INTRODUCTION

In pursuance of National Housing Policy of

Central Government, Reserve Bank of India

has been facilitating the flow of credit to
housing sector.
During last few years, the housing sector has
emerged as one of the sectors attracting a
large quantum of bank finance. The current
focus of RBI's regulation is to ensure orderly
growth of housing loan portfolio of banks.

DIRECT HOUSING FINANCE

Direct Housing Finance refers to the finance provided

to individuals or groups of individuals including cooperative societies.
INDIRECT HOUSING FINANCE

Banks should ensure that their indirect housing

finance is by way of term loans to housing finance
institutions, housing boards, other public housing
agencies, etc

HOUSING LOANS UNDER PRIORITY

The following housing finance limits will be
SECTOR
considered as Priority Sector Advances:
1. Direct Finance
(i) Loans up to Rs. 15 lakh in rural, semiurban, urban and metropolitan areas for
construction of houses by individuals, with the
approval of their Boards.
(ii) Loans up to Rs.1 lakh in rural and semi
urban areas and Rs. 2 lakhs in urban areas for
repairs to damaged houses by individuals.

2 Indirect Finance
(i) Assistance given to any governmental agency

for construction of houses, or for slum clearance

and rehabilitation of slum dwellers, subject to a
ceiling of Rs. 5 lakh of loan amount per housing
unit.
(ii) Assistance given to a non-governmental
agency approved by the National Housing Bank
for the purpose of refinance for reconstruction of
houses or for slum clearance and rehabilitation
of slum dwellers, subject to a ceiling of Rs. 5
lakh of loan amount per housing unit.

GROWTH OF HOUSING
FINANCE

Earlier marketing
scenario
Walk-in customers
Passive marketing, belief that word of mouth
from a satisfied customer was the best form of
advertising

Current marketing
With increased competition, buyers became
scenario
more demanding
Customers want door-step service
Use of direct selling agents (third party
distribution channels)
Captive distribution company
Property fairs and exhibitions
Cross selling products and services

Home Loan
HOUSING FINANCE SERVICES
Home Improvement Loan/Repairs/renovation

to existing flats/house
Home Extension Loans
Land Purchase Loans
Top Up Loans
Purchase of flats/house
Construction

HOME PURCHASE LOAN

THIS IS THE COMMON LOAN FOR PURCHASING A HOME.

HOME IMPROVEMENT LOAN
THIS LOAN IS GIVEN FOR UNDERTAKING REPAIRS,
RENOVATIONS AND/OR UPGRADATION TO YOUR HOME.
HOME CONSTRUCTION LOAN
THIS LOAN IS AVAILABLE FOR THE CONSTRUCTION OF A
NEW HOME.
HOME EXTENSION LOAN
HOME EXTENSION LOANS ARE GIVEN FOR EXPANDING
OR EXTENDING AN EXISTING HOME. FOR EXAMPLE,
ADDITION OF AN EXTRA ROOM, ETC.

HOME CONVERSION LOAN

AVAILABLE FOR THOSE WHO HAVE FINANCED THE

PRESENT HOME WITH A HOME LOAN AND WISH TO
PURCHASE AND MOVE TO ANOTHER HOME FOR
WHICH SOME ADDITIONAL FUNDS ARE REQUIRED.
THROUGH A HOME CONVERSION LOAN, THE
EXISTING LOAN IS TRANSFERRED TO THE NEW
HOME, INCLUDING THE ADDITIONAL AMOUNT
REQUIRED, ELIMINATING THE NEED FOR PREPAYMENT OF THE PREVIOUS LOAN.
LAND PURCHASE LOAN
THIS TYPE OF LOAN IS SANCTIONED FOR
PURCHASE OF LAND FOR HOME CONSTRUCTION.

BRIDGE LOAN

THE BRIDGE LOAN IS DESIGNED FOR PEOPLE WHO WISH

TO SELL THE EXISTING HOME AND PURCHASE ANOTHER.
THE BRIDGE LOAN HELPS FINANCE THE NEW HOME,
UNTIL A BUYER IS FOUND FOR THE OLD HOME.
BALANCE TRANSFER LOAN
BALANCE TRANSFER LOANS HELP YOU PAY OFF AN
EXISTING HOME LOAN BY AVAILING A NEW LOAN FROM
ANOTHER WILLING LENDER INSTITUTION.
REFINANCE LOAN
THIS LOAN HELPS YOU PAY OFF THE DEBT YOU HAVE
INCURRED FROM PRIVATE SOURCES SUCH AS RELATIVES
AND FRIENDS, FOR THE PURCHASE OF YOUR PRESENT
HOME.

STAMP DUTY LOAN

THIS LOAN IS SANCTIONED TO PAY THE STAMP

DUTY AMOUNT THAT NEEDS TO BE PAID ON THE
PURCHASE OF A PROPERTY.
LOAN TO NRIS
THIS LOAN IS TAILORED FOR THE REQUIREMENTS
OF NON RESIDENT INDIANS (NRIS) WISHING TO
BUILD OR BUY A HOME IN INDIA. THESE LOANS ARE
PROVIDED BY ELIGIBLE FINANCIAL INSTITUTIONS IN
ACCORDANCE WITH THE GUIDELINES ISSUED BY
RESERVE BANK OF INDIA FROM TIME TO TIME.

Eligibility conditions for a home

loan
To qualify for a home loan, most of the lending

institutions in India require you to be:

a) An Indian resident or NRI
b) Above 21 years of age at the
commencement of the loan
c) Below 65 when the loan matures
d) Either salaried or self employed and
e)Worthy of credit facility.

Interest rates vary from institution to institution and

Interest
rates
offered
for
home
presently range
from 9%
to 12.5 % for
floating
interest
rate & 11.25% to 14% for fixed interest rate (for loan
loans
amount below 20 lakhs). The interest on home loans in
India is usually calculated on monthly reducing balance.
In some cases, daily reducing basis is also adopted.
Annual reducing:
In this system, the principal, for which you pay interest,
reduces at the end of the year. Thus you continue to pay
interest on a certain portion of the principal which you
have actually paid back to the lender through EMIs paid
during the year. This means the EMI for the monthly
reducing system is effectively less than the annual
reducing system.
.

Monthly reducing:

In this system, the principal, for which you

pay interest, reduces every month as you
pay your EMI.
Daily Reducing:
In this system, the principal, for which you
pay interest, reduces from the day you pay
your EMI. EMI in the daily reducing system
is less than the monthly reducing system

What is a fixed rate of interest?

Fixed rate of interest means that the rate of interest

remains unchanged for the specified duration of the
loan. This means you do not benefit, if rates of interest
drop in the market. Similarly you do not lose if rates of
interest increase. Under fixed home loan rates also,
banks/HFCs retain the right to increase the rate of
interest after the prescribed interval. This provision is
mentioned in the loan agreement. This is known as
reset clause in the fine print.
What is a floating rate?
This is the rate of interest that fluctuates according to
the market lending rate. This means you stand the risk
of paying more than you budgeted for in case the
lending rate goes up.

Fixed Rate Mortgages

A mortgage in which the interest rate remains the same

throughout the entire life of the loan isa fixed rate

mortgage. These loans are the most popular ones,
representing over 75% of all home loans. They usually
come in terms of 30, 15, or 10 years, with the 30-year
option being the most popular. While the 30-year option
is the most popular,a 15-year builds equity much faster.
The biggest advantage of having a fixed rate is that the
homeowner knows exactly when the interest and
principal payments will be for the length of the loan. This
allows the homeowner to budget easier because they
know that the interest rate will never change for the
duration of the loan.

Not only are fixed rate mortgages the most

popular of home loans, but they are also the most

predictable. The rate that is agreed upon in the
beginning is the rate that will be charged for the
entire life of the note. The homeowner can budget
because the monthly payments remain the same
throughout the entire length of the loan. When
rates are high and the homeowner acquires a fixed
rate mortgage, the homeowner is later able to
refinance when the rates go down. If the interest
rates go down and the homeowner wants to
refinance, the closing costs must be paid in order
to do so. Some banks wishing to keep a good
customer account may wave closing costs.

If a buyer buys when rates are low they

keep that rate locked in even if the broader

interest rate environment rises. However,
homebuyers pay a premium for locking in
certainty, as the interest rates of fixed rate
loans are usually higher than on adjustable
rate home loans.

Adjustable
Rate
changes based on a specific
schedule after a
fixed period at the beginning of the loan, is
Mortgages
calledan adjustable rate mortgage or ARM.
A mortgage loan in which the interest rate

This type of loan is considered to be riskier

because the payment can change significantly.
In exchange for the risk associated with an
ARM, the homeowner is rewarded with an
interest rate lower than that of a 30 year fixed
rate. When the homeowner acquires a one
year adjustable rate mortgage, what they have
is a 30 year loan in which the rates change
every year on the anniversary of the loan.

However, obtaining a one-year adjustable rate

mortgage can allow the customer to qualify

for a loan amount that is higher and therefore
acquire a more valuable home. Many
homeowners with extremely large mortgages
can get the one year adjustable rate
mortgages and refinance them each year. The
low rate lets them buy a more expensive
home, and they pay a lower mortgage
paymentso long as interest rates do not rise.
The loan is considered to be rather risky
because the payment can change from year
to year in significant amounts.

Unless the buyer plans to quickly flip the

property or has plenty of other assets and is

usingan interest-only loanasa tax write of,
almost anyone taking adjustable rates
shouldtry to pay extrain order to build up
equity in case the market turns south.

Home loans usually attract following

extra costs:

a) Processing Charge: It's a fee payable to the lender on

applying for a loan. It is either a fixed amount or may
be a percentage of the loan amount applied.
b) Pre-payment Penalties: When a loan is paid back
before the end of the agreed duration, a pre-payment
charge is demanded by some banks/companies, which
is usually between 1% and 2% of the amount being prepaid.
c) Commitment Fees: Some institutions levy a
commitment fee in case the loan is not availed of within
a stipulated period of time after it is processed and
sanctioned.
d) Miscellaneous Costs: It is quite possible that some
lenders may levy documentation or consultant charges.
e) Registration of mortgage deed.

 repayment period options?

Repayment period options range generally from 5 to 20 years.

How do banks/HFCs decide on the loan amount?
Usually, most companies give home loan up to a maximum of
85% of the cost of the house. Balance 15%, sometimes called
'seed money', has to be provided by the loan applicant
upfront. The amount, for which the applicant is eligible, is
determined by the age, income, no. of dependents, monthly
outgoing and repayment capacity. This varies from case to
case.
securities required for home loans?
In most cases, the property to be purchased itself becomes
the security and is mortgaged to the lending institution till the
entire loan is repaid. Some institutions may ask for additional
security such as life insurance policies, FD receipts and share
or savings certificates.

Requirement of a guarantor to get a home loan?

Some institutions ask for 1 or 2 guarantors.

joint application for home loans?
Most institutions are willing to consider the joint
incomes of the applicants for deciding the loan
amount. Some institutions do not require the coapplicants to be co-owners of the property to be
purchased.
tax benefits of home loans?
Both principal as well as interest of home loans
attract tax benefits. With efect from 1st April 2005
(i.e. assessment year 2005-07) under section 80C of
the Income Tax Act 1961:

Interest paid on the home loan

As per Sec 24(b) of the Act, a deduction up to Rs.

150,000 towards the total interest payable on the home
loan towards purchase / construction of house property
can be claimed while computing the income from house
property. The interest payable for the pre-acquisition or
pre-contruction period would be deductible in five equal
annual installments commencing from the year in which
the house has been acquired or constructed.
In case of self occupied property, this deduction is
allowed only for one such self - occupied property. The
interest towards home loan taken for purchase,
construction, repairs, renewal or reconstruction of house
property is eligible for deduction under section 24(b).

Principal repayment of the home loan

As per Section 80C along with section 80CCE of

the Act, the principal repayment up to Rs. 100,000
on your home loan will be allowed as a deduction
from the gross total income subject to fulfillment
of prescribed conditions.