How interest and tenure determine the EMI
An equated monthly instalment (EMI) is the general mode of repayment of home loans. EMIs are the fixed instalments a borrower needs to pay over the tenure of the loan in order to repay the loan as well the related interest for the period to the bank. The loan amount plus the interest for the loan tenure divided by the tenure (in months) gives you the EMI.

The amount of EMI is decided upfront, in advance, and usually remains so during the currency of the loan. The amount of EMI to be paid depends on the amount of loan, tenure of loan, rate of interest, and mode of calculation of interest. Longer the tenure, lower is the EMI. Shorter the duration, higher is the EMI. But at the same time, it is to be noted that in case of longer duration loans, during the initial period, the interest component is more and the principal component is less. Over the years, it gets reversed, and the principal component becomes more while the interest element becomes less. This is because, in the initial phase, the loan amount outstanding is more as compared to the later period.

The shorter the tenure, lower the interest rate because of the reduced risk the bank takes. Because of the shorter tenure, the EMI is higher as the loan and interest are to be repaid over a shorter time span. The longer the tenure, higher the interest rate because of the increased risk the bank takes. However, the EMI is lower because the loan and interest are spread over a longer span of time.

Depending on the present and future income and expenditure levels, you can choose an appropriate loan tenure. The income of the borrower is also important. This means both the present as well as the expected future income of the person. A borrower should be able to pay his EMIs without compromising on his standard of living.

The age of the borrower is important in this case. In case you decide to borrow at an early age, you can opt for the longer tenure loans, where the EMIs would be lower. Although the amount of interest paid would be higher as compared to the other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing at the later years of life, you may have to opt for a shorter tenure.

This is an emerging segment and a large number of buyers are in the market now.

Every market shift throws up challenges and creates opportunities. The present economic slowdown has posed several challenges for developers to come up with attractive offers to sell their apartments. On the other hand, it has given rise to extremely good opportunities for investors and homebuyers. Banks too have pitched in with loan offerings tagged with low interest rates. In other words, the era of affordable housing has arrived.

Changing market dynamics

In Bangalore, the real estate market rode the crest of a booming IT segment for almost a decade. Whitefield, Devanahalli, Yelahanka, Hebbal, Sarjapur Road, and Bannerghatta Road, that were once considered suburbs without good connectivity and basic amenities, were included as part of Greater Bangalore. Road development and other infrastructure projects such as the international airport, the Metro Rail, elevated road, and underpasses improved connectivity to these localities, sending realty prices upwards.

New segment of home buyers

From October 2008 onwards with the global economic downturn, the real estate sector began going through a correction and prices fell up to 30 percent. This brought in a fresh segment of homebuyers and investors into the market, waiting to make the most of what was on offer and within their EMI structure.

Those employed in government services, bank employees, teachers, double income couples who had pay cuts but steady employment, singles with good income, all became prospective homebuyers. Homebuyers who were not wooed by developers earlier are now ready to buy homes because they fall within their budget. Now that prices of property have come within their budget, they have the money ready for a purchase.

Win-win situation

Gauging the rising demand for smaller and affordable homes with premium facilities, established builders have announced projects on the outskirts of the city promising homes available for prices ranging between Rs 20 lakhs and Rs 40 lakhs. This works out well for both developers and homebuyers. For those buying their first home, they still get a good deal with banks offering home loans of 85 percent of the value.

A few real estate developers, who have large land banks in the peripheral areas, have earmarked projects in Bangalore North and South for affordable housing. This kind of affordable apartment options are being made available in the range of Rs 20 lakhs to Rs 40 lakhs depending on the floor area. Currently, three affordable housing projects, one in the north zone and two in the south - one near Mysore Road and the other on Sarjapur Road - are coming up on the city outskirts giving real estate development a boost.

Investment prospects

The fact that homes have become affordable now should come as a boon for those who had been planning to buy a home before the downturn. In the current market scenario buying a flat, both as an investment and a potential place to live in, should be the objective for a family having a collective take-home monthly income of Rs 60,000-75,000. They can look at investing in a flat in the range of Rs 25-33 lakhs where their combined EMI works up to around Rs 20,000-30,000.

People, especially first home buyers, are buying affordable homes now because you can get a decent 1,000 sqft, two-bedroom apartment easily for Rs 25 lakhs. Even two years down the line, this can fetch a 20 to 30 percent appreciation if they desire to sell it to buy a bigger apartment.

Here we compares a short and long tenure loan to analyse the impact of tax benefits

The repayment of housing loans is through equated monthly instalments (EMIs). Some banks provide an accelerating or step-up EMI facility to borrowers. The step-up EMI facility intends to reduce the repayment burden in the initial years and helps in increasing the loan eligibility of the borrower. The facility helps young borrowers particularly. They prefer borrowing early but at the same time do not have high incomes and can't afford higher EMIs in the initial years. However, over time, as their income increases, they can afford to pay higher EMIs.

In this facility, the EMI portion is recovered in parts. During the first few years, a lower EMI is to be paid by the borrower. During the latter part of the loan tenure, the EMIs are increased, so that a higher EMI is payable during the later years. This way the burden of repayment in the initial years is reduced for the borrower.

The step-up facility involves a lower outgo in the initial periods. Borrowers who are likely to earn more in future can avail this facility to get higher loans and adjust their cash flows over a period of time. In this process, the borrower takes on a higher interest rate risk if the loan is based on a floating rate of interest. A rise in rates would mean that a portion of the interest would remain unrealised and added to the borrower's principal.

Since a large part of the initial instalments go towards interest payments, the borrower can avail of tax benefits for a longer period. Interest on the loan is a cost. However, tax benefits reduce the cost of borrowing. This way the borrower can deploy his savings in other investment schemes.

The principal repayment under the step-up loan may start immediately, thereby reducing the interest rate risk for the borrower. In other cases, the EMIs for the first few years are just enough to cover the current interest rate. The process of step-up can be in different phases. In some cases, two phases are offered - one at a lower rate and the other at a higher rate. In other cases, the step-up can be a gradual process. It can be done yearly, every five years or some other frequency. Some banks also offer the step-up facility with a fixed interest rate, but the rate of interest on such loans is higher than that on a floating rate loan.

The borrowers need to understand that in the step-up facility, the interest rate risk exposure is quite high. In the initial years, the interest component is more and the principal component is less - lower EMIs in the initial years would mean that lesser of the principal is being repaid. This deferral of principal to the later part of the loan tenure will increase the interest cost of the loan. This may turn out to be costly in case of a floating rate loan where the interest rate increases. The higher interest rate would have to be paid on a higher outstanding principal loan amount. In case of a rise in interest rates, the difference is recovered through higher EMIs towards the end of the loan tenure.

Basic steps for those planning to buy a house

Everyone dreams of owning a home. It is a major decision. At one time, people used to buy a home only close to retirement when they had sufficient savings. However, the scenario has changed quite a bit in the last decade or so. Nowadays, people buy a house in their mid to late 20s. In some cases, even before marriage. This could be attributed to many factors. A rise in the earnings of the middle income group, easy financing, aggressive marketing of properties and tax rebates provided by government to promote infrastructure development are some.

Here are some tips to help you buy that dream home as soon as possible:

Planning and research

This is the first step in buying a property. You need to decide on the locality, space-cost factor, flat or independent house etc. It is ideal to make enquiries and research each of these thoroughly. This validates and refines your thinking, and helps in taking the right decisions.


Planning finances

Buying a property is a major financial decision. Often, it happens once in a lifetime. It is always advisable to go in for a housing loan. These loans are easily available and the government offers tax relief to home loan borrowers.
If you are planning to buy a property in the near future, you should plan your finances for an upfront payment too. Usually, a property buyer has to pay 10 to 15 percent upfront from his own resources. A loan covers the rest of the amount. Therefore, it is important to plan and arrange for such an amount if you are planning to buy a property in the near future.
People who are planning to buy a property 2-3 years down the line can look for slow and steady savings through market instruments - mutual funds, systematic investment plans, investing in blue chip stocks etc. However, people looking at buying a property in the next few months should save in debt instruments which safeguard capital.

Loan eligibility

A housing loan disbursement was quite easy a couple of years ago. Housing finance companies have tightened the process a little now due to the slowdown in the economy. However, there is no dearth of options for buyers who plan well. Usually, banks scrutinise these documents to arrive at the loan eligibility of a borrower. People planning to buy a property in the near future should keep them in mind and plan accordingly, to sail through the process of loan disbursement easily.

Documents that go into arriving at loan eligibility:

Tax returns:

Last three years' income tax returns or Form 16 are checked for consistency in earnings. Large variations in income go against the applicant.

Bank statements:

Usually, banks like to verify the last 3-6 months' bank statements. This is to identify various monthly cash outflows of the borrower. People planning to take a loan in the near future should avoid any unnecessary transactions.

Work history:

This is another important aspect. A long stint with the current employer is seen as a positive sign. Similarly, a good reputation and corporate image of the employer creates a positive impact.

Loan history:

Any previous loan default is treated as a serious negative by banks.

Some banks are offering low interest rates. With rates plummeting to single digit numbers, homebuyers are expected to make a beeline for fresh loans. The home loan process is an elaborate, usually oncein-a-lifetime affair. Hence, prospective borrowers must employ due diligence and do a thorough homework.

Here are some simple steps to make the process easy to go through:

Step 1: Identify your dream house

Is the house large enough to accommodate an increase in the size of your family at a later date? Is the neighborhood safe? Is it close to your place of work and children's school? Is public transport easily available? Are shops located close by? Finally, verify the property documents. After scrutinising the property documents, it is time to go hunting for a good lender.

Step 2: Arriving at loan eligibility

Banks will lend you an amount based on your income, age, and salary. If you have defaulted on any previous loan, it will impact your creditworthiness. Increase your loan eligibility by clubbing your income with that of your spouse's.
Do not opt for a huge loan that could jeopardise your finances. One must borrow as little as possible.

Step 3: Selecting a lender

A huge interest rate means larger EMI outflows month after month. Shop around for the best rates offered by lenders in the market.
Do not overlook fees and penalties. Often people get so carried away in their quest for lowest rates that they fail to notice other charges levied by the lender. A lender may offer lower interest rate but may have many clauses and fees. Application fees, processing fees, legal charges, valuation charges, switching charges and prepayment penalties are a few to watch out for.
Not all banks lend the same amount of money for an applicant's income level. Different banks have different yardsticks for calculating an applicant's loan eligibility. Is the lender willing to lend you the money you require? See if the bank maintains a good customer relationship.

Step 4: Apply for a loan

Fill in the application form. Here, the lender requires information about your assets liability, personal and professional data, and cost of the property you intend to purchase. Keep the down payment or margin money that is about 10 to 15 percent ready. You will be required to submit several documents to substantiate your claims.
Some banks charge a processing fee of 0.25 to 0.50 percent of the loan amount. The bank evaluates your repayment ability based on the information provided to them.

Step 5: Verification process

The banks thoroughly verify details provided by the applicant. All details including your existing residential address, your place of employment, employer credentials and financial standing are verified.

Step 6: Credit appraisal

The bank evaluates the amount of credit that can be given to the applicant. If some documents are misleading, the lender can reject the loan application. Your repayment capacity is based on your income, age, salary, experience, employer and nature of business.

Step 7: Sanction and offer letter

The bank sends an offer letter that indicates your loan eligibility. It includes loan details including rate of interest, loan amount, tenure and repayment options. You can negotiate the rate of interest with the lender to your advantage.
If you are in agreement with the terms in the offer letter, an acceptance copy must be given to the banker for its records. The banker conducts a legal check on your documents to validate their authenticity. They make a technical valuation of the property too.
The processing fee is not refundable and if your application is rejected, you will in all possibility lose this money.

Step 8: Disbursement

After signing the loan agreement, the bank makes a lumpsum disbursement. The banker usually retains the original documents pertaining to transfer of ownership of property. When a loan is partly disbursed, the bank does not start EMIs immediately. Instead pre-EMI or simple interest on the loan amount disbursed is charged.

Some tips to help you manage your home loan repayment better and plan finances for other needs too

A home loan is a longterm commitment for a borrower. You need to make regular repayments month after month for some 15 to 20 years. When a major chunk of the salary goes towards the loan repayment, other important expenses get overlooked. Planning finances becomes a major challenge. Striking a proper balance between debt repayment, investing for the future and meeting home expenses is critical.

Financial planning aims at meeting your long-term financial objectives. It includes asset allocation, exploring investments, tax planning, retirement planning and risk management. Financial planning first involves computation of your earnings, estimating your future needs to maintain your desired lifestyle and arriving at an investment plan to reach your objectives.

If you thought that your home loan was the only longterm commitment, it is not so. Children's education, marriage expenses, retirement savings, medical bills, unforeseen expenses and emergencies are all major expenses. You may also have other debts like personal loans, credit card bills and vehicle loans. Spending too much of your income and improper management of money, can lead you to a debt trap.

The tenure of any typical home loan is usually long. And owing to inflation and other pressures, a floating rate of interest is bound to go up as years pass by. So, your EMI due to the lender may shoot up, but your salary may not move up by the same fraction. Hence, when planning for repayments keep a considerable cushion for these increases in rates. Uncertainties abound. The health of the economy, inflation numbers, interest rates, your job stability and financial conditions are indeterminate elements. Repayments can become an arduous challenge for many borrowers if no cushion is provided.

The interest rates are showing signs of taming down. If the trend continues you can expect further reductions in rates. Borrowers must make as much down payment as they can, so that the burden of their EMIs will be minimal. Then, opt for floating rates, rather than fixing at the current relatively high levels.

If you were contemplating a vehicle loan or another personal loan, simply postpone to a later date. More debt means more financial obligations. For those already reeling under the burden of rate hikes, acquiring new debts can be an unwise move.

The key to successful retirement planning is to start off quite early and benefit from the power of compounding. Retirement planning acquires even more prominence because the inflation monster is waiting to eat into the money in your savings account. Increased life expectancy and escalating medical costs increase the need for a decent retirement savings.

If you are in a serious unmanageable debt, work out plans to sail out of debt first. This may include paying off high interest loans, paying credit card bills on time and cutting down on a lavish lifestyle. Investments in debt instruments, equity vehicles, balanced funds, real estate, and insurance must be made with due diligence. Adopt a disciplined approach and refrain from the temptation to splurge till your debts are paid off.

When does EMI change?

In case of a pure fixed loan, the EMI due to the lender remains constant. In case of a floating rate loan, the EMI moves up or down depending on the bank's benchmark lending rate. When a lender increases the interest rate, either the tenure of the loan is increased (and EMI kept constant) or EMI is increased (and tenure kept constant).

Some banks offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by. In step-down loans, EMI is high initially and decreases as years roll by. Stepup option is convenient for borrowers who are in the beginning of their careers and hold a tremendous growth potential. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

What determines EMI?

Banks arrive at EMI based on:

• Total amount borrowed,
• Tenure of the loan,
• Rate of interest and
• Computation method.

When a borrower takes a larger loan, his EMI outflow is bigger. In the current scenario of volatile rate fluctuations, it is prudent for borrowers to make as much down payment as possible. Thus, they must borrow as little as possible. EMIs are heavily tilted towards interest repayments during the initial years.

What is monthly reducing method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly rests, interest is computed on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month. In case of annual rests, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

How does tenure affect cost of loan?

Longer the tenure of the loan, lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your debt clears faster. Borrowers who are in a debt trap generally increase their loan tenure. This way, their EMI burden comes down. But longer tenures can drain larger interest towards the loan and make it expensive.

What is amortisation schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero.

If you apply for a loan jointly with your spouse, you can get a higher amount and maximum tax benefits

A joint loan is often considered a tool to enhance loan eligibility. When a borrower's income is clubbed with that of his spouse or parents, their combined income is taken into consideration by the lender. Thus, they are entitled to a larger loan and can afford a bigger house.

Banks insist that all co-owners be co-applicants. But the reverse is not necessarily true. All co-applicants need not necessarily be coowners. Some banks may have hesitations to allow brothers or sisters to apply jointly. The lender may be unwilling to take the risk of a family dispute in future that could impact the repayments due to him. That's the same reason why banks do not allow friends or distant relatives to apply jointly for a loan.

Only owners and co-owners are eligible for tax benefits in respect of home loan repayments. If you are neither the owner nor the coowner of the apartment, you will not be eligible for any tax benefits on the loan repayments.

Home loan borrowers can claim tax deduction benefits on the interest portion of the loan under Section 24(b) of the Income Tax Act. In case of a self-occupied property, the deduction on interest payable is limited to Rs 1.5 lakhs. The principal portion of the loan paid is eligible for deduction under Section 80C. Tax deduction benefits on the principal component under Section 80C is up to a limit of Rs 1 lakh.

Consider the scenario, where both husband and wife contribute towards EMI repayments. How are they eligible for tax benefits on their repayments? You will get tax benefits in the proportion to your share in the loan. Since a home loan is huge amount, the interest and principal repayment components tend to exceed the deduction limit. By applying jointly for a home loan, the co-owners can claim tax deductions in the proportion of their holding in the loan and avail maximum tax benefit.

If you apply jointly, you can increase your loan eligibility and get maximum tax benefits.

Investment begins at home. Though the real estate sector has seen a deep correction, a house is probably one of the best investment avenues one can seek today. Despite the global economic slump, which has hit the property prices too, real estate still remains a prized possession.

If falling interest rates and cooling off property prices are prompting some to take a leap and grab their dream houses, there is also no dearth of those who want to sell their house to overcome the recession blues. And, given the importance attached to this most prized asset class, taxman has provided tax incentives for both the buyer as well as the seller of the house.

Buying A House
If your dream house has now come within your reach, check out the following before taking the plunge.

(a) It is always advisable to go in for a home loan. Interest paid on home loans can be deducted from your taxable income up to a maximum of Rs 1.5 lakh.

As this deduction is applicable to each individual owner of the house, this can be a double bonanza in the case of joint ownership. Thus, if the joint owners equally bear the interest burden, then each owner shall be eligible for a deduction up to Rs 1.5 lakh
However, it is important to note here that where more than one owner claims deduction, the total deduction cannot exceed the actual interest paid by the joint owners.

For example, if the annual interest liability on the house property is Rs 2 lakh and the property is jointly owned by husband and wife, then each gets a deduction of Rs 1 lakh only.
Similarly, where the annual interest liability is Rs 4 lakh, then each owner gets a deduction of Rs 1.5 lakh only, taking the total deduction to Rs 3 lakh

(b) It is not only the interest repayment but even the principal re-paid can be claimed as a deduction under section 80C. The limit here is restricted to Rs 1 lakh provided the loan is borrowed from a recognised financial institution

Owning More Than One House

It is not unusual to see people own more than one house these days, especially by those who like to invest in real estate. It has in fact become a common practice to buy and let out houses, which also adds substantially to one’s income, given a high demand for rental premises.

If the subsequent houses are also purchased through borrowed finance, the entire amount paid as interest can be claimed as deduction from taxable income. Ceiling limit of Rs 1.5 lakh is not applicable in case of subsequent properties as these are deemed to be let out.

Thus even if the same are vacant, the owner shall be required to disclose a notional rental income that the property would have derived had it been actually let out.

Selling A House

Selling a house is rewarding - from tax perspective - provided the same is held for at least for three years before transferring the title. Holding a property for three years and more makes it a long-term capital asset and eligible for various tax incentives under the Income Tax Act.

Gains arising from the sale of a house are treated as income and are thus taxable in the hands of the seller of the property. However, if the sale proceeds are utilised for either buying or constructing another property, the same shall be exempt from taxes.

However, one needs to keep in mind the following to avail of these tax incentives.

(a) If the new house is intended to be bought, the same should be purchased one year before or within two years of selling the existing property

(b) However, if the new house is to be constructed, ensure that it is done within three years of sale of the earlier property. It is not necessary to begun construction only after selling the earlier property. However, the construction must be complete within three years of sale

(c) For the interval between the sale of the existing property and buying or constructing another property, the sale proceeds need to be deposited in the ‘capital gains deposit account scheme’ with any nationalised bank. The proof of this deposit should be submitted along with the return of income to claim an exemption from capital gains tax

For those who do not wish to acquire another house from the sale proceeds of the existing property, capital gains tax can be avoided by investing the sale proceeds in the capital gains bonds issued by NHAI or REC within six months of sale of the property. The maximum investment permitted in such bonds is Rs 50 lakh, and these bonds can be redeemed only after three years from the date of investment.

Rental Accomodation

Tax incentives are available not only for the owners but also for those who have rented accommodations. In case of salaried employees who receive a house rent allowance (HRA) from their employers, the least of the following three options can be claimed as an exemption under section 10(13A):
(a) HRA actually received from the employer
(b) Rent paid in excess of 10% of the salary
(c) 50% of the salary (metros) or 40% of the salary (non-metros).

In case of self employed individuals or those employees who do not receive an HRA, the least of the following three options can be claimed as an exemption under section 80GG:
(a) Rs 2000/- per month
(b) 25% of the total income
(c) Rent paid in excess of 10% of total income.

Currently, the economy is going through a slowdown across the board. Due to the slowdown, the prices of property went through a correction. Many experts believe this is the right time to invest in property. Interest rates on home loans have also come down in the last few weeks after the Reserve Bank of India (RBI) cut the policy rates (repo rate, reverse repo rate and cash reserve ratio) drastically during the last four months.

Analysis of condition of economy

Currently, the economic conditions are not good across the world. Many developed countries are in a much worse situation as they have a dip in their real GDP during the last couple of quarters. For example, US, UK, Germany and Japan are already in recession. India is in a better condition.

In India, the economic growth rate has come down from nine percent last year to less than seven percent this year. Analysts and experts are predicting that the bottom of recession has not yet been reached and we may see a further dip in this growth number in the months to come.

Analysis of home loan rates

Home loan interest rates peaked during the middle of last year. They started coming down after the RBI cut the policy rates drastically in the last four months.

Here are some reasons why home loan interest rates are expected to come down in the short to medium term:

Some banks have not yet passed on the full benefits of previous rate cuts to their borrowers. They are taking a cautious approach towards reducing the loan rates and fresh loan disbursals.
The inflation rate has already come under control due to lower commodity prices in the global market The government will pressurise banks to reduce the interest rates on home loans

• For those borrowing now

Looking at the current scenario and expectations of the near term, it is clear that home loan interest rates are not going to go up. It will have a tendency to go down in the near future. Therefore, it is recommended to go in for a floating interest rate home loan scheme. The banks have not reduced rates substantially on fixed interest rate home loan products. Thus, fixed interest home loans come at significantly higher interest rates than floating interest rate loans.

However, it is good to look for banks which provide the option to switch from floating rate loans to fixed rate loans by charging a small fee. Other factors that borrowers should look at include pre-closure or pre-payment penalty, processing fee etc.

• For those who have already borrowed

Some banks have not yet revised the interest rates downwards for existing borrowers in some cases. Such borrowers can consider a switch option. However, they should weigh the cost of the switchover with respect to interest rate differential before making such a decision. The cost of the switch includes pre-closure penalty, processing fee of new loan, registration charges etc.

Many banks provide software that calculates the exact difference in terms of total cost between the old loan and new loan. You can analyse the comparison and look for loans with faster recovery of switchover costs by way of savings from the interest component of EMIs payable under the new loan.

Some factors you need to consider to arrive at the ideal home loan tenure:

Loan tenure is the duration of the loan. In case of housing loans, generally, the tenure is long - may vary anywhere between five and 20 years. Most borrowers prefer to go in for a longer tenure rather than a short one. The repayment through EMIs depends on the tenure of the loan and amount. Longer the loan tenure, lower the EMI. Shorter the loan tenure, higher the EMI. Of course, going by the same logic, for shorter loan tenures, the interest amount paid is also less as against the longer tenure loans, where the interest amount increases.

Present income

A number of factors influence the determination of loan tenures. The first and foremost one is the income of the borrower - i.e. the disposable income of the borrower. The reason is that it is from this part of the income that he would be repaying the loan instalments. So, if the net disposable income of the borrower is low, it is advisable to go in for a longer tenure loan rather than opting for a short tenure one. This way, the EMI portion is reduced. The loan amount is spread over a longer period of time. The immediate burden on the borrower is low. This is despite the fact that the borrower is required to pay interest for the extended period of borrowing.

Future income

Another important element to be considered is the future income of the borrower. In case the borrower is expecting an increase or reduction in the income levels in future, he has to decide on the tenure accordingly. For example, in case a person is to retire in another five years' time, he may look at a maximum of a 5-year tenure, and may not like to stretch it beyond his retirement age. Similarly, a 30-year-old can think of having a longer tenure loan stretching up to 10-20 years, because gradually his income would also rise. In the initial years of employment, the income levels are low. The income increases over the years (so does the expenditures). So, one may opt for a longer duration loan and reduce the present burden.

Interest rate

Then comes the element of interest. Generally, the short tenure loans attract lower rates of interest as compared to the long tenure loans. This is because a bank can estimate interest rate movements in the near term more accurately than over a long term. So, in case you have adequate liquidity and resources to repay the loan amount, opt for shorter duration loans vis-avis the longer duration ones and thus take advantage of the lower interest rates.

Loan tenure

Yet another factor influencing the loan tenure is the amount of loan. The amount borrowed determines whether you should opt for a longer tenure or shorter one. In case the amount borrowed is huge, go in for a longer tenure loan.

Objective – investment or own use

Another factor that influences the loan tenure is the objective of the loan. Whether you intend to take the loan to purchase a property for your own use or as an investment option is a key question. Generally, if you are borrowing for the purpose of buying as an investment, go for a shorter duration loan to avoid the exit charges payable in case of early termination of the loan and to maintain liquidity of capital.

All these factors are interlinked and need to be analysed in totality to arrive at the ideal loan tenure.

Here are some home loan terms it helps knowing

CREDIT APPRAISAL

This is a process by which a lender evaluates the creditworthiness of the loan applicant. It involves assessing the borrower's past repayment history, establishing the sustainability of his current income and evaluating his capacity to repay. The applicant will be sanctioned a loan only after taking into account his savings, income, age, qualifications, period of employment and other outstanding debts.


EMI

EMI (equated monthly installment) is an unequal combination of two components - principal and interest. This is the amount of money the borrower owes the lender every month, through the tenure of the loan.


MARGIN MONEY

Also called down payment, margin money is typically around 10-15 percent of your loan amount. The bank does not disburse the entire cost of the property when you seek a home loan. It lends only around 85-90 percent of the project cost. The borrower is expected to bring in the remaining money. This is referred to as down payment or margin money.


HOME IMPROVEMENT LOAN

Some people may need money to repair, renovate, remodel or extend their home. Banks offer home improvement loans that you can use for making structural improvements, external and internal repairs, flooring, painting, improving plumbing, electrical work etc.


JOINT LOAN

A loan applicant can apply jointly for a loan with his spouse or parents. This way he can club the incomes. This increases his loan eligibility.


HOUSEHOLDER’S INSURANCE

This policy offers insurance for household belongings against fire, malicious damage, burglary and natural disasters like flood and earthquake. The householder's insurance policy is a comprehensive package that protects the house and its various contents against a variety of risks. It is a single policy that takes care of a number of contingencies.

Some tips to help you cope with higher EMIs without the risk of defaulting

Many borrowers, especially those who took a home loan when the rates were very low, are feeling the pinch of the higher rates prevailing now.

To understand the impact of the increase in rates on your Equated Monthly Instalments (EMI) outflow, consider this example. Five years ago, interest rates were at an unbelievable low of around seven percent. Suppose a borrower, takes a loan of Rs 50 lakhs for a tenure of 20 years, his EMI outflow comes to around Rs 39,700 at seven percent. For the same loan amount and tenure, consider the current rate of 13 percent. The EMI outflow comes to around Rs 58,500. If a borrower's income level has not risen up by this amount, then managing loan repayments becomes a tough task.

Here are a few tips that will help you cope with increase in interest rates:

• If you have money in instruments like fixed deposits or some surplus cash, consider prepaying partially. This way the increase in EMI outflow due to rate increase can be nullified.

• Consider paying off high interest debts first. Credit card penalties are huge. If your finances are simply unmanageable avoid using the credit card and transact in cash only.

• Rework on your budget if your incomes have stagnated and interest rates are shooting upwards. Make lifestyle changes and avoid high expenses.

• Consider refinancing if another lender offers a much lower rate. Some lenders who offer lower rates only to new customers and not to the existing ones must be avoided.

• Increasing the loan tenure brings down the EMI due every month to affordable levels. However, you pay more to the lender in the form of interest on the loan.

• Keep a tab on your monthly expenses, long-term financial commitments and other debts. Continue setting aside a small portion of your income towards a contingency fund.

• Do not indulge in debts.

Borrowers hold high emotional bonding to their homes. Defaulting is their worst nightmare. If you feel making EMI repayments an arduous task, contact your lender. You can try to workout a suitable repayment option and avoid defaulting.

The single-most expensive purchase that most people indulge in, usually once a lifetime, is buying a house. Homeowners invest their life's savings in their home. Ever wondered what happens if a huge fire destroyed your home or an earthquake ravaged it? It's hard to imagine your hard-earned money go up in smoke. Is there any way to ensure protection of your roof and its contents? Enter property insurance.

Property insurance provides protection against most risks to property from threats such as fire, burglary and earthquake. Open perils cover all the causes of loss not specifically excluded in the policy. In other words, it is insurance coverage for all risks other than those that the policy explicitly excludes.

Common exclusions on open peril policies include damage resulting from floods, nuclear incidents and war. Named perils require the actual cause of loss to be listed in the policy of insurance to be provided. In other words, it is insurance policy that covers only losses which result from causes specifically listed in the policy. It includes damage caused by fire, lightning, or theft.

When taking a home loan, some banks offer free property insurance. However, property insurance is not a prerequisite for applying for a home loan. Property insurance isn't merely about protecting your investment in your home. It also covers your valuable personal belongings, both inside and outside your home. Property insurance will reimburse you for losses if your home or personal belongings are damaged by fire, your belongings are stolen or some catastrophe strikes.

Read the fine prints in the policy. Do not compromise on crucial elements to save a few rupees and do not pay for covers you do not require.

The householder's insurance policy is designed to cover risks and contingencies faced by householders under a single package policy. It provides protection for property and interests, as well as legal liability of the insured and his family members who permanently reside with him. Instead of taking different policies you can opt for multiple sections or covers of your choice under one policy.

Home loan insurance plans provide cover to your home loan in the event of any unforeseen calamity happening in your life. If the breadwinner is unable to earn, what happens to his EMI repayments? With home loan insurance, your family will have the support of the insurance cover to pay for the outstanding home loan, without being burdened by the loan's EMIs.

Home loan insurance provides cover on housing loans. Let's assume the breadwinner dies during the term of the policy. The cover would provide a lump sum amount equal to the outstanding amount on the home loan. As the outstanding amount on the loan decreases over time, so does the cover under the policy.