The corollary to this question is - How Much Can I Afford? This is presuming that
questions like what sort of loan I require what sort of time frame am I looking to get a
house/flat, its ranking on my priority list etc have been thought out and you are gung ho
about the idea of a house.
The amount of loan, the bank/HFC gives you depends on three more or less similar questions
they ask themselves about you:
Will we get our money back? - This roughly translates to finding out
whether you make enough money to pay back the loan.
Can this guy repay us? - This translates to finding out your credit
worthiness and the risk profile
Are we safe? - This translates to taking a check on the collateral - if
you have a co-guarantor or something of value - should you be unable to repay the loan
Once the bank/ HFC is satisfied that these questions are answered comfortably, issues
concerning various interlinked parameters of a housing loan — tenure, amount interest
rate and miscellaneous charges — also have an impact on your ability to afford the
loan.
Amount
This largely depends on a number of factors like your age, profession, salary, the city
you reside in among other such factors. It varies between Rs. 25,000 to Rs. 1 crore
depending on the lender. As a rule of thumb, depending upon the HFC, you will have to
cough up 15%-20% of the loan amount as a down payment. For smaller amounts, this may not
be much. But for figures running into lakhs, this could make loads of difference. For eg.
An apartment costing Rs 10 lakh may get 85 per cent financing. So, you will have to
arrange for the remaining Rs 1.5 lakh. If you take this into account, the additional
thousands will definitely put a strain on your finances.
Tenure
Generally, the maximum tenure of home loans is 15 years, with a few lenders offering
tenure of 20 years or more (ICICI has recently launched a 30 year loan). The longer the
tenure, more you pay in total interest, but your monthly payments will be less. So
depending on your earning potential and bank balance, you can choose an appropriate
tenure. An important requirement of most banks/HFCs is that you pay up the entire loan
before you retire. You can always prepay your entire loan amount before it is due. There
is a trend to do away with the pre-payment penalty being imposed by some lenders so its
best you check on this as well.
Interest Rate
Without doubt the most important parameter to factor into your calculations. The interest
rates may vary from institutions to institutions and generally range from about 12.5% to
around 16%. Repayment is in the form of EMI's (equated monthly installments). The longer
the tenure, the more you pay in interest, but your monthly payment will be less.
Refinance
This is a concept that is yet to catch on in the home loan market but is bound to be a
major service in the months to come. Under this facility, you can take a new loan from
another bank/HFC to pay back an old loan before its natural tenure. It gives you the
opportunity of prepaying your high cost debt and gets a lower cost one. In today's falling
interest rate scenario you should use this vehicle to lower your debt payments as much as
possible. The lender facilitates the shift by paying the outstanding and transferring the
asset to their portfolio.
Miscellaneous charges
A heading that should be ignored at one’s peril! The interest rates and EMIs are not
the only cost factor. Never underestimate how much the processing and administration fees
amount to. A 1% administration fee and a 1% processing fee on, say, a Rs 5,00,000 loan,
would amount to Rs 10,000. Other times, it could be just one fee (either administration or
processing) but could yet work out to be much more if it is considerably higher at, say,
2.5 per cent or 3 per cent. The various other fees, which you are required to pay along
with the margin amount, are:
a) Interest Tax
This is the tax payable on the interest paid on a home loan and not the principal. This
tax is some times included in the interest rate of the loan, or may be charged separately
as interest tax.
b) Processing Charge
It's a fee payable to the lender on applying for a loan. It is either a fixed amount not
linked to the loan or may also be a percentage of the loan amount. The loan amount
received by you can be less than the processing fee.
c) Prepayment Penalties
When a loan is paid back before the end of the agreed duration a penalty is charged by
some banks/companies, which is usually between 1% and 2% of the amount being pre paid.
d) Commitment Fees
Some institutions levy a commitment fee in case the loan is not availed of within a
stipulated period of time after it is processed and sanctioned.
e) Others
It is quite possible that some lenders may levy a documentation or consultant charge.
