FAQs - Housing Loans
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Introduction
When you are not on move, you like
to dwell in your home. It is everybody’s dream to own his or her home. It is
needless to say that you need to pay a price for acquiring a home. You are
lucky if you can acquire it from your own resources. If not, you may have to
knock the doors of a financial institution/ bank for a loan and you are
flooded with information deluge. You may like to know about eligibility
criteria, interest rates (fixed/ floating), plethora of fees and charges,
documentation and so on. Well, you may have many questions unanswered. We
attempted to answer some of them.
1. What are the
eligibility criteria for availing a housing loan?
The bank’s assessment of your
repayment capacity determines your eligibility for a loan. Some of the
important factors considered by the banks are-
·
Monthly income
·
Family expenses and net disposable
income
·
Assets and Liabilities
·
Credit history
·
Cost of the property you propose
to acquire
2. Are interest rates on
bank loans determined by Reserve Bank/ Government?
·
No. Banks are free to fix interest rates. But they have to
convey them to the customers upfront.
·
Interest may be calculated on a
fixed or floating rate basis. Some banks also offer packages combining both
the methods.
3. When do banks start
charging interest on a housing loan?
Banks start charging interest from
the date the loan is first disbursed. The rate of interest offered in the sanction
letter is applicable to loans disbursed within a particular period after the
sanction of loan. If the loan is disbursed after that period, revision, if
any, in the interest rate may be applied to the loan. Banks will not charge
any interest for the loan sanctioned but not disbursed.
4. Should banks
communicate changes in interest rates?
Yes. The banks must inform you when they change interest rate
on housing loan. (cf. para 3.3. of ‘Code of Bank’s Commitment to Customers.)
Ask the bank to give a copy of the
revised repayment schedule of the loan every time the interest rate is
revised.
5. What is a fixed rate
loan?
·
Interest rate is fixed for the
entire period of the loan or it may be revised after the first few years
depending upon the terms and conditions of loan.
·
This option is preferable if
prevailing interest rates are low when you take a loan. Even if interest
rates in the market go up in future, interest rate on your housing loan
remains unchanged.
·
Banks generally include a reset
clause in which case interest rate remains fixed for the first few years,
thereafter, interest rate is re-fixed or becomes variable/or floating.
6. What is ‘Floating’ or
‘Variable’ Rate Loan?
·
Interest rate is not fixed and can
be varied by the bank. The rate is linked to a reference rate (generally,
prime lending rate) declared by the bank from time to time.
·
If the PLR goes up, interest rate
on housing loan and monthly repayment will go up and vice versa.
·
The bank fixes a spread between
PLR and floating rate while sanctioning a loan. The spread remains constant
during the tenure of the loan. The spread can be changed with mutual consent
of borrower and the bank.
·
The loan document specifies the
reset period for changing interest rate, i.e. at the beginning of the
following month/ quarter/ half-year immediately after the PLR is revised.
Banks also permit the borrower to
change from fixed interest rate loan to floating interest rate loan and vice
versa subject to certain conditions. Ascertain these details before availing
of housing loan from a bank.
7. How and when banks
should communicate changes to terms and conditions?
·
· In terms of para 3.5 of ‘Code of
‘Bank’s Commitment to Customers’, banks have to inform customers changes in
terms and conditions one month in advance. Changes to the terms and
conditions may be communicated through any of the following channels:
o
Account statements
o
ATMs
o
Notice Board at each branch
o
Internet, including email and
website
o
Newspaper
·
If your bank makes any change
without notice, it will notify the change within 30 days. If such change is
to your disadvantage, within 60 days you are free to close the account or
switch it without having to pay any extra charges.
8. What is EMI? Under
the instalment plan for housing loan, how is interest calculated?
Repayment of a loan is usually
made on a monthly basis in equated monthly instalments (EMI). Each instalment
consists of two parts, namely, principal repayment and interest payment. EMI
is mutually agreed between the borrower and lender. The instalment depends on
the following:
·
principal amount of loan
·
loan tenure
·
interest rate
9. How interest is
computed under monthly-reducing basis?
·
the principal amount paid every
month reduces the principal amount
·
interest for the following month
is computed on the reduced principal outstanding at the start of each month
·
with the repayment of loan
periodically, interest portion of the instalment gets reduced and principal
portion rises
10. What are the fees
and charges applicable to the loan?
Generally, banks levy fees/
charges for:
·
processing loan application
·
documentation
·
late payment
·
changing the loan tenure
·
switching to a different loan
package during the tenure
·
prepaying a portion or full loan
·
restructuring the loan
·
changing from fixed to floating
interest rate loan and vice versa
Some of the other charges levied
by banks are:
·
legal fee
·
technical inspection fee
·
recurring annual service fee
·
document retrieval charges, etc.
11. Do I have access to
loan documents? If so, what are they?
Yes. You can have access to loan documents. Following are
some important documents provided by banks:
·
letter of offer
·
copy of filled in loan application
·
copy of loan agreement
·
terms and conditions governing the
housing loan
·
other documents such as schedule
of fees and charges
Banks are required to give
authenticated copies of documents executed by you free of charge. (cf. para
8.11.1 of Code of bank’s Commitment to Customers)
12. What needs to be
observed while concluding loan agreement?
·
Do not sign any blank document.
·
Do not give any undated cheque or
without filling it.
·
Do not rely solely on verbal /
telephonic communications given by bank staff/ bank’s Direct Selling Agents.
Obtain written documentation wherever possible.
·
Always take note of the fine print
relating to interest rates, fees, terms and conditions.
·
Ask the bank staff or your lawyer
to highlight critical clauses.
·
Ask for an explanation if you are
not sure how certain terms and conditions will apply.
·
Obtain a list (with
acknowledgement of the bank) of all documents handed over to the bank while
taking the loan.
·
On full
repayment of the loan, give written
instructions to the bank to close the account and collect the following:
o
No Due Certificate
o
Unutilised post dated cheques, if
any
o
Original documents (including
property documents) tendered while taking loan
Some of the items that could
require explanation may be relating to the bank’s right to:
·
recall the loan
·
debit any of the borrower’s
savings or deposit accounts maintained with the bank to settle the
outstanding amount due under the loan
·
implications of a “jointly and
severally liable” clause in the loan agreement for a loan taken out by two or
more borrowers
13. What is switching of
loan? What are the procedures and costs involved if I decide to switch the loan?
If you take a new loan from your
bank or another lender to repay your existing loan it is called switching of
loan. Review your housing loan once every few years to see if you can get a
better deal by switching. Ask your existing bank for re-pricing options,
before checking with other banks.
Before switching consider if you
are better off:
·
sticking to your current loan
package
·
converting to a different loan
package with your existing bank or
·
taking a loan from a different
bank to repay the existing loan
Ask your current bank whether:
·
you will incur a fee for
terminating your existing loan
·
you can convert the loan to one
which is more attractively priced
·
fees will be imposed on such
conversion
·
there will be a lock-in period for
the new loan and if so what is the lock-in period and charges involved.
Ask the bank whose refinancing
package you are considering to show how you will be better off with the
refinanced package.
Note that the instalment amounts
and interest payments will change once there are changes to the loan package.
Compare the present repayment
schedule for your current loan package with that of the new loan package you
are considering and check the total amount of interest payable and other
charges.
14. What happens if I
default on payment of my monthly instalments?
If you have defaulted or fallen
behind with your payments-
·
The account may be classified as
NPA.
·
Bank may report the debts owed by
you to the Credit Information Agency/ Credit Referral Agency.
·
Your credit history may reflect
the defaults / debts owed to your bank which may adversely affect future
access to bank credit.
·
If you continue to default, the
bank can sue you for the loan outstanding or initiate foreclosure (or both)
to sell your property to recover the outstanding loan balance and unpaid
interest.
15. How to ensure timely
repayment of loan?
To ensure timely repayment of
loan, you may adopt one of the following modes in consultation with the
lender-
·
ECS
·
Standing instructions to your banker
·
Post-dated cheques. Ensure that
fresh post-dated cheques are given to the lender at least one month before
the earlier cheques are exhausted to avoid delay.
16. Do I have to pay
penalties for early repayment of loan?
Banks may allow early settlement
of loan with penalty/ fess. Banks need to inform customers about these
charges, upfront. Therefore, before availing the loan ascertain from your
bankers fees levied as also penalty, if any for prepayment.
17. What is the tax
implication of early repayment of housing loan?
·
Under the Income Tax Act, you are
eligible for certain tax benefits on the principal and interest repaid on
housing loan during a particular financial year.
·
Ascertain tax implications of
early repayment of loan from your banker or Tax Consultants.
REVERSE MORTGAGE LOAN
18. What is reverse
mortgage loan? What is my eligibility and how I will get back the title
deeds?
The scheme of reverse mortgage has
been introduced recently for the benefit of senior citizens owning a house
but having inadequate income to meet their needs. Some important features of
reverse mortgage are:
·
A homeowner who is above 60
years of age is eligible for reverse mortgage loan. It allows
him to turn the equity in his home into one lump sum or periodic payments
mutually agreed by the borrower and the banker.
·
The property should be clear from
encumbrances and should have clear title of the borrower.
·
NO REPAYMENT is required as long as the borrower lives, Borrower should
pay all taxes relating to the house and maintain the property as his primary
residence.
·
The amount of loan is based on
several factors: borrower’s age, value of the property, current interest
rates and the specific plan chosen. Generally speaking, the higher the age,
higher the value of the home, the more money is available.
·
The valuation of the residential
property is done at periodic intervals and it shall be clearly specified to
the borrowers upfront. The banks shall have the option to revise the
periodic/lump sum amount at such frequency or intervals based on revaluation
of property.
·
Married couples will be eligible
as joint borrowers for financial assistance. In such a case, the age criteria
for the couple would be at the discretion of the lending institution, subject
to at least one of them being above 60 years of age.
·
The loan shall become due and
payable only when the last surviving borrower dies or would like to sell the
home, or permanently moves out.
·
On death of the home owner, the
legal heirs have the choice of keeping or selling the house. If they decide
to sell the home, the proceeds of the sale would be used to repay the
mortgage, with the remainder going to the heirs.
·
As per the scheme formulated by
NHB, the maximum period of the loan period is 15 years. The residual life of
the property should be at least 20 years. Where the borrower lives longer
than 15 years, periodic payments will not be made by lender. However, the
borrower can continue to occupy.
·
From FY 2008-09, the lump sum
amount or periodic payments received on reverse mortgage loan will not
attract income tax or capital gains tax.
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