Many home buyers in India may now well empathise with subprime borrowers in the US home loan market who are paying double digit interest rates while those who are better off lock into long-term (30 year) fixed rate loans at lower rates of interest. Successive bouts of interest rate tightening over the last three quarters and, that too, at the short end have now exposed local home buyers to the vulnerabilities of a financial sector where even good quality borrowers are unable to access long-term fixed rate loans. Indian home loan buyers have been relatively late in buying into the concept of variable or floating rate loans (what is termed in the US adjustable rate loans) used as they have been to high nominal interest rates. Lenders in India started pushing variable interest rate loans after 2000 when there was a secular fall in interest rates for over three years. Those who were wooed into contracting variable rate loans at an average rate of close to seven or a little more are now like the subprime borrowers in the US in for a tough haul. Their home loan rates have now topped the double digit mark. Banks obviously had a good reason to change track six years ago, as traditional sources or windows for long-term finance had dried up either from the central bank or the government. By end 2006, the proportion of fixed rate long term loans on the books of local lenders had reduced considerably. Few banks or institutions now offer true fixed rates like the 30 year mortgage loans in the US, Europe or in Japan. Even if some do, the pricing of such long-term loans is so expensive in comparison to the floating or variable rate loans to put off many borrowers.

This one will further discourage specialised housing players to lend to the commercial real estate sector. The National Housing Bank (NHB) has asked housing finance companies (HFCs) to make a general provision of 0.4% of their total outstanding non-housing loans in the nature of standard assets. Non-housing loans mainly comprise loans to the real estate sector, which any way attract a high-risk weightage of 150%. The provisioning requirement will, however, be implemented in phases., HFCs will be required to make a provision of 0.1% of total outstanding non-housing loans in the form of standard assets. Subsequently, the provisioning requirement will be increased to 0.4% in four stages by December 31, 2007. NHB has issued a notification on March 26, 2007, towards this end. With this diktat, it has for the first time asked HFCs to mandatorily make provision towards standard assets. This also means that HFCs will have to take a small hit on their profitability in fiscal 2006-07 itself. Profitability will be impacted to the extent of the provisioning requirement. According to experts, non-housing loans essentially mean mortgage loans against commercial properties (real estate loans), project loans and lease rentals. Every HFC is allowed to offer non-housing loans up to 25% of the total long-term borrowings, in order to increase the interest rate spread..Housing Development Finance Corporation (HDFC) managing director Keki Mistry sees this move as NHB’s signal in the context of a possible real estate bubble. “As far as HDFC is concerned, I don’expect any significant impact. We, in any case, make a general provision against all standard assets, be it in housing loans or non-housing loans,” he said. The provisioning requirement will be increased to 0.2% by June 30, to 0.3% by September and subsequently to 0.4% by December 31, 2007. DHFL Vysya Housing Finance managing director R Nambirajan said, “The interest rate spread on housing loans has become quite thin. This has forced all HFCs to resort to non-housing loans within the total ceiling prescribed. This decision, therefore, will affect the profitability of HFCs. Although for the current year, the provision will be just 0.1% only, for the next year, the impact will be more.“ The NHB decision is seen as a follow-up measure to reduce HFC’s real estate exposure. The apex bank has already increased the risk weightage on loans to commercial real estate to 150%. It may be noted that the Reserve Bank of India has also been putting pressure on commercial banks to reduce their respective real estate exposures. Banks also make provision of 0.4% against real estate loans in the nature of standard assets.

The finance minister’s diktat on home loans does not hold for private banks. India’s largest home loan provider and second largest bank — ICICI Bank —on Tuesday hiked its home loan by 1%. The bank has also increased its deposit rates. As per the new rate structure, customer will have to pay 10.5% on the home loans with a floating rate, while the fixed home loan will now invite an interest of 12.5%. With this increase, the monthly instalment on a Rs 1 lakh loan for 20 years goes up by Rs 70. Besides home loans, all other rates, including that on auto loans, two-wheeler loans, loans against shares and loans for corporates will see a rise of 100 basis points. Rates on corporate loans would also go up.
According to V Vaidyanathan, executive director, ICICI Bank, tightening liquidity conditions and steep rise in term-deposit rates have been the key triggers for the 100 basis point hike in the prime lending rate. The bank has also announced a 1.25% increase in interest rates to 9.50% from 8.25% for fixed deposits (under Section 80C) of value less than Rs1 lakh for 5-year tenor with effect from February 9, 2007. The bank had on January 20 raised deposit rates in the range of 0.25-1.25%. Other major players like HDFC are holding their rates for now. “We are not looking at hiking our home loan rates as of now,” said Renu Sud Karnad, executive director, HDFC. The institution presently charges 11% on fixed rate loans and 9.5% on floating rate loans. ICICI Bank is the largest retail player in the country. Other players that have increased rates include YES Bank and Indian Bank. Incidentally, Indian Bank is the only one among PSU banks to raise rates before the directive from the FM on rate hikes. ICICI bank had last hiked its lending rates by 50 basis points on December 13, post the hike in CRR ratio. The bank on Tuesday announced an increase of 1% in its benchmark advance rate (I-BAR) and its floating reference rate (FRR) for consumer loans (including home loans) with effect from February 9, 2007. The revised I-BAR will be 14.75% as against 13.75% at present, while the revised FRR will be 11.75% pa as against the present 10.75%.

The home loan market is in for a very significant overhaul. The system of marketing such loans through direct selling agents (DSAs) commissioned by banks or housing finance companies (HFCs) may be completely revamped. In fact, the National Housing Bank (NHB) is understood to have proposed replacing the army of DSAs with professional home loan counsellors. This issue was discussed at a recent NHB meeting with banks and HFCs and NHB proposed the creation of a common forum of banks and HFCs, which can serve as a self regulatory organisation (SRO) in the housing sector. “There is no standard or uniformity in DSAs’ advice, fees and/or charges, quality of advice, responsibility and accountability. This leads to complications later. Professional advice is also required for those who want to buy new dwelling units without availing of loans,” NHB noted in its agenda for the meeting. Significantly, customer protection has been on top of the Reserve Bank of India’s agenda as well. RBI governor YV Reddy has already underscored the need to promote fairness in home loan marketing practices and safeguard borrowers’ interest. In fact, the three major mortgage markets in the world, namely the UK, the US and Australia follow very comprehensive practices for customer protection. In the UK, for example, customers enjoy a withdrawal right, which authorises them to withdraw from the contract within a given time period. At the European Union level, this period usually ranges between 7 and 14 days. The European Mortgage Federation, which represents approximately 75% of the EU mortgage market, follows a strict code of conduct. In the US, full disclosure of all costs in lending is mandatory under its Truth in Lending Act.

LIC Housing Finance will enter the public deposit market in to raise money in a span of 3-5 years. The housing finance company plans to expand its international presence by opening offices in Singapore and Malaysia to tap the NRI clientele in South East Asia. the establishment of community living centres in Bangalore, and the second centre being set up in Bhubaneshwar, the company is in talks with state governments of Kerala, Maharashtra, Uttaranchal and Rajasthan for opening community living homes for senior citizens through its subsidiary, LICHFL Care Homes. In this connection Mr Mitter said that procuring land for these centres remains a serious issue, and hence, the company prefers to go through the respective state governments, in which case dealings are more straightforward and economical in nature. However, the critical factor in these cases would be the rate of return which has to be competitive, he added. LICHFL has hiked its lending rates twice in the recent past and the current rate of interest on floating rate loans stands at 9.5%. Mitter said that rates are likely to stabilise in the short term.

HDFC has reduced home loan rates by 50 basis points (bps) during this festival season. The company is offering discount till the end of this month on a floating interest rate loans. However, the new will be useful to only those borrowers who are availing of disbursement in October. According to the new festival rates, HDFC will be charging 9.25% for loans up to Rs 10 lakh and 9% for loans above Rs 10 lakh. In case of ICICI Bank, the immediate rival in the housing finance business, the rack rate is 9.25% for all floating rate loans irrespective of tenure and the loan size. However, sources said that the rates are negotiable and the bank is offering loans at 9%, but on floating interest rate basis. Meanwhile, other banks like State Bank of India and Punjab National Bank too are offering a discount of 50 and 25 bps, respectively, on floating interest rate loans on account of Hindu festival. SBI will charge 8.75% for loans between 5-15 years and 9.25% for loans above 15 years. Besides, the bank has also reduced the processing fee by 50% and reduced the margins on loans from 85% to 90%. However, all the reduction in rates are only for those availing of floating interest rate loans. Bankers expect a spurt in retail loans during the festival season. Over the last few months, there has been a slowdown in the housing loans segment, partly on account of rising interest rates and property prices. Among other businesses that banks are looking at expanding during the season is retailing of gold with several of them launching special schemes ahead of Dhanteras — a day where North Indians traditionally buy gold. The latest to launch a scheme is Union Bank of India which has announced sale of gold coins with 99.99% purity weighting 5 gms, 8 gms and 10 gms. The scheme would be launched in 15 centres across the country.

The home loan market has never been hotter. Owning your dream house is no longer a daunting task like it was a decade before. With more and more banks and other financial institutions falling over each other to lure customers, it has become very difficult to work out who is offering the best deal. Here is a look at how to get the best deal to acquire your dream home.

What are the eligibility criteria for getting a home loan?

Basically, home loan are disbursed based on two factors: the amount of loan repayment you can afford to make per month and a specified percentage of the cost of property. The actual figure will be lower of the above two different figures after making the calculations. Home loan experts Harsh Vardhan Roongta and Krishnan Subramanian say that though your income may make you eligible for a higher loan, the bank will always cap the sanctioned amount to 80%-90% of the cost of the property. Your ability to repay is based on your income and expenditure pattern. For instance, say Roongta and Subramanian, if your monthly income is Rs 10,000 and your monthly expenses Rs 8,000, you can pay Rs 2,000 towards any home loan you take. This amount can now be taken as an installment amount and your eligibility can be reverse-calculated. So, at an interest rate of 9%, the monthly installment of a Rs 1-lakh 20-year loan will be Rs 900. It is done by the following formula:

Rs 2000/900 x 1,00,000 = Rs 2.2 lakh.

So, the higher your repayment capacity, the higher will be your loan.
The amount you get as a loan largely depends on a number of factors like your age, profession, salary, the city youreside in among others. It varies between Rs 25,000 and Rs 1 crore depending on the lender. As a rule of thumb, depending upon the housing finance company, one will have to cough up 15%-20% of the loan amount as down payment. For smaller amounts, this may not be much. But for figures running into lakhs, this could make loads of difference.

Buying a house is a once in a life time event. This is because it is one of the most expensive purchases that a family will indulge in, running into several lakhs of rupees. The borrower must set aside EMI amounts regularly through the tenure of the loan to avoid defaulting. Home loan becomes difficult to manage when a borrower over-stretches himself beyond his financial capacity. Borrowers must leave sufficient cushion for uncertainties, unforeseen expenses, unemployment and other financial commitments.A home loan is not the only debt that most salaried homeowners have. Borrow today and repay tomorrow is the prevailing concept. With our lives inundated with numerous luxuries riding on borrowed money, loan repayments can sometimes become quite a challenge. Car loan, educational loan, personal loan, vehicle loan, credit card debts - the list is endless. Borrowers must employ a systematic approach towards managing their debts, especially the home loan. Do not wait till you’re knee deep in debt and could lose your house. Here’s how to manage your home loan well:

Prioritise your debts

Is your income just enough to meet your numerous debts? Then the best approach would be to prioritise them. A home loan is the most crucial debt. It is on top of priority lists of most borrowers. It holds as much emotional value as investment value and losing a house is most painful. If you commute by car or two-wheeler then the vehicle loan will be second on the priority order.

Pay off more expensive debts

A credit card debt may be more expensive than a personal loan. A personal loan may be more expensive than a car loan. Whatever be the case, it is wise to close loans that charge high interest rates first. Focus on the debt with the next highest interest rate once you’ve paid off the one with the highest rate.
Prepare a budget

Keep track of your income and set financial goals. Prepare a budget that details various sources of your monthly income and numerous outflows. Housing expenses, other debts, transportation, family care, living expenses, recreation, social obligations and regular savings must reflect in your budget.

Prepay

When taking a home loan, make as much down payment as you can afford to. Take a stock of other assets that you own. Jewelry, stocks, bonds, savings and other personal assets that could come to your rescue can be considered. Take loan only after making maximum down payment. If the sharp increase in interest rate is difficult for you to tackle, explore the prepayment alternative.