Tuesday, August 18, 2015

Housing Finance




Selecting a suitable house to suit one’s needs and taste is difficult task.  After moving into newly constructed or purchased house, residents complain of various shortcomings, and often feels that previous house was more convenient.

Choosing suitable home financer is also more difficult, requires lot of study of various schemes, interaction with the present borrowers.  Market is flooded with financers, offering different schemes supposed to suit borrowers needs, glossy advertisement proclaiming to save a lot of interest as though financial institutions are charitable institutions doling out money for acquisition of house. The borrower needs to be very selective and careful while choosing the financer.

Your Banker

Generally every individual will have a bank account: and have personal relations with the bank.  The bank having dealt with the account for many years will have adequate knowledge of financial position of its client and many a times will be a family friend.

Housing finance is of a long duration, generally with a minimum of 15 years and maximum of 25 years.  It is but natural to have ups and downs during their long period with fluctuation in income, may be owing to illness, expenditure on marriages, mishaps in the family leading to temporary cessation of payment of equated monthly instalments.  Your banker should be able to understand your difficulties and co-operate with you during those difficult days.  With the enactment of SRAFESI Act, the banker may take possession of your house with a notice of 60 days and thereafter may sell it.  So it is always preferable to choose your long time banker for financing of acquisition of house who will not resort to aggressive measures.

Amount of Loan

Many new era bankers sell their products, home loans by adopting aggressive methods and also lure to you borrow big loans, which in future may become difficult to service.  Borrower’s failure to repay the loan as agreed would be boon to such bankers, who may take possession of the property and sell it and add various expenses to borrower’s liability.

Do not anticipate that income will regularly increase until retirement.  Inflation frequently erode earnings.  Prepare cash flow statements, providing education of children, marriages, illness and unexpected expenditure.  Correctly arrive at year wise surplus funds, portion of which may be directed towards equated monthly instalments, based on which the loan amount may be arrived.  Please avoid directing entire surplus to repayment.  It is advisable to seek the help of financial consultants.

Repayment period

Though, the loans are available with in repayment period of 25 years or more it is viable to repay the loan in 10 to 15 years so that interest burden is not too much.  Repayments in five years or less may feasible for small loans for a couple of lakhs, EMI for one lakh of rupees alone at 7.5% will be Rs.2000/-.  Do not stretch the repayment until retirement, but ensure that loan is closed at least a couple of years before retirement.  One should not expect that his terminal benefits to take care of repayment.  Terminal benefits are meant for future unencumbered happy living.  Chose step-up or step-down repayment depending upon your needs.

Interest rates

There are two different types of interest rates floating and fixed.  Some institutions offer different types of fixed rates, semi fixed, fixed for certain period, a combination of fixed and floating.

Floating rates are related to market conditions and may increase or decrease. Fixed rates are supposed to be fixed for entire period of loans, but loan agreements of many financial institutions have conditions where fixed rates are also revised under certain circumstances.

Floating rates are preferable where the interest rates are going down and the repayment period is small.  Fixed rates have to be opted where interest rates are going up and repayment period is long.  At present interest rates are at lowest, fixed rates are preferable.

Card Rates

Though financial institutions advertises their lending rates; The advertised rates are called card rates.  But actual lending rates depend on the income of the borrower and his negotiating skills.  This also is related to risk involved, higher the risk, lower the income, interest rates will be more.  Many banks reduce their card rates in case of borrowers with good income and lower risk.


Borrowers have very little choice in documentation.  Each financier has his own set of documents and will be made available to the borrower at the last minute. They are one sided pre-dominantly in the favour of financiers.  But borrowers should study each and every clause, conditions, and seek clarification wherever required.  They should obtain a copy of all documents executed.

Uninvited Borrowers 

Every financial institution has its own list of category of people to whom finance is allowed.  It is based on the experience of the institution, and category of people whose income is not assured, litigant minded people and the people who may influence the repayment.  Politicians, advocates, film and T.V. artists, Journalists, Police, are among a few who are on negative list.  Such borrowers may approach their regular bankers.


Of recent times, direct selling agents are very active in the field.  They are just agents of the financial institution to procure business.  They have a sweet tongue, work for commission and will be in touch with, until the loan is disbursed.  You cannot get any after sales service from them.  The borrower should develop personal rapport with manager of the financial institution to have better after sales service.

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