnishing homes in addition to tailor-made loan schemes to renovate, repair, extend, convert or otherwise improve one’s home. Consumers are also benefiting from the numerous property fairs and expos being organised by various lending institutions and also through counselling and legal advisory services being extended on matters pertaining to property titles, evaluation, pricing.

This has been more visible in the post-reform period, where there has been appreciable growth in housing finance through several intermediaries such as commercial banks (CBs), housing finance companies (HCFs), and apex co-operative housing federations (ACHFs). From the buyer’s perspective, the increased number of players has boosted competition subsequently giving rise to a buyer’s market, where the customer now has choice and bargaining power and is in a position to demand quality service in the wake of the housing finance industry increasingly being commoditized.”

The mortgage industry in India is still very nascent with only about 4% of India’s GDP being home mortgages as opposed to over 70% in the US markets. With interest rates moving up and low delinquency in this lending space, many NBFCs and Financial Institutions have been acquiring Housing Finance Company (HFC) licenses. There are two repercussions of this; firstly, with increasing competition for providing home loans amongst players, consumers would be able to secure the most competitive or the most favourable rate and terms for their home loans. Each mortgage provider, especially the non-banking service company is wooing consumers with aggressive marketing campaigns. Even banking HFCs are providing deposit linked mortgage schemes to lower the overall cost of borrowing. That is empowering the consumers to choose from a multitude of options. Also small business owners and lower salaried homebuyers are now able to find a mortgage provider that was earlier difficult”.

The increasing competition is explained by the fact that the current housing finance market size is about Rs. 1.5 trillion and is expected to double by the end of FY15. Anil Kothuri, head (retail finance) of Edelweiss Group, a financial services conglomerate that has recently commenced a housing finance business under Edelweiss Housing Finance Limited (EHFL) says, “There is an upward pressure on Home loan interest rates. They are already hovering at 9 ¼ to 9 ¾%, so getting into double digits is not so far away. In fact, in 2010 the RBI has raised rates by seven times amounting to a cumulative 3 ¼% and home loans rates have gone up by just around 1¼% . So the home loan rates have some catching up to do – the question is, how high.”

Aslong as people are able to manage the down payment, a 100-200 rupees increase in EMI may not influence the demand factor especially in certain areas where there is high demand like suburban areas. The sales will grow with the surging economic growth. Also, the job market is likely to see salary hikes of 10-15 %, which can offset the burden of incremental interest rates”. But he also notes that as inflation grows, the common man may have less disposable income for EMIs. Adding to it is the resultant higher interest rate; so the government should take prudent fiscal and monetary measures to improve the situation in the longterm interest of the common man.

Indian consumers tend to be largely swayed towards banking institutions as opposed to NBFC, FIs or other unorganized firms due to their prolonged interactions with banks. However, the deal clincher lies in two facts: a) The interest rate, the lowest offers for the term of the mortgage and b) The trust on the brand by the consumer. Sometimes however the second may be replaced by the time to disbursement. Hence those institutions that can offer the most competitive rates in the shortest time to disbursement clinch the deal. If a renowned banking institution can offer both of these then business automatically moves there. Hence, the likes of ICICI, HDFC, SBI and LIC HF have the largest
market share in this space.

Many developers are increasingly tying up with non-banking HFC for pre-approval of projects for consumer mortgages. We don’t hold any preference as long as volumes keep coming.” For the buyer such pre-approvals mean that there has been a lot of due diligence done by these institutions, so their money is relatively safe. If banking and non-banking HFCs have pre-approved the project then the consumer choices become much simpler and faster.”

You can apply anytime after you have decided to acquire or construct a property, even if the property has not been selected or the construction has not commenced. Besides, you can also avail of the loan facility even if you want to renovate or extend your home.

• How do I make an application?
  You need to approach a Housing Finance Company with your most recent salary slips along with TDS forms (16) for the last two financial years. This applies to both, you and your applicant, if any. The loan officer, after going through the details of the documents, will tell you the loan amount you are eligible for and the terms of the same. You need to submit the application form along with the necessary documents. On receipt of the application form, along with other required documents, the Housing Finance Corporation may approve the loan. You are advised to visit more than one financial institution for better terms/a larger loan amount, if you shop for the best deal.

• How long will it take me to get an application processed and the loan sanctioned?
  It may take up to fifteen days for processing one’s application if the documents are in order. Under normal circumstances, it may take another week for the banking company/financial institution to inspect the property papers and make the disbursement.

• What is the maximum amount which I can borrow?
  Home loans are generally provided for in the range of approximately 85-90% of the asset value. The loan amount varies from institution to institution and is generally approved on the basis of the applicant’s financial credentials and repayment capacity.

• How is my loan eligibility determined?
  The primary concern of the HFC in determining your loan eligibility is your repayment capacity. You repayment capacity is determined by taking into consideration factors such as income, age, qualifications, number of dependants, spouse’s income, assets, liabilities, stability and continuity of occupation and savings history.

• What are some of the repayment period options available to me?
  Repayment periods generally range from 5 to 20 years.

• What are Collateral Securities?
  Housing Finance Companies usually demand additional securities (to traditional security); these are called collateral securities. In essence, collateral security is extra security provided by a borrower as evidence of his/her intention to repay a loan. Collateral securities may take the form of guarantees (from one or two persons), the assignment of life insurance policies, the deposit of shares, or units of other securities.
  These additional securities provide recourse if a loan is not paid back, so that the lender has an intermediate solution before resorting to the mortgage itself.

• How is the interest calculated on my loan?
  Most Housing Finance Companies follow the yearly reducing-balance method which accounts for your principal repayments only at the end of the financial year. Hence, you pay interest on the principal that you have already paid back to the Housing Finance Company during the year. In contrast, banks and even some Housing Finance Companies follow the daily or monthly reducing-balance method, which results in a lower interest burden.

• What is the basis of interest rate calculation?
  As mentioned in faq 8., the interest on home loans in India is usually calculated either on a monthly or yearly reducing balance.

Monthly Reducing Balance: In this system, the principal on which you pay interest reduces every month as you pay your Equated Monthly Installments (EMI).

Annually Reducing Balance: In this system, the principal is reduced at the end of the financial year. Thus, you continue to pay interest on a certain portion of the principal that you have already paid back to the lender during the year. This means that the EMIs for the annually reducing balance are effectively higher than for the monthly reducing system of calculating interest.

Furthermore, there are two kinds of interest rates for housing finance in India- fixed and floating rates of interest.

Fixed Rate of Interest: With a fixed rate, the interest rate remains constant for the entire duration of the loan, and generally varies from approximately 12.5% to 16%. Repayment is in the form of Equated Monthly Installments (EMIs). Factors that determine the interest rate include the tenure of the loan and the Housing Finance Company’s evaluation of your likeliness to default. In the case of a longer tenure, you will pay more in interest, even though your monthly payments will be lower.

Floating Rate of Interest: As for floating or variable rates of interest, the interest rate depends of the type of home loan and its tenure. Since the floating rate fluctuates with the market lending rate, you will benefit from drops in the market interest rate.

• What is the fixed rate of interest?
  Some Housing Finance Companies offer a fixed rate of interest, which means that the interest rates remain constant through the entire duration of the loan. As a result, the borrower does not benefit/lose from interest rate declines/hikes in the market.

• What is a floating rate of interest?
  This is a variable rate of interest that fluctuates according to the marketing lending rate.

• What are the fees and charges payable in the contextof home loans ? When are they due ?

Home loans are usually accompanied by the following extra costs:

1. Interest Tax: This is the tax imposed on the interest paid (and not the principal) on a home loan.. This tax may either be included in the interest rate of the loan itself, or it may be charged separately as interest tax.
2. Processing Charge: This fee is payable to the lender up on application for a loan. It is either a fixed amount (not directly linked to the loan) or may also be a percentage of the total loan amount.
3. Pending Penalties: When a loan is paid back before the end of its agreed duration, some banks and companies charge a penalty. This usually varies between 1% and 2% of the total amount being pre-paid.
4. Commitment Fees: Some institutions levy a commitment fee after a loan has been processed and sanctioned in case it is not availed of within a stipulated period of time.
5. Miscellaneous costs: Lenders often levy documentation and/or consultant charges.

• What securities do I have to provide in exchange for the loan I wish to take?
  A mortgage is the pledging of a property to a lender as a security for a mortgage loan. Hence, security for the home loan is normally provided through the deposit of title deeds. The title should be clear and marketable. Some Housing Finance Companies may also require collateral security such as the assignment of life insurance policies, the pledge of shares, National Savings Certificates (NSCs), units of mutual funds, bank deposits and/or other investments.

• What documents are required at the time of application?

The common documents that the financiers require at the pre-approval stage are:

• Proof of Age
• Copy of Bank A/C statements for the last 6 months
• Copy of latest credit card statement
• Passport sized photograph
• Signature verification from bank authorities
• Income Tax returns for the last two years

If you are salaried, you need to produce:

• Salary and TDS certificate
• Latest pay slip
• Letter from employer
• Copy of PAN Card

If you are self-employed you required

• Your business track record
• Copy of audited financial statements for the last 2 years.

At the disbursal stage (for property already located), you need to submit:

• Allotment letters
• Photocopies of title deeds
• Agreement to sell
• Non-Encumbrance certificate

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