Housing is one of the most basic human needs and comes after food and clothing in importance. India is facing a chronic shortage of houses particularly for weaker sections of society. It requires extraordinary efforts on the put of the Government to provide this basic need to its vast population. Gigantic investment in this sector is necessary to provide a real boost to house building activity.
Institutional finance was hitherto rare for house building activity by
individuals. National Housing Policy was framed to meet the challenge and
'National Housing Bank' was established at the apex level to provide a quantum
jump to investment under this sector. Commercial banks were also required to
commit substantial funds for this purpose on a regular basis. Banks are
required to achieve prescribed target of 'housing finance' as per policy of RBI
announced annually.1 For F.Y. 2002‑03, 3%
of incremental deposits was to be made available by the banks to housing
sector. This is the minimum housing finance allocation and banks are free to
exceed this level, keeping in view their resource position. Banks can achieve
housing finance allocation either by direct finance or indirect finance or
investment in bonds of NHB/ HUDCO or combination thereof or investment in rated
securitised debt instruments issued by any Special Purpose vehicle or entity
representing housing loans granted by approved Housing Finance Companies.
Besides, the funds of banks are to be augmented by making refinance facilities
available from National Housing Bank.
Initially, detailed guidelines were issued by Reserve Bank of India in respect of 'Housing Loan Scheme' to he operated by commercial banks. However, over a period of time RBI has granted freedom to banks to evolve their own guidelines on margin, security, age of dwelling unit, repayment schedule etc. and therefore individual banks have framed their own 'Housing
Finance Schemes’. Such schemes may differ from bank to bank and one may have to approach the concerned bank with whom one is dealing for detailed guidelines. However salient features of the broad 'Housing Loan Guidelines' as generally obtained in commercial banks are stated below:
·
For purchasing plot and constructing a
residential house thereon or for construction of house on the owned/leased
land.
·
For purchase of an existing (old) house/flat.
·
For purchase of flat to be constructed by the
society/builders or other ready built house/fiat.
·
For making extension/additions or carrying out
repairs/renovation to existing houses/flats.
·
Repayment of housing loan availed from other
banks/financial institutions to avail of the benefit of better terms.
·
Individual must be at least 21 yews of age and
the loan must terminate before or when he turns 65 or before retirement
whichever is earlier He must be in gainful employment/profession/business
having regular income to repay the loan with interest.
·
Minimum of 3 years' work experience is a must.
The quantum of loan is decided taking into account the estimated cost of construction and cost of site/purchase price less prescribed margin and also gross salary/average annual income of the applicant.
(a) Quantum
of Loan in case of Salaried Persons:
Maximum Housing Loan in ewe of salaried persons shall not exceed 50
months' gross salary. Salary of the spouse may be included for determining the
quantum of housing loan if he/she joins as co‑obligant. Salary of the
other close relatives (like father/son/direct brothers and sisters) within the
family may also be considered for determining the eligible loan amount provided
the house property is held in joint names and they agree to join as co‑borrowers.
(b) Quantum
of Loan in case of Others:
In such cases, maximum quantum of loan shall not exceed five times the
average annual income based on Income Tax Assessment Order or the Income Tax
Return submitted for the past three years. Income of the spouse may be included
for deciding the eligible loan amount provided he/she joins loan transaction as
surety. However, where income of close relatives is considered the property
should be held in joint names and they should join as co-borrowers.
Generally, a margin of 15% of project cost is prescribed. However,
margin will increase for loans above Rs.1 crore.
In case of extension/additions/repairs/renovation to existing
houses/flats, generally a margin of 20% of estimated cost is prescribed and for
purchase of plot for construction of house, a margin of 30% is prescribed.
Home loans are offered at fixed rate of interest for the full tenure of the loan or at the option of the borrower, at a interest rate linked to the Bank's PLR. Floating interest rate linked to the PLR moves up or down with the Bank's PLR. Interest is normally calculated at monthly rest. Penal rate of interest is charged in the event of default.
The rate war has resulted in better home loan packages for the borrowers. The average cost of a home loan is around 7.5% and 8.25% for floating and fixed schemes respectively.
Banks, these days, are claiming 0% processing fees. But borrowers often end up paying 0.5% to 1 % of the loan amount on account of payment for legal opinion and valuers.
Equitable mortgage by deposit of original title deeds in respect of
property for which loan is considered. If advised by legal adviser, any other
type of mortgage i.e. Registered Equitable Mortgage or Registered Simple
Mortgage may also be insisted upon depending on the merits of the individual
case.
Housing Finance
·
Where equitable mortgage is not possible, m an
alternative to it, banks may take suitable collateral security with sufficient
margin in the form of NSCs/KVPs/Term Deposits/LIC Policies etc. or any other
landed property valued equivalent to the loan amount or more.
·
When housing loans against leasehold land are
permitted it is generally ensured that the lease is perpetual/unexpired period
of lease is 50 years or more and leased land is legally suitable to be taken as
security.
·
Generally, banks insist on third party
guarantee but in suitable caws when spouse/close relatives having sufficient
regular income also join the loan transaction, this condition may be waived.
·
Loan amount shall be released in 3 to 5 stages
where it is meant for the construction of the house, after the applicant has
invested his own contribution to the full extent. However, in exceptional
cases, prorata disbursement may also be permitted.
·
In case of ready‑built house/flat, loan
amount along with margin money shall be remitted directly to the vendor at the
time of registration of sale deed.
·
In case of repair/renovation/extension/alteration,
disbursement shall be made in stages after ensuring utilisation of instalment
released.
·
Generally, repayable in equated monthly
instalments (EMI) stretchable upto 20 years based on the age and capacity of
the borrower.
·
Repayment by way of EMI shall commence from the
month following the month in which final disbursement is made.
·
Prior to commencement of EMI, simple interest
on the loan disbursed shall be payable from the date of first disbursement to
the date of final disbursement.
·
Instalment to gross income ratio (IIR)(G) of
40% is normally considered as permissible by the Banks.
·
For repayment of EMI, banks may also collect
post‑dated cheques on year to year basis from the customer.
Comprehensive
insurance for the total cost of house/flat constructed/ acquired jointly in the
name of applicant and the bank is a must with insurance premium being borne by
the applicant.
Banks may require the
applicant to submit the following
(a) In
pose of salaried persons:
(i) Latest Salary Certificate of the applicant/proposed surety indicating the details of deductions along with copies of Income Tax Assessment Order/Income Tax Return of the applicant/surety.
(ii) Undertaking from the employer that the monthly salary of the applicant will be credited to SB Ale maintained at the financing bank branch or that the monthly housing loan instalment shall be deducted from the applicant's salary and remitted to financing branch for clearance of loan.
(b) In
case of business class/professionals/persons other than salaried class:
Copies of Balance Sheets/Profit and loss accounts for the last 3 years
duly certified by the Chartered Accountant and Income Tax Assessment Orders/
Income Tax Returns for the last three yews.
(c) In
case of applicant/proposed surety being agriculturist: Income certificate
issued by the Revenue Authorities.
(d) In
case of Private Property proposed to be acquired:
·
Sale Deed/Partition Deed/Gift Deed/Settlement
Deed/Conveyance Deed.
·
Khata Certificate/Record of Rights' extract
from Revenue Authorities.
·
Non‑Encumbrance Certificate from the sub‑registrar's
office.
·
License for construction.
·
Approved plan/blue print and commencement
certificate along with detailed estimation of the cost of construction.
·
Latest Land/Building tax paid receipt.
·
Valuation certificate issued by the Approved
Architect/Civil Engineer in case loan is for purchase of ready built
house/flat.
·
Copy of the Letter of Offer/Agreement for sale.
(e) In
case of Sites Allotted by Statutory Bodies and Societies:
·
Allotment Letter issued by the Statutory
Body/Society.
·
Absolute/Conditional/Auction sale deed or lease
cum sale deed executed by the statutory body/society.
·
Possession Certificate issued by the Statutory
Body/Society.
·
Non‑Encumbrance Certificate from sub‑registrar's
office from the date of allotment till date.
·
Share Certificate issued by the Society
favouring borrower.
·
No Objection Certificate from the Statutory
Body/Society to mortgage the property in favour of the Bank
·
Copies of license for construction and latest
tax paid receipt.
·
Approved Plan and Blue Print along with
detailed estimation of cost of construction.
(f) In case of Purchase of
Ready Built House/Flat :
·
Letter of Offer/Agreement for sale with the
builder/promoter/vendor.
·
In case of a flat where undivided right of land
is registered then the same along with the construction agreement.
·
Land Records/Original Title Deeds of the
vendor.
·
Valuation report from an Approved
Architect/Civil Engineer.
·
Receipt for the margin money paid to the
builder/vendor.
Requests for additional finance within the overall loan eligibility of
the borrower, for carrying out alterations/additions/repairs to the house/flat
already financed by banks may also be entertained by the banks. In the cue of
individuals who might have raised funds for construction/acquisition of
accommodation from other sources and need supplementary finance, banks may
extend credit after obtaining pari passu or second mortgage charge over the
property mortgaged in favour of other lenders and/or against such securities as
the banks may require. In both the cases, the terms and conditions will he the
same as already discussed and will be related to the size of accommodation.
Even existing housing loan borrowers of a bank may be permitted to avail
second housing loan from the same bank for additions/extensions/repairs/
renovations of the existing house within the eligibility norms provided the
earlier housing loan account is closed. This facility may he extended in those
cases also where the borrower has repaid the existing homing loan at least for
5 years and the liability is regular and that the total deduction shall not
exceed the stipulated norms.
Bank Finance for Purchase of Plot
Finance for purchase of a plot of land alone may he considered by the
bank and it will form part of housing finance provided the bank obtains a
declaration from the borrower that he intends to construct a house on the said
plot, whether with the help of bank finance or otherwise, within a period of
two years from the availment of the finance.
RBI has allowed banks to incorporate suitable covenants in the loan
document at the time of sanction, to enable them to recall the loan or charge a
higher rate of interest, in the event of non‑compliance by the borrower.
How to choose between floating‑rate
and fixed‑rate loans
There is one vexing question that all home loan seekers have to address: whether to go in for a floating‑rate scheme or take shelter in a fixed rate scheme. Given the volatile nature of the home loan market, which is linked to various macro economic developments, most find the floating‑rate strategy the better option. However, any upward movement in interest rates will see an increase in EMI (equated monthly instalment) or the loan tenure, resulting in an increase in the number of EMIs that the has to pay. On the other hand, fixed‑rate scheme spares you the headache of tracking changes in interest rates or worrying about your EMIs as the rates me fixed for the loan tenure. However, any further lowering of interest rates could make you regret the decision to go for the fixed‑rate option.
So how to choose? The answer depends on a variety of factors. First and
foremost, the prevailing interest rate regime. Different rates are offered for
different tenures. The difference between fixed and floating rates also conies
into the picture. Switching over from floating rate to fixed rate and vice
versa, subsequently also involves cost. For a better understanding let's look at
what floating and fixed‑rate schemes actually mean.
A floating rate or variable rate is one where the rate charged on the
housing loan is liable to change as and when the broad interest rain in the
economy change. The interest rate charged on housing loans tends to vary with a benchmark, which is generally the prime lending rate (PLR). The change in interest rate is reflected either in the form of a change in the
EMI on the housing loan or a change in the tenure of the loan. When the interest
rate falls, the EMI is also likely fall or the tenure may be reduced. If the
PLR moves up, the interest rate on your loan would move up, raising your EMI.
Thus, the borrower is exposed to interest rate risk in the case of a
floating rate loan scheme. A floating‑rate scheme is best suited in a
failing‑rate scenario. But it becomes costly m and when the rates move
up. Most banks offer floating‑rate loans at an interest rate that is
slightly lower than that of fixed‑rate loans.
The good thing about a fixed‑rate scheme is that the interest rate
charged by a housing finance company remains fixed throughout the term of the
loan. Which means that the consumer is immune to fluctuations in interest rates
and a rise in interest rates will not affect your cash flows. It also offers
the advantage of knowing your liability per month (EMI) in advance, which
remains fixed throughout the term of the loan, enabling better financial
planning. On the flip side, you do not benefit from a fall in interest rates.
It is advisable to go in for a fixed‑rate scheme if one feels that the
rate of interest in the market has touched rock‑bottom and hence they may
have nowhere to go but up.
Most home loan companies offer the option to switch from floating to
fixed rate and vice versa. However, switching loans is fraught with its own
perils. One can shift a fixed‑rate loan to a floating‑rate one only
by paying a penalty. For example, banks like SBI and ICICI Bank give their
existing customers the option of shifting from floating rates to fixed for a
fee of 2 per cent and 1.75 per cent respectively of their outstanding
principal.
Customers also have the option of shifting to new floating‑rate
schemes, which are introduced at frequent intervals by housing companies to
lure new customers. But you are charged a fee for the service, which currently
varies from 0.5 per cent to 1 per cent of the outstanding principal amount,
depending on the loan provider.
While moving your loan from fixed to floating rates within the same
company involves only a switching cost, shifting your loan to another company
is a more expensive option. If you are moving from the fixed‑rate loan of
one company to a floating rate loan to another, you have to pay pro‑payment
penalty charges to the former. The latter may charge you processing fees since
it considers your switch as a fresh loan application.
Typically for fixed‑rate loans, most banks charge a higher rate of
0.250.50 per cent over floating rates. Even then, a fixed rate loan is
preferred than a floating‑rate one. Since most housing loans are usually
for 15‑20 yews, any rise in interest rates, even if it happens three four
years down the line, can have a very negative
impact on tight financial planning.
When that happens, you are left with
suit much option but to try
to pre‑pay the loans as and when you can. Refinancing your loan is one
option in that cam. That is, take a fresh loan from another housing finance
company to repay the existing loan. But again, you will be charged a
refinancing penalty of about 2 per cent of the principal outstanding on your
loan. Refinancing makes sense only if you have already pre‑paid a
substantial proportion of the principal due on the loan. However, if you have
just started on your loan repayment, the burden of refinancing can be quite
heavy.
With a fixed rate of 8 per cent available even for 20 year loans, it
makes better sense to got into fixed‑rate loans rather than getting
locked into a floating‑rate loan and risking the consequences of rising
interest rates in future.
The answer is not that simple. The decision to choose your loan depends
on a lot of factors. Your age, for instance. If you are a young loan seeker, it
makes sense to go for a floating‑rate scheme, assuming that your earning
potential and the time available make it easy for you to pay off your long term
loan. While a floating‑rate scheme could help you save when interest
rates move downwards, you con also cushion the impact of rising interest rates
because of the options available to prepay through refinancing or switching
your loans. However, for older people it makes more sense to take advantage of
the current low rates, which lessen their monthly EMIs.
You need to have a better understanding of the interest‑rate
scenario and the frequency of changes made by your loan institution in terms of
rates. You also need to take into account the different rates offered for
different tenures and the cost of switching loans. Fixed rates me better suited
for long‑term loans with an average life of 10‑20 years while
floating rates can be considered for short‑term borrowing. It also
depends on your risk appetite. If you are one of those who like to take risks,
then go for a floating‑rate scheme with the hope that interest rates stay
low for many more years. But if the thought of higher interest rates gives you
palpitations and stress, it is better to opt for a fixed rate scheme. But above
all before you sign the loan agreement with any housing finance company, make
sure to go through the fine print carefully.
ADVANCES TO INSTITUTIONS/PUBLIC AGENCIES
ETC.
Housing finance institutions can avail term loans from banks. The
quantum of loan shall he determined on the basis of debt equity ratio, track
record, recovery performance and other relevant factors. In terms of NHB
guidelines, total borrowings of housing finance companies (whether by way of
deposits, issue of debentures/bonds, loans and advances from banks or from
financial institutions but excluding any loan obtained from NHB) should not
exceed 10 to 15 times of their net owned funds (i.e. paid‑up capital and
free reserves less accumulated balance of loss, deferred revenue expenditure
and intangible assets).
As regards housing finance companies not eligible for refinance from
NHB, in no case the quantum of term loans to be granted together with the
outstanding balances in the existing term loans from the banking system should
exceed three times of their Net Owned Funds (i.e. paid up capital plus free
reserve less accumulated balances of loss and other intangible assets).
However, housing finance companies (HFCs) which are eligible to draw refinance
from NHB shall be exempted from the above stipulation.
As regards rate of interest, banks are free to charge interest rates
without reference to PLR effective from October 29, 1999.
Banks may extend term loans to State Level Housing Boards and other
public agencies on the same terms and conditions as indicated in case of
housing finance institutions. Banks will, however, look into the past
performance of such boards in recovering the instalments from beneficiaries and
will also stipulate that the Boards will ensure prompt and regular recovery of
loan instalments from the beneficiaries.
Financing for Land
Acquisition
Banks can grant loans to public agencies for acquisition and development
of land provided it is part of the complete project including development of
infrastructure such as water systems, drainage, roads, provision of electricity
etc. The maximum period of repayment will be 3 years if the project also covers
construction of houses. Credit extended to individual beneficiaries should
conform to the terms and conditions already discussed.
In view of the important role played by professional builders as
providers of construction services in the housing field, especially where land
is acquired and developed by State Housing Boards and other public agencies, commercial
banks may extend credit to private builders on commercial terms by way of loans
linked to each specific project. The period of credit for loans extended by
banks to private builders may be decided by banks themselves based on their
commercial judgement subject to usual safeguards and after obtaining such
security, as banks may deem appropriate. Such credit may be extended to
builders of repute, employing professionally qualified personnel. It should be
ensured, through close monitoring, that no part of such funds is used for any
speculation in land. Care should also be taken to see that prices charged from
the ultimate beneficiaries do not include any speculative element, that is,
prices should be based only on the documented price of land, the actual cost of
construction and a reasonable profit margin.
(i) Banks
are permitted to grant term loans at their own terms and conditions to housing
intermediary agencies against the direct loans sanctioned or proposed to be
sanctioned by the latter, irrespective of the per borrower size of the loan
extended by these agencies.
(ii) The
rate of interest on term loans extended to these agencies for on‑lending
to Indian residents can be determined by banks without reference to PLR.
(iii) Banks
are also permitted to grant term loans to these agencies against the direct
loans sanctioned/proposed to be sanctioned by them to NRIs provided the
agencies being financed are authorised by RBI to grant housing loans to NRIs.
Reserve Bank of
India has advised banks to establish housing finance branch in each district Initially the opening of such specialised branches may be restricted to
semi‑urban/urban areas. Requests for this kind of branch in rural area
will also be considered where there is a clear need and assured viability.
The banks may open housing finance branch in districts for which they
have been assigned lead responsibility, or else where they have very nominal
lead responsibility, they can open such branches in districts where they have a
large presence.
However, Bank should avoid opening of such housing finance branches at
metropolitan centres which am served by quite a few specialised housing finance
companies like HDFC or housing finance subsidiaries of the commercial banks.
National Housing Bank will take up the task of training the staff to be
posted in the specialised housing finance branches so that they are equipped
with the necessary skills for the work.
'Housing Loan' has become an important financial activity. Many public
sector institutions and agencies and also a few private sector banks and
companies have come out with very attractive schemes for granting housing loan
to public. The important agencies, which are very active in this field, are as
under:
(1) Life
Insurance Corporation: LIC has come out with few
special schemes for granting housing loan. The repayment of these loans is
either by way of proceeds of LICs life policies or by way of equated monthly
instalments or m a combination of both. Full details of these schemes may be
obtained from LIC.
(2) General
Insurance Corporation: GIC has also floated a subsidiary company to exclusively deal with the
housing loans to public.
(3) Subsidiaries
floated by various public sector banks are also exclusively taking up housing
loans to public but most Banks we now themselves, pushing through aggressively
in the home loans market. SBI and ICICI banks are emerging as the leading home
low providers.
(4) City Bank has also come
out with a scheme to grant housing finance.
(5) HDFC has also introduced
special scheme called Home Loans Scheme.
Full details of various schemes of the above institutions may be
obtained from the concerned institution.
[R1] Master Circular IE CD No. (HF) 1/03.27.25/2002‑03
dt. 1.7.2002,