Finance against Mortgage

Rajkumar S. Adukia

researchadukia@gmail.com

The sky rocketing real estate prices has not put a dampener on people’s intentions to invest in it. 2005 was a good year for the home loan industry and reports suggest that there has been a 30% growth rate in comparison to 2004 in home loan disbursements. Housing finance companies (HFCs) have made merry on account of such sporadic growth. HFCs are also slowly seen to be moving beyond the realm of offering `pure' home loans. They are not just restricting themselves to home loans only but are now venturing into offering property related loans. The year 2006 will see the HFCs moving towards becoming a one-stop shop for property and home loan seekers. The loan seeker will look at the HFC as a very convenient destination to meet all their property and home loan requirements. The rising home loan interest rates experienced during the year, with a rise in the range of 25-50 basis points, has not been a deterrent to the buyer.

There are various options that are available to a person who would like to get a loan to buy property or to get a loan against property. Some of them are briefly listed below:

1.HOME LOANS

• Purpose

      Purchase of

• Flat, row house, bungalow from developers
• Existing freehold properties
• Properties in an existing or proposed co-operative housing society

• Maximum loan
  85% of the cost of the property (including the cost of the land) and based on the
  repayment capacity of the customer.
• Maximum Term
  20 years subject to your retirement age.
• Rate of Interest

     Different for each HFC but ranges between 8 to 11%

2. LOAN AGAINST PROPERTY (LAP)

• Purpose

LAP is a loan available against the mortgage of property. It works just like a personal loan but at relatively lower interest rates. Also like a personal loan, the end use of LAP is not monitored. It is one of the products that tackle the working capital needs of many business people, which helps them overcome tight financial conditions.

• Maximum Loan

       The limit is up to 60% of the current market value for an unencumbered residential property and it is 50 percent of the value in case of commercial property. Though each lending institution will have a threshold of  the maximum amount which can be loaned.

• Maximum Term

      The repayment period varies from 7-15 years

• Rate of Interest

      The rate of interest varies from 11-13%

3. HOME EXTENSION LOANS

• Purpose
  Home Extension Loan is available if you want to add space to your home. Like an additional room, a larger room, or even enclosing an open balcony.
• Maximum loan
  85% of the cost of extension
• Maximum Term
  20 years subject to your retirement age
• Rate of Interest

10 to 13.5%

  4. HOME IMPROVEMENT LOAN

•          Purpose
• External repairs
• Tiling and flooring
• Internal and external painting
• Plumbing and electrical work
• Waterproofing and roofing
• Grills and aluminum windows
• Waterproofing on terrace
• Construction of underground/overhead water tank
• Paving of compound wall (with stone/tile/etc.)
• Borewell
• Maximum loan

             85 to 100% of cost of Improvement subject to the property market value

• Maximum Term
  15 years subject to your retirement age
• Rate of Interest

Similar to a Home Extension Loan rates.

  5. SHORT TERM BRIDGING LOAN

• Purpose 

      This is a short term loan to help customers with the interim period between the         sale of your old home and the purchase of a new home.

• Maximum loan
  90% of cost of new property
• Maximum Term
  2 to 5 years
• Rate of Interest

Is usually higher than a housing loan as the term is also short.

  6. LAND PURCHASE LOAN

• Purpose

Loan to purchase land either to construct a house or as an investment

• Maximum loan
  85% of cost of the land and based on the repayment capacity of the customer.
• Maximum Term
  15 years subject to your retirement age

Other property loans available are :

Home Conversion Loans

Borrowers can avail of a Home Conversion Loan to acquire another dwelling unit, through sale of the existing dwelling unit. The existing loan can be transferred to the new property with an increase in loan amount based on the current eligibility. This saves the customer from the hassle of prepaying the first loan and availing of new loan thus saving them prepayment charges and processing charges to the extent of loan conversion.

Top - Up loans

It offers the customer a loan against the mortgage of the existing house. It helps in encashing the investment in a house without having to dispose it off to fund various needs related to Higher Education, Purchase of Furniture, Business Requirements,etc. The rates of interest are same as Housing Loans.

Loan to Professional for Non residential premises

Purchase, Construction, Improvement of Office, Clinic

• Doctors
• Chartered Accountants
• Lawyers
• Other self-employed professional

Loan against future rent receivables

Owners who have let out or propose to let out their premises to Reputed Companies/institutions, Public Sector Undertakings/Established Commercial Organizations/Multinationals/Banks etc. can avail of loan on the basis of the rent which they would receive from letting out their property.

Home Loan Eligibility

Not all HFCs have the same method of calculating the home loan eligibility but the fundamental nature of calculation remains the same. The EMI per lakh along with the individual's `income available for making EMI payments' is what determines the home loan eligibility for the individual. All HFCs have their own EMI table, which lists the monthly EMIs per lakh, for varying tenures and interest rates.

Factors like individuals profession and location of the property are considered when working out the loan eligibility. Most HFCs have a list of `negative' professions’ and ‘negative areas’. Though these lists may not be official loan applicants covered under these lists will reduce their chances of a loan. Other details like the number of people financially dependent on the individual, the individual's credit repayment history if any and his saving habits help the HFC in deciding the individual's home loan eligibility.

Steps to get better loan eligibility : -

1.The EMI payable is directly related to the tenure of the loan. For a fixed amount of loan the longer the tenure the lesser the EMI. So if the applicant increases the loan tenure he would have to pay a lower EMI which would enhance his chances of loan eligibility

2. An applicant already having other outstanding loans payable by him like car loan or personal loan would find it more difficult to be eligible for a home loan. A bad track record in credit card payments is also a significant factor for home loan eligibility.

3. Applicants can apply for such loans that have the facility of having redued EMI’s for the first few years and then the EMI’s can be enhanced further. The applicant’s loan eligibility would increase as HFCs usually consider the lower EMI of the initial years to calculate his loan eligibility.

4.Applicant can club his income along with the income of his spouse/father/mother/child so as to increase his loan eligibility to a higher amount .

Processing Fees

A processing fee has to be paid to the housing finance company (HFC) for the home loan. Different HFCs charge different processing fees depending on the type of loan applied for. Some HFCs take a processing fee from the individual before the loan is sanctioned, which is when the individual has submitted all the requisite documents to the HFC. HFCs also have a minimum amount of processing fee- for eg. Rs 2,500 or 0.50% of the home loan amount, whichever is higher. In some cases, the HFC will take a part of the processing fee before the sanction that is non-refundable and the remaining part is taken after the loan is sanctioned. Whichever the HFC, the applicant must bargain for a lowering of the processing fee rates.

Reasons for Rejection of Loan application

   Being aware of some of the major reasons of loan rejections can help us be better prepared and save us from disappointments.

1.      To ensure that the specific norms with respect to a minimum area of the flat are met with. The `minimum area' norm will vary across HFCs so you need to ensure that your home meets the minimum area requirement while applying for the loan        or else look for an HFC that gives a loan as per your flat area.

2.      Financial standing of the applicant is checked before loan approval. Affirmative responses to whether his monthly income meets the minimum income requirement, whether he has a fixed source of income, and if he has a clean credit background will ensure getting a loan approved.

3.      The personal history of an individual like the number of dependants an individual is scrutinized to ascertain the repayment capability of the individual. A higher number of dependants implies lower repayment capacity. The last 6 months' savings account statement of the individual will speak about his saving habits and his ability to honor EMIs.

4.      The applicants age when applying for the loan will determine the tenure of the loan and in turn the EMI. So the higher the age the lesser the loan tenure and also the chances of getting the loan approved.

5.      HFCs are also likely to decline the loan in case of a legal/technical discrepancy like an unclear title deed.

6.      Home loans on resale properties are sanctioned only if they are less than 50 years old. Similarly, the property also has to fall within the geographical limits as defined by the HFC for it to sanction the home loan

Gone are the days when owning one house was considered as a luxury. The current change in scenarios and with the HFCs aggressively marketing the home loans they have helped the common man achieve their dream of owning a house that was unthinkable of some years back. And since buying a home is probably the biggest purchase most of us will ever make in our lifetimes it is always beneficial to make a well-informed decision not only about the home but also about the financing of the home.