Escolar Documentos
Profissional Documentos
Cultura Documentos
com
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.
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.
LOANS TO NRIs
This loan is tailored for the requirements of NRIs wishing to build or buy a home in India
What is an EMI?
EMI (Equated Monthly Installment) is the amount payable to the lending institution every month, till the loan is paid back in
full. It consists of a portion of the interest as well as the principal.
1|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
a) Some of the lending institutions sanction the loan without requiring you to identify property as a prerequisite for eligibility
b) Free accident insurance
c) Discounts
d) Waiving of pre payment penalty
e) Waiving of processing fee
f) Free property insurance
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
What are the interest rates offered for home loans? What are: Daily Reducing, Monthly Reducing and Yearly Reducing?
Interest rates are different from institution to institution and generally range from about 9.25% to around 12 %. The interest on
home loans in India is usually calculated either on monthly reducing or yearly 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. 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.
Keep the loan period constant and calculate the total amount paid for the home through the different loan options available.
Some institutions have a fixed rate of interest, which means the rate of interest remains unchanged for the entire duration of
the loan. This means you do not benefit, even if rates of interest drop in the market.
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.
What are the other costs that usually accompany a home loan?
2|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
b) Pre-payment Penalties: When a loan is paid back before the end of the agreed duration, a penalty is charged by some
banks/companies, which is usually between 1% and 2% of the amount being pre-paid.
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 a documentation or consultant charges.
Usually, most companies give up to a maximum of 85% of the cost of the house. The 15%, sometimes called 'seed money', will
have to be provided by the loan applicant. 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.
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.
On an average, loans are disbursed within 3-15 days after satisfactory and complete documentation and completion of all
relevant procedures, including proof that 15% of the cost has been paid upfront to the seller of the property.
Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount. Some institutions do
not require the co-applicants to be co-owners of the property to be purchased.
Both principal as well as interest of home loans attract tax benefits. With effect from 1st April 2005 (i.e. assessment year 2005-
07) under section 80C of the Income Tax Act 1965:
Principal amount of repayment of loan along with other savings such as PF, PPF, Life Insurance premium etc up to a maximum
of Rs 1,00,000/- will be eligible for deduction from gross income.
Interest paid on loan after completion of construction will be deductible from income from property
3|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
For self occupied - Income will be treated as nil and interest payment will be treated as minus income which will be adjusted
against other income.
For rental property - It will be adjusted against rental income.
There are different sections of the “Income Tax Act” of India under which you can avail deductions on the taxes, confers you to
save a signification amount on your total tax liability.
There are two sections of the “Income Tax Act” of India which will allow you to get a deduction if you have taken a home loan;
this of course ignores home loans from “private sources” (Friend, Family, etc). The two sections are here under.
The Section 24(b) of the Income Tax Act, 1961 is applicable on Home loan for purchase of house or construction of the house
property. You can avail a deduction of up to Rs. 1,50,000 of you total tax liability, Also reconstruction or renewal or repairs is
eligible for deductions under the said section.
The Section 80(c) of the Income Tax Act, 1961 allows you a deduction of up to Rs. 1,00,000 on the principal repayment amount.
Illustration
Suppose your total taxable income is Rs. 4,00,000.
Principal repayment is Rs. 1,50,000 and total Interest Payable is Rs. 1,80,000.
The total deduction allowed is Rs. 2,50,000 (1+1.5Lacs) under the sections. Hence now your total taxable income becomes only
Rs. 1,50,000 (4-2.5Lacs) and that saves a lot of money!
Lets say a person Z has taken loan of Rs 20,00,000 (twenty lakhs) on 12th September 2010 at a floating interest rate of 9% p.a.
Floating interest rate means it is linked to a reference interest rate, which varies from bank to bank. Lets say the reference rate
is 10% p.a for Z's bank. So, in the loan agreement that Z signed with his bank, the floating rate is stated as "1% below ref rate".
So whenever the reference rate changes, the effective interest rate changes too. (That's why it is called as "floating").
Coming back to the loan. The start date of the loan is 12-09-2010. So, the interest will be calculated that day onwards. The
interest is calculated for each day using the following formula:
interest per day= balance amount * rate of interest / ( 365 * 100 )
So, for Mr Z, the table for the two months starting September 12 would look as follows:
(Cr/Dr is Credit/Debit and RoI is Rate of Interest)
Row daily
Date balance ref rate RoI Cr/Dr Comment
No interest
1 12/09/10 2000000 10 9 493
2 13/09/10 2000000 10 9 493
3 14/09/10 2000000 10 9 493
4 15/09/10 2000000 10 9 493
4|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
5|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
The table has a lot of redundant information but it is included just to explain things in a better way.
Points to note:
1) For the month of September, Z had to pay interest only for 19 days (12th Sep to 30th Sep).
2) Whenever some amount is credited to the account, the daily interest reduces marginally. All credit transactions are
highlighted in green. EMI is nothing but a simple credit transaction. So, for a daily reducing balance system, it wouldn't matter if
Z pays his EMI all at once or in installments. In fact, it does not matter how much he pays as long the balance at the end of the
month is continuously reducing-provided his bank doesn't care for a certain minimum each month. If Z pays less per month, just
enough to reduce his balance, the bank makes more profit.
3) The interest is calculated for each day on the balance amount. However, the interest accrued over the entire month is added
back to the balance only at the end of the month. See the entries highlighted in brown. So next month onwards, interest is
calculated on this new balance as principal.
4) The floating rate of interest MUST change along with the reference rate. The entries of rate change are highlighted in blue.
5) Though the interest is reflected in the balance at the end of month, the credits(and debits) are reflected the same day.
5) To summarize:
Total amount paid by Z so far (row num: 5,7,24,30,39)= 50000
Total interest paid = 9266 + 15043 = 24109.
Loan principal (or balance) reduced by = 2000000 - 1974309 = 25691
State bank of India uses this method to calculate the home loan interest. For other banks too, the method must be same with
minor differences. For example, the dates of compounding monthly interest and balance could differ. Using this table, the
impact of credits and withdrawals can be easily analyzed. In this case, the interest compounding takes place on last day of
month. So, it is advisable to do all credit transactions at month start and all debits just before month end. This way, most of the
month's interest is charged on a lesser amount.
Case study:
How SBI cheated me...
I am a home loan customer of SBI since October 2008. I have opted for a floating rate of interest.
SBIs floating rate was linked to SBAR (State Bank Advance Rate) upto June 2010. After that, the concept of base rate came into
existence and SBAR disappeared.
As per my agreement with the bank, the effective interest rate on my loan was 2.85% below SBAR. The SBAR was 13.75 at that
6|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
So, as per my agreement with SBI, the effective rate of interest should have been (current SBAR - 2.85 ) at all times. However,
the bank never reduced the interest rates accordingly. This continued for almost 2 years and I continued repayment at a higher
interest rate.
However, in August 2010, when it came to increasing the interest rates,the bank acted immediately and my effective rate of
interest straight away went up by 0.5%! Calculations told me that my balance (i.e. principal of loan) should have been 30000
(thirty thousand) less than what the bank statement reflected!
The real story began after this. When I brought this discrepancy to the notice of the bank officials, no one entertained me. The
officials gave me vague answers like "we don't control the interest rates", "the central server in Mumbai makes all changes",
"why are you cribbing about such a small thing? how much difference is it going to make?" etc. No one seemed to care about
the concerns I raised.
Then I tried the option of online complaint registration. After about a month of constant email communication with
helpline.lhomum@sbi.co.in (which was one way most of the time - me sending them emails asking about the complaint status),
they responded and the interest rate was altered. All this took about 4 months time.
The most frustrating part- I still had to recover the extra interest I paid because of faulty interest rate. I repeatedly met the
branch officials at SBI Pune City branch (where I have opened a Savings and a loan account). The officials kept promising me
that the balance would be recalculated. Let alone crediting the difference to my account, the bank debited 10000 from my
account - TWICE! I was being deprived of having my own money without any reason!
Moreover, no one in the bank had a clue why the amount was debited. Finally, I got to meet the branch manager and it seemed
like "light at the end of the tunnel". With high hopes, I tried to explain him the matter.
However, as they say, "the light could be that of an incoming train", my hopes shattered when the manager himself gave me
utter foolish answers. He told me that he had never seen a clause like "2.85% below SBAR" in his entire career of 20 years. Also,
he stated that all the changes were "done by system". He tried to convince me that "the system" (i.e. computer) was the root
cause of all the trouble. His colleague present there was of the opinion that 10000 (ten thousand) Rupees was a negligible
amount and the bank would surely refund it before the repayment period (of 20 years) is over.
Finally, the branch manager agreed to have a look into the issue and assured me that he would call me back within 3 days time.
The three days time is over today and no one has called me from the bank.
7|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
If 25% of outstanding
amount is paid within 3
0.5% plus applicable
HDFC Ltd 9.75% years - No Penalty ,
service tax and cess
otherwise 2% of
outstanding amount
2% of out standing
LIC Housing 9.90% ( Fixed for 5 yrs), Floating 9.25% 0.5 % -1%
Payment
1% of the loan
AXIS Bank 9.50% amount + applicable NIL
taxes
Up to 1%of loan
amount
(Rs 2500 to be If Balance Transfer then
IDBI 9.50%
collected at login and 2% Otherwise Nil
balance at the time
of sanction )
5000 + 10.30%
(service tax) (Upto
20Lacs)
ING Vysya 9.75% 2%
5000 + 10.30%
(service tax) (Above
20Lacs)
4% for 18 months and 2%
Standard Chartered 9.50% 0.5%
after 18 months
If 20% of outstanding
amount is paid every year
0.5% - 1%(basis on
DHFL 10.25% (Upto 15Lacs), then 10.50% -No Penalty , otherwise
profile)
2% of outstanding
amount
up to 90% no charges
Deutsche Bank 9.75% - 10% 10000 + Service Tax
after that 2.5%
upto 30lacs - 2,500 +
10.30% (service tax)
above 30lacs to 1.5Cr
India Bulls 9.75% - 5,000 + 2%-3%
10.30%(service tax)
Above 1.5Cr - 10,000
+ 10.30%(service tax)
0.50% of loan
Allahabad Bank 10.75% amount, Maximum N.A
Rs. 10,000/-
0.50 % of loan
Central Bank of India 10.50% amount, maximum N.A
Rs.20,000
Upto Rs.5 lakhs
0.50% of loan subject
Corporation Bank 10.50% N.A
to min. Rs.1,000/- &
max. Rs.2,500/-
8|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
9|P ag e
4/21/2011 Biswa Prakash Nayak, Tweet @ razabpn , Email: razabpn@gmail.com
1% of the loan
amount applied for,
subject to a minimum
25%of the original loan
of Rs 10000 plus
HSBC Bank 10% - 13% amount free for every
service tax. This fee is
financial year
payable on
application and is not
refundable
EMI Calculator:
EMI_Calculator.xls
Sources:
http://vbsez.blogspot.com/2010/09/how-sbi-cheated-me.html
http://www.guide2homeloan.com/resources/home-loan-faqs.aspx
http://www.loanindia.in/home-loan-tax-saving-benefits-india.html
http://au.answers.yahoo.com/question/index?qid=20100714095237AA8hMf6
http://www.deal4loans.com/home-loans-interest-rates.php
http://www.naveen.info/2009/06/21/how-to-calculate-emi-download-excel-emi-calculator/
10 | P a g e