FAQs - Housing Loans

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.

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

• 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.

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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.

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.

• 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.

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• 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.

• · 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:

  • Account statements

  • ATMs

  • Notice Board at each branch

  • Internet, including email and website

  • 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.

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

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• 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

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.

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

• 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:

  • No Due Certificate

  • Unutilised post dated cheques, if any

  • 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

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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.

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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.

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.

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.

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• 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.

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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