c Ê




        

c  

         

c  
  
  

    
   
   !   
  "      #$%&        

c  

 '         

c 

        

c 

       

c  
 

 '       
 

c 
 
! "         #() &    * +,- $),$-  
  . ,%)  /      0      Ê#$%    
    ($%&  %
 /      0

c      &"      #&    

      
    (&  

c 


! 1  '     

  !

 2  

20    

!   

! 2 3 4  

!  2  

    

1!    

 !  
 52! 3 4  

6 !

!! 2  

 2 2  

 2    

  2  

7  *  2  

! 
6581

82    

5   !  2 3 4  

5   2    3524

Choosing a Loan:‘

here are several features of a Home loan that you must consider based on an analysis of
your specific needs.‘‘‘

!
 

 ‘‘‘

Ês the investment in a home does not yield any monthly income, (unless you have rented
out the home) your ability to repay the loan depends entirely on your salary or regular
income from a stable business. Finance companies would normally give you a loan to the
extent that your monthly repayments are less than 35-50% of your gross monthly salary.
ÊbodesIndia.com gives you the ability to find the Maximum loan that you can afford among
the companies in the database.‘‘‘

!
  ‘‘‘

Having found a Rs. 10 lac property that you want to buy, you must decide how much of the
cost can be funded by a loan.‘‘‘

Normally Housing Finance Companies will loan you about 80-85% of the property value. You
need to make a minimum down payment of 15-20% of the property value. Please also
remember that you have to normally bear the following fixed costs before your loan is
disbursed:‘‘‘

‘ Processing and administrative fee (1.5-2% both included)‘


‘ Legal fees‘

‘ vtamp duty charges ( for resold property)‘

‘ Property insurance premium‘

‘ Êccident insurance premium‘

Make sure that You have an asset base that is easily converted to cash (e.g. cash in a Bank
FD etc.) to cover all charges including down payment.‘‘‘

Ês the value of the loan amount increases, the interest rate charged usually also increases.
You may feel tempted to take a smaller loan by funding the large down payment (the
difference between the value of the property and the loan you have applied for), by
withdrawals from other investments. If your investments are in Fixed Deposits that are
giving you about 11% p.a (about 7.4% p.a. after tax) and the effective post tax cost of you
Home Loan is 10% (about 15% before tax) then this is a good idea. However, if you expect
to make over 20% p.a. (about 13.5% post tax) by investing in shares or in a business, then
you must borrow as much as you can on the Home Loan and not withdraw money from your
other investments. ÊbodesIndia .com helps you get some idea of your credit standing and
the maximum value of the home loan that each Finance Company would be willing to make
to you.‘‘‘

Ênother important consideration is your tax bracket and the extent of using available tax
breaks. he tax breaks are directly related to the level of interest and principal repayments
made each year, with an over all upper limit. You may not qualify for the full tax break if
your loan is relatively small. Êlso remember that the government is keen to give more
concessions to the housing sector and the overall cap on tax breaks will go up in the future.
It is prudent to lock into a large loan today rather than a smaller one. In ÊbodesIndia.com
use the ax Planning ool to help you check post tax costs under different tax policy
scenarios you can construct.‘‘‘
‘‘‘

If you have identified other profitable avenues of savings that are expected to give you 15-
20% returns p.a, you can use the Home Loan as a way of getting a cheap loan. In this case
borrow up to the limit of 80-85% of the property value rather than withdraw cash from the
other savings to make the down payment on the loan.‘‘‘


  ‘‘‘

Loans are usually for a maximum period of 15 years (which may go upto 20 years in some
cases). Longer tenure loans have smaller monthly installments. You can still get a large loan
on a relatively small monthly salary by choosing to take a longer period loan. However,
longer period loans maybe more expensive (higher rate of interest) even though the
monthly installment payment is lower. Convenience always comes at a cost!
««««ÊbodesIndia.com will try to lower costs.‘‘‘

vtatistical evidence also shows that most people take a longer tenure loan of 10-15 years
but end up prepaying the same in 5-6 years. his happens because salaries invariably
improve with time. here are two costs that could have been avoided through better
planing. he first is the Prepayment penalty of 1-2 % and the second is the higher interest
rates quoted on longer tenure loan (especially over 20 years).‘‘‘

In this example, both costs could have been avoided by taking just a 5-6 year loan.‘‘‘

Further, if you intend to sell the home after about 5-10 years, take a 5-10 year loan only.
here is no point paying a higher interest rate for a longer tenure loan of 15-20 years, if you
intend to PREPÊY the loan in 5-10 years.‘‘‘

!

  ‘‘‘

ill recently you did not have to make this decision as all loans were given on a 

 basis. his means that the interest rate is fixed for the full tenure of the loan and so
is your monthly repayment amount. Life was simple. You could easily plan for the future as
your cash flows each monthly after the loan repayments were very predictable.‘‘‘

However, interest rates in the economy, changes depending on the demand and supply of
money. When industry is booming and everyone needs money to do business, interest rates
move up and vice ±versa. Home loan customers became unhappy about having to pay a
very high interest rate that they were locked into, when rates subsequently fell.‘‘‘

For the customer¶s convenience,   loans were recently introduced. he
interest rate on these loans changed every time the interest rate in the financial system
changed. he monthly installment falls if interest rate in the economy falls ( HvBC home
loan product) . With other companies the monthly installment amount was kept fixed but
the tenure of the loan reduces if interest rates in the economy falls ( e.g HDFC floating rate
loans). Normally, floating interest rates are quoted in the form of "PLR plus premium". he
PLR (Prime Lending Rate) varies from company to company and changes as frequently as
once in 3 months.‘‘‘

Example««‘‘‘

Ê floating rate quote of PLR+0.5% means that interest rate on the loan will change from
14.5% to 15.5% if PLR goes up from 14% to 15%. Êlso a PLR +0.5% quote from one bank
is very different from a PLR +0.5% quote from another as the PLR levels for each may
differ.‘‘‘

In a floating rate loan, the customer gains if interest rates fall, but will take a severe
beating if interest rates rise.‘‘‘

In order to reduce this disadvantage of a the floating rate loan some progressive banks like
HvBC have introduced a ! In this case a person can decide to fix the interest
rate on his loan for periods of 1,2 or 3 years on a long tenure loan and subsequently decide
to float his loan.‘‘‘

For example«..‘‘‘
You can take a 15 year loan specifying that you will have a fixed interest rate for the first 3
years, after which you have the option to convert to a floating rate loan. If you think that
interest rates are about to fall them you will opt for a floating rate loan after 3 years. If
interest rates were to rise during the 3 year period you are fully protected as you had
locked in a rate for 3 years.‘‘‘

You will want to stay on with a Floating rate loan as long as you feel that interest rates are
expected to fall further. he moment you expect interest rates to start rising, switch
immediately to a fixed rate loan. Ês these changes never happen overnight, you will have
enough time to make the move «..provided you watch interest rates carefully.‘‘‘

his additional flexibility can be capitalised to substantially lower the cost of the loan, often
saving as much as 50% of the total interest you may have paid on a simple Fixed rate loan.
But««there is a cost ««..the trouble of tracking interest rates and taking a forward looking
view on interest rates««. ÊbodesIndia.com will help you with that.‘‘‘

   ‘‘‘

Each monthly installment consists of a portion that goes towards repaying the original loan
principal and the balance going towards interest on the outstanding loan. If you pay
anything over the amount that would go towards principal repayment, the excess amount is
construed to be a loan prepayment. Most Housing Finance companies charge a fee of 1-2%
on the amount being prepaid. his can be a big disadvantage in several cases.‘‘‘

‘ Your earning capacity will normally increase with age and a prepayment fee deters
you from completely retiring your debt before time.‘

‘ Your ability to refinance the loan if interest rates subsequently fall gets constrained‘

‘ You may want to sell the home during the tenure of the loan and you find
prepayment costs are an unnecessary burden.‘

If you may need to do any of the above, choose a loan with no prepayment fees.‘‘‘

 

     ‘‘‘

It is very important for you to understand the total cost of the loan and try to minimise this
cost to the extent possible. Ês home loans are of a long duration even a 0.5% difference in
interest rates can cost you a lot of money over time.‘‘‘

For example«««‘‘‘

If you had taken a taken a 15 year loan of Rs. 5 lacs at 15% p.a you would have paid Rs.
31000 less than a 15 year loan of Rs 5 lacs for 15.5%.‘‘‘

Most of us compare the cost of the loan by comparing the EMI¶s (Equated Monthly
Installments). his can be misleading as you are ignoring the "time value of money" which
means that you need to look at when the EMI is being paid. his is because the value of
One Rupee today is vastly different from the value of a Rupee 10 years ago. Using a
Discounted Cashflow Model that calculates the Effective interest cost depending on when the
EMI amounts are being paid solves this problem. ÊbodesIndia.com does it all for You.‘‘‘
Other costs that go into the same Discounted Cashflow Model include:‘‘‘

‘ Ênnual rest, monthly rest, daily rest method of quoting interest rates. he annual
rest method of quoting interest rates gives the borrower the credit of principal repaid
only once a year although he is paying a portion of the principal in each monthly
installment (EMI). Ê loan quoted with an annual rest interest rate is much more
expensive than one quoted on a monthly /daily rest method although the 2 numbers
may look identical on paper.        
    ‘

‘ Processing and administrative fees that have to be paid at the time the loan is
disbursed.‘

‘ ax benefits that reduce the total annual repayment.‘

Ä

 



 

 
  

‘‘

ë
‘
 ‘
‘


‘‘ 

‘ ‘ 
 ‘ ‘‘

‘ ‘‘
‘ ‘
 ‘
 ‘ ‘
‘

‘ 
‘‘
‘‘
 ‘
‘‘‘‘‘ ‘‘
‘ ‘ ‘ ‘

‘ ‘ ‘

 ‘ ‘
‘‘ ‘
 ‘‘
‘
 ‘
‘‘
‘
 ‘
‘‘

‘
‘
 ‘ ‘
‘‘‘
‘‘
 ‘ ‘ ‘ !‘‘



  ‘‘

]‘
‘
‘
‘
"‘‘ ‘
‘ ‘‘
‘
 ‘ ‘‘ ‘
‘‘ ‘‘#‘ë‘$
‘‘‘‘$ ‘%
‘
 ‘
‘
‘
‘
‘
‘
‘ ‘‘ ‘  ‘‘‘#ë$‘

 "‘
‘‘
‘‘‘ ‘
‘ ‘
‘
‘
‘
 ‘
& "‘
‘
 ‘‘ ‘ 
‘‘
‘‘'
‘
( 
‘‘
‘ ‘ ‘
‘ ‘
 ‘
‘‘
 
 ‘
‘‘
‘‘
‘ ‘‘
‘‘ ‘

 ‘‘‘#ë$‘  "‘
‘ ‘
‘


‘‘

=

   
 
 
 ‘‘

‘‘
‘)*+‘
 ‘‘#ë$‘
‘
‘
‘‘
‘  ‘
‘

 ‘ ‘
‘
‘ ‘ ‘
‘ ‘‘
‘‘ ‘‘ ‘
 
"‘
‘ 
‘ ‘‘ ‘
‘
‘
‘
‘‘ ‘
 ‘
‘ ‘ ‘

"‘
‘
‘
‘
‘
‘
‘
‘
‘ ‘‘ ‘
‘
‘
‘,
‘
‘‘ ‘
‘
‘
‘
‘‘ ‘

‘
 ‘ ‘ ‘ ‘‘&%(!‘& "‘‘
‘ ‘ ‘

‘ ‘ 

‘ ‘ ‘
 ‘
‘‘
‘ 
‘
‘ ‘‘

‘‘

"‘‘ ‘ ‘
‘'‘
‘
‘‘

ï ‘‘

 ‘
 ‘
‘

 ‘ ‘
‘
‘ "‘ ‘ ‘ ‘


‘ ‘
 ‘
‘


‘ ‘
‘ ‘
‘‘ 
‘ ‘
‘‘‘ ‘
‘ ‘
‘
 ‘ ‘
‘‘‘ ‘
‘
‘
‘

 ‘
‘ ‘ ‘ ‘
‘
‘ ‘-
‘ ‘
‘‘
 ‘‘
‘ ‘‘
"‘‘
‘‘‘ ‘
‘
‘‘‘.  
 ‘
‘ 

 ‘
‘ ‘
‘

 ‘ ‘ 
 ‘ ‘
‘/0&ë,‘$ ‘
 ‘‘
 ‘‘ ‘
 ‘‘ ‘( 
‘ 
‘
 ‘‘
‘ ‘
‘


‘
 ‘
 !‘‘

Ô
   ‘‘

.‘ ‘‘‘‘ ‘ 
‘ *


‘
‘

‘
 ‘‘

‘
‘
‘

 ‘$
 ‘
‘
‘ ‘1*)2‘ ‘‘
‘

‘‘

Ê
   ‘‘

.‘ ‘‘‘‘ ‘ 
‘ *


‘
‘

‘ ‘
‘

‘ ‘ 
‘$
 ‘
‘
‘ ‘1*)2‘ ‘‘
‘

‘‘

=


 ‘‘

 ‘ ‘ ‘
‘‘

‘ ‘ ‘
‘‘
 ‘
‘‘
‘
 ‘ ‘3*4‘  ‘‘
‘ ‘ ‘ ‘


‘

‘1*)2‘
‘  ‘‘

   
‘‘

&
‘'
‘ 
 ‘
‘ ‘
‘
‘
‘ ‘‘ ‘ ‘
‘‘ ‘
‘‘  ‘
‘ ‘ ‘ ‘‘
 ‘
.
 ‘‘‘‘ 
‘‘‘ ‘
‘‘
‘
‘

 ‘ ‘
‘ ‘ ‘ ‘
‘ 
‘

‘)2‘ ‘‘ ‘
‘

‘ ‘‘‘‘
‘
‘ ‘152‘‘‘


‘ ‘
‘

‘ ‘
‘ ‘

‘15)62‘ ‘ ‘
‘ 

 ‘
‘

 ‘.' $‘ ‘
"‘ ‘
‘ ‘ ‘
 ‘ ‘
‘ 
 ‘

 ‘ 
          ‘‘

Ô 
 ‘‘

 ‘&
‘'
‘ 
 ‘
‘
‘‘ ‘
‘
‘
‘
 ‘ ‘
‘
‘ ‘ ‘ ‘ ‘‘
‘‘
 "‘
‘
‘
 ‘,
‘
‘

‘‘ 
‘
‘‘
‘
‘
‘

‘‘
‘‘
‘‘ ‘ ‘‘
 ‘ ‘
‘
‘ ‘

‘‘
‘‘ ‘
 ‘
‘
‘
‘‘
 ‘‘‘ ‘
 
‘‘‘
‘ ‘1*)2‘ ‘‘
‘

‘‘

ï    = ‘‘

 ‘&
‘'
‘ 
 ‘ ‘ ‘
‘
‘ ‘
 ‘
 ‘
‘ ‘
 ‘& "‘‘
‘‘
‘
‘
‘ ‘
  ‘ ‘
 ‘'
‘( 
"‘
‘‘
‘ ‘
‘
‘
$
‘
‘ ‘1*)2‘ ‘‘
‘
 
‘‘


 
‘‘

&
‘
‘ 
 ‘
‘ 
‘‘
‘
‘
‘ ‘67*682‘ ‘
‘

‘ ‘‘ ‘‘
‘

‘
‘
‘ ‘
‘‘
‘
‘ ‘‘ !"‘
‘
‘ ‘
‘ ‘‘‘
 ‘ ‘‘

‘‘

  
 
 ‘‘

0 
"‘
 ‘
‘‘ ‘
‘ ‘ ‘1*18‘
 ‘ ‘ 
 ‘

 ‘‘
 ‘
 ‘)7‘
 ‘
‘
‘
 
‘ ‘ ‘ ‘7)82‘*
782‘ ‘ 
 ‘ ‘ ‘
 ‘
 ‘ ‘
‘
 ‘ ‘
‘
‘‘