Personal Finance - Home Loans / Housing Loans

Housing is a priority sector (banks are required to lend a prescribed percentage of their total advances to this sector) declared by RBI. In view of stiff competition among banks and financial institutions for personal advances and because housing loans are secure and safe advances with comparatively higher loan amount than other categories of personal advances, all banks and financial institutions show their keenness for home or housing loans. An individual looking for finance for acquiring a home / flat/ apartment should compare the offers carefully before finalizing the bank / financial institution for availing the finance. Some important aspect to be compared are:

Interest Rate : The interest rate to be charged by the Bank / financial institution.
Whether the interest will be applied on daily reducing balance basis or on maximum outstanding during the month. The interest application on daily reducing balance basis results in reduction in interest cost as the interest gets reduced from the date of credit of instalment in the account.
Prepayment / Advance Payment Penalty : All banks usually charge penalty for prepayment of loan. However, the amount of penalty charged by different banks / financial institutions is different. You should look into this area carefully as you may, in future, desire to pre-pay or switch the loan to some other bank / financial institution for the reason of lower interest rates or any other reason. Banks also charge penalties for late payment of installments, return of instalment cheque etc. The incidence and amount of penalties may be looked into.
Some banks offer home loan accounts as overdraft accounts. In these accounts you have monthly reducing drawing power. These type of accounts result in lower interest burden as you are able to park your surplus funds in your account and reduce the interest cost/burden.
Processing / Application Handling Charges : These charges are also different for different banks / financial institutions.

The features, in general, of Home Loans / Housing Loans available from banks/financial institutions are as under:

Item

Description

Purpose

Purchase or Construction of a House/ Flat

Purchase of a plot of land for construction of House Extension, repair or renovation or alteration of an existing House/ Flat

Eligibility

Minimum Age	18 / 21 years. (differs from bank to bank)
Maximum Age	65 / 70 years (differs from bank to bank)(The loan should be repaid by this date).
Income	A regular source of income for servicing the loan.

Amount of Loan

The amount of loan is determined by:

There is no upper limit for sanction of a Home / Housing loan.
The eligible loan amount is determined by the income of the borrower and the cost of the housing project.
Banks usually finance up to 40 to 60 times the net monthly income of the borrower or 75-85% of the cost of the housing project. whichever is lower.
Some banks also include Stamp Duty for registration of the housing property, Purchase of Furnishings and Consumer Durables as a part of the project cost.

Interest Rate

Home/Housing Loans being priority sector and fully secured advances attract lower rate of interest than other personal advances.

The interest rate applicable on Housing loans is linked to the Prime Lending Rate (PLR) /Advance Rate of the financing bank.

Banks offer the option of choosing fixed and floating rates of interest on housing loans. Under fixed rate option the interest rate remains same during currency of the loan and under floating rate option the interest rate will up or down with the financing bank's Prime Lending Rate (PLR) /Advance Rate. Banks also offer the option of combining fixed and floating rate options by allowing you to opt for fixed rate for a few years and floating rate thereafter.

Some banks charge interest on daily reducing balance basis and some banks charge interest on monthly reducing balance basis. The charging of interest on daily reducing balance basis results in less interest load on the borrower.

Processing fee and / or Application Handling Charges

The amounts of processing fee / Application handling charges differ from bank to bank. Some banks charge a flat amount and some charge a percentage of the loan amount.
Some banks also retain a portion of the processing charges/fee in case of rejection of the loan application by the bank.

Type of Loan and Repayment

The loan is sanction as Term Loan. The repayment is allowed by way of monthly installments for a maximum period of 20 - 25 years or upto the age of 65/70 years. Generally, banks allow repayment period of 25 years to borrowers aged below 45 years and a repayment period of upto 15 years to borrowers aged above 45 years.

Application

Application for the loan is required to be made on standard application form of the financing bank / financial institution.

Pre-sanction Documents

The application has to accompany the following documents:

Two Passport size photographs.
Proof of identification (Not required in case of existing account holders) - Copy of Passport, Identity Card issued by the employer, Voter Id Card, PAN Card etc.,
Proof of address - Copy of a utility bill (electricity, water, telephone, gas etc.) in borrower's name at the given address, Voter Id Card, letter from employer, Credit Card statement etc.
Proof of income : Latest salary Slip showing all deductions and
Copy of Form 16 issued by the employer for past one/ two years or copies of income tax returns filed.
Statement of Bank Account for last 12/24 months.
Post dated cheques for the monthly of the loan

Illustrative list of additional documents required, depending upon the type of housing project:

A. Purchase of a ready built house or land for construction of a house

Copy of Sale letter/agreement
Copy of Approved Plan and Approval from the Local Authority.
Copy of Sale Deed/ Title Deed of the property
Non-encumbrance report from an advocate on the bank's panel.

B. Construction of a house or Addition / Alteration / Renovation of an Existing House:

Documents listed at 2 to 4 under 'A' above and
Estimate for construction/ addition/ alteration/ renovation from Architect.

C. Acquiring a house / flat from Development Authority

Allotment letter of house /flat allotted to the borrower from the Development Authority.
Demand letter from the development Authority for making payment for the allotted house / flat.

D. Acquiring a flat/house from a Co-operative Housing Society / Private Builder

Copy of Share Certificate issued by the Co-operative Housing Society.
Copy of the Sale Deed/Title Deed of the land allotted to or belonging to the Co-operative Housing Society/ Private Builder.
Non-encumbrance certificate for the land/property of the Co-operative Housing Society/ Private Builder from an Advocate on bank's panel.
Letter regarding estimated cost of the flat/house with schedule of demand for from Co-operative Housing Society/ Private Builder.
Copy of approved plan/map of the flat/ house.
Certificate from the architect/Co-operative Housing Society/ Private Builder regarding current stage of construction.
No Objection Certificate from Co-operative Housing Society/ Private Builder for noting of the bank's lien on the flat/ house to be allotted.

E. Purchase of housing property on Power of Attorney basis:

Only a few banks finance purchase of property on Power of Attorney basis as the title of property remain in the name of the seller.
As the housing property cannot be mortgaged to the bank as security by the borrower, alternate security(ies) is/are required to be provided.
Depending upon the type of property, documents from the above lists will be required.

Post Sanction/ Disbursal Documents

After sanction of the loan by the banks undernoted documents are required to be executed/ furnished by borrowers to banks:

Equitable mortgage of the housing property to the Bank. Equitable mortgage attracts stamp duty in some States like Gujarat.
If the housing property cannot be mortgaged as security, the borrower is required to provide alternate security(ies) like mortgage of other immovable property, Term Deposits, NSCs, Shares etc. good for the amount involved.
Term Loan agreement on non-judicial stamp paper.
Third Party Guarantee - Banks may ask for guarantee of a person whose networth is good for the amount involved.
Insurance of the housing property with the Bank Clause.
Copy of Insurance Policy with noting of the Bank's interest as financer in the insurance policy.

Disbursal of Loan

In case of purchase of housing property, borrower has to deposit the margin money with the bank and a draft/ pay order/ banker's cheque for the cost of the housing property (less advance paid, if any) is issued in the name of the seller.

In case of construction of a house, the loan amount is released in suitable installmentsinstallmentsinstallmentsh at various stages of construction based on progress report from an architect and inspection by bank official(s).

Moratorium Period

In case of purchase of property, the repayment usually starts from next month.

In case of construction of house/ flat, the repayment starts from the month following the month of completion of construction or 18/24 months from the date of sanction of loan, whichever is earlier.

Pre-payment / Advance Payment of Loan

All banks usually charge penalty for pre-payment of loan. However, the amount of penalty differs from bank to bank.

Banks also charge differing amounts of penalty on late payment of installments / other indiscipline in the loan account. The penalty clause should be looked into carefully to avoid any future problems.

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