A few important aspects you need to go into.

• Scheme of loan

Whether the loan is a fixed or floating rate one. As is common knowledge, in case of floating rate loans, the interest rate will move up or down with each revision in the benchmark rate of the bank. In case of a fixed rate loan, the interest rate may remain fixed for either a given period of time or entire tenure of the loan.

• Rate benchmark

In case it's a floating rate loan, what the rate is benchmarked against is important. Usually, floating rates are determined with reference to the prime lending rate (PLR), fixed at the time of taking the loan plus a mark-up. If your home loan is at a spread of one percent to the PLR, which is say 10 percent, you will pay an interest rate of 11 percent per annum.

How often the bank changes the benchmark rate should be checked. Banks periodically revise the PLR to which the home loan interest rate is pegged.

If one has opted for a fixed rate loan, it is to be checked whether the interest is fixed for a part of the tenure or the entire tenure. Do check the reset clauses. The bank normally reserves the right to revise the interest rates upwards or downwards, once in three or five years, even on a fixed rate loan.

• Charges

Also check whether the loan can be prepaid, and if so, what the charges are. It may be a fixed fee, a percentage of the loan outstanding, or a percentage of the loan amount. Further, there may be a restriction on the number of prepayments you can make during the tenure of the loan.

Check what the other charges you will be required to pay to get the home loan are. There could be a fee for processing, services, and administration.

How a home loan’s tenure, interest amount and EMI are linked? Here is how....
The repayment of a loan taken to buy a house is made through EMIs (equated monthly instalments). EMIs are the fixed instalments which a borrower needs to pay over the tenure of the loan to repay the debt as well the related interest for the period to the bank.

Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure, divided by the tenure of the loan (in months) gives you the EMI. The amount of EMI to be paid depends on and varies with the amount of loan, tenure of loan, and rate of interest. One of the important parameters governing the EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in a few cases upto 25 years as well.

Arriving at tenure

Here are two most significant factors that determine tenure:

1) Age: If you decide to borrow early, you can opt for a longer tenure loan - 15 to 25 years. This way, your monthly EMI payment would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time. However, if you are borrowing towards the end of your career, you may have to opt for a shorter tenure.

2) Income: This means both the present as well as the future income. You should be able to repay his EMIs without compromising drastically on your quality of living. The cash flows available after payment of EMIs should not entail a dent in the living standards. As such, a judicious planning of cash flows is required.

Tenure and interest

The longer the tenure, higher will be the interest rate. This is because of the increased risk the bank has to take. Also, the interest amount in absolute terms is higher, because of the longer tenure. However, the EMI is lower because the loan and interest are spread over a longer span of time.

The shorter the tenure, lower will be the interest rate. This is because of the relatively lower level of risk the bank takes. Also, the interest amount in absolute terms is lesser, because of the shorter tenure. However, the EMI is higher because the loan and interest are to be repaid over a shorter span of time.

Tax benefits

You should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest upto Rs 1.5 lakhs per annum paid on housing loans is deductible from the taxable income of a borrower. You should structure the housing loan amount and tenure so that your annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course, this would be contingent on other factors as well, like your annual income and savings potential.

Fall In Interest Rates, Property Prices Makes It Tempting To Invest In A House, But Do A Reality Check
WITH interest rates on a downward spiral and prospects of getting a good deal on a house, the real estate sector could witness some buying in the coming months.

Though property consultants recommend waiting for a few months for the right price, some home seekers may be tempted to kick off their house hunting expedition soon.

Time for short listing

While there is no need to rush into a decision, you can start looking out for a house right away. Once the market bottoms out, home-seekers will start making a beeline for properties and loans. If you have identified your ideal home beforehand, you will be a step ahead. You can jump at the earliest opportunity available — in terms of price and interest rate. Lack of buying activity means that the market is skewed towards the buyer at the moment.

You can start quoting a price that seems reasonable to you. Try quoting a price that is 50% less than the highest price of a property in the locality commanded in the past. Another method of determining a property’s price is to ascertain, if you want to buy it in five years later, too. If the answer is in the affirmative, you can consider sealing the deal. Approaching an agent posing as a seller could be a good idea to determine the real price of the house — chances are that the selling price would be considerably different from the buying price quoted to you.

Identify your needs and capacity

Your heart may be set on a plush residential complex replete with state-of-the-art facilities, but that should not make you lose sight of your basic needs. For instance, if the well-equipped complex is not close to a railway station/bus stop, and you do not own a private vehicle, then commuting could turn out to be a nightmare. Hence, when you commence your house-hunting mission, it is advisable to keep a list of must-have attributes ready. In addition to quality of construction, evaluate the existing infrastructure. Finding a perfect house is nearly impossible, but comparing short listed properties will help you zero in on one that meets majority of your requirements.

This apart, the present and future market drivers, financial ability and personal investment objectives should be borne in mind. A ruthless assessment of your financial situation — current as well as future — is essential; factor in possible pay cuts and job loss. If you are planning to sell your old flat and buy a new one, it is better to do so only after securing the sales proceeds. Though bridge loans meant for such funding gaps are available, in the current scenario, it is better to steer clear of avoidable liabilities.

Consider old flats

If you are not fixated on ‘ultra-modern’ amenities, you can consider buying an old flat. If you locate a well-maintained house in the desired locality that boasts of robust ancillary infrastructure, there is no reason why it should not be considered. After all, the strain on your budget will be minimal. The difference in prices of new and resale properties would depend on various factors, but would usually be a third less than that of a new property. However, a comparison between the new and old houses should also cover renovation costs, the latter would necessitate.

Check if the property is already mortgaged

Many times, builders start developing properties after mortgaging the same to institutions that extend finance to the project. If it is mortgaged, you must insist on getting a no objection certificate (NOC) from the lender or satisfy yourself that your rights under the purchase contract are not subservient to the lenders. You must insist on an Occupation Certificate, sanctioned building plan and the Building Completion Certificate.

Get clarity on refund

While signing the contract, the buyer should enquire about the time frame within which the project will be completed and the penalty that the builder would be liable to pay in the event of delay.

The builder would be legally liable to render a refund, if it can be proved that he has not met his part of the pact. This would include unreasonable delays in construction, flawed construction, flawed title or evidence of previous claims on the property or the land on which it stands.

Buyers should enquire about the portion of advance paid that will be forfeited and the time frame within which the balance will be refunded, in case they choose to cancel the booking.

It’s better to have a lower home loan exposure in times of falling real estate prices.

THE softening in real estate prices, which are now down in most places by as much as 25%, has not been the best piece of news for existing home loan borrowers. This is thanks to the “depreciation of security” clause that is mentioned in home loan agreements.

Simply stated, if the value of the property — which is mortgaged as security for a home loan — falls to below the outstanding loan amount, the borrower is required to pay the difference as a one-time margin amount to the bank. The other option is to provide additional collateral for the equivalent amount. If none of this happens, the bank reserves the right to seize the flat and a borrower, in turn, becomes an unenviable defaulter irrespective of his repayment record.

Let us take the example of a person who has bought a house for Rs 50 lakh. In line with the stipulated loan-to-value ratio, the bank cannot lend more than Rs 42.5 lakh. In today’s market, the value of that property drops by, let’s say, a quarter. The value of that house consequently is now Rs 37.5 lakh. Suddenly, the borrowed amount is less than the collateral, which leaves the bank with a situation where it can ask for additional collateral. This may be in the form of gold, property or any other asset. If none of that materialises, the borrower makes the margin money payment out of his/her pocket.

The way out for the borrower, according to experts, is to have higher home equity. The clause becomes vital only if the bank has a higher equity component than the borrower.

If the borrower holds substantial home equity component through his personal funding and pays EMIs regularly, then he will not be in a tricky situation.

From the bank’s viewpoint, a borrower, who has demonstrated the ability to repay on time, is often the preferred one. Usually they make some leeway for a borrower with a good payment track record. A disciplined borrower can negotiate with the bank for more time to pay the collateral/margin money.
The collateral issue has changed substantially over the past few years. Banks typically are mandated to lend up to 85% of the property’s value to the borrower. But that has often has been breached with past instances suggesting that the number could be as high as 95%. The borrowers did not have to bring in very much and, as a result, could easily stretch their finances.

Banks undertake valuation exercises for property that is under construction. According to an official at a private sector bank, If the value (of the property) falls by 25%-30%, we revalue it, especially if we have lent up to 85% of the value. The idea is to ensure that the outstanding loan amount is lower than the property value.

Interestingly, if a borrower approaches a bank today, he will get a lower loan amount, as the bank discounts the property value. If a borrower approaches with a property value of Rs 1 crore, we evaluate it at Rs 80 lakh. This is not just in our interest but also augurs well for the borrower.

The crucial part is to ensure that the borrower does not go overboard. A borrower should not increase his or her loan exposure even if it’s a home loan. A buffer should be created by borrowing only 50%-60% of the house value.

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.

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.