Usually, there is a lot of insecurity among home buyers till a bank approves their loan. A pre-approved loan is a product offered by banks to give some respite to such anxieties. Simply put, a pre-approved loan is an instrument that banks use to lure customers to avail a loan without much hassle.

In a pre-approved loan, the amount sanction is based on the preliminary yet crucial checks done by the lending institution, to ascertain the financial eligibility of the borrower which includes his repaying capacity and credit history.

So, how does one get a pre-approved home loan?

Once the purchase decision is finalized, the person desirous of availing a pre-approved home loan has to provide the property details. The lending institution will verify the legal and title information of the said property. Important conditions such as interest rate, tenure, penalties, etc., are then settled. . The loan is disbursed only if all papers are as per the norms of the lender. The pre-approval is valid for a period of about three to six months. The borrower is required to complete the transaction before the expiry of the approval.
If you are wondering what are the advantages of availing this kind of product, read on.

The biggest advantage of a pre-approved home loan is that it lets you plan your finances. From the beginning itself, it is clear how much loan you can avail. So, you look for only those properties that suit your budget, thereby making your search more focused.
Unlike standard home loans which take more time to process, having a pre-approved loan allows you the flexibility to negotiate for a better deal because you are identified as a serious buyer by the builder or the seller of the property. And since in the latter variant, the income documents & credit rating is already established, acquiring a home loan becomes much faster.

However, caution needs to be exercised due to some demerits that tag along with pre-approved home loans. Opt for pre-approval, only after short listing a few potential properties. Frequent applications can lower your credit score.

Further, in case you decide to not avail of the pre-approved home loan or if the validity period has expired, the processing fees paid to the lender are not refunded as a norm.

Industry experts also point out that if the interest rates fall between the pre-approval and the actual disbursement, the borrower may not benefit from the reduced rates, as the rate of interest has already been decided on.

Remember, taking a pre-approval just because a financial institution is offering it to you, is not at all a prudent thing to do. Apply for it only if and when you require it.

Go through the terms and conditions for payment/prepayments very carefully. Understand the benefits, such as special or discounted interest rates, determine the applicable penalties and charges before applying.

Get extra tax exemption on your first home loan

The Finance Bill 2016, which is expected to be approved by Parliament during the ongoing second half of the Budget session, provides for up to Rs 50,000 tax benefit on housing loans up to Rs 35 lakh taken for first residential property. The proposal aims to promote the government’s ‘housing for all’ scheme and strengthen the real estate sector which is facing a massive slowdown for last three-four years.

The Bill, which was presented by the FM Arun Jaitley read, “In furtherance of the goal of the Government of providing ‘housing for all’, it is proposed to incentivise first-home buyers availing home loans, by providing additional deduction in respect of interest on loan taken for residential house property from any financial institution up to Rs 50,000.”

After the Finance Bill is passed by Parliament, the amendments in this regard in the Income Tax Act will take effect from April 1, 2017. This incentive is proposed to be extended to a house property of a value less than Rs 50 lakh and a loan not exceeding Rs 35 lakh has been sanctioned during the period from April 1, 2016 to March 31, 2017.

, “the tax incentive will encourage first-time home buyers and increase the demand for housing significantly,” Realtors’ apex body CREDAI Getamber Anand said

The proposed deduction is over and above the limit of Rs 2 lakh provided for a self-occupied property under section 24 of the I-T Act.

Home Loans for everyone by PNB Housing Finance

In an effort to bring cheer to middle and lower income segments which dream of owning a home at affordable Equated Monthly Installments, PNB Housing Finance Ltd. launched a special home loan scheme for the salaried and self-employed professionals with income starting from Rs 10,000 per month and above for a loan amount up to Rs. 25 lakh.

In a bid to support the government’s initiative of Housing For All by 2022, the scheme has been Named ‘Unnati Home Loans’, where the tenure of loan is up to 30 years with an option of fixed and floating interest rates. Loans under this scheme can be availed with a co-borrower and up to 90% of the property value. Starting at an interest rate of 10.50 %, the borrower also gets an option of fixed rate for 3, 5 and 10 years that will shield him from market fluctuations.

“Unnati is aimed at supporting lower income groups in their endeavour of owning a home. With our customized credit schemes, we are attempting to reach out to employees of indigenous establishments and SMEs,” said Sanjaya Gupta, managing director, PNB Housing Finance, adding that With this new scheme, the company are eyeing individuals residing in peripheries of Tier I cities as well as those living in Tier II and III cities.

For borrowers, interest matters

In the traditional Indian society, a ‘loan’ was considered to be a forbidden fruit. From times when ‘udhaari’ was a strict no-no, to the time when we have loans for everything, things have changed really. Now-a-days, loans are available for holidays to weddings and from homes to cars. And if this was not enough, the EMI option for any purchase keeps your credit card active!

So, while we are busy living this life on loans & credits, don’t you think you need to spend some time to understand how the interest is calculated and how much you end up paying actually? Next time you get that phone call offering you a loan, you can negotiate a good deal by reading on & learning some simple calculations.

A loan repayment has four components namely principle amount, interest rates, loan tenure and method of calculation of interest. While the first three factors are clear & elucidated, the fourth factor is what makes all the difference. Basically there are two methods of interest calculation viz flat or fixed rate and interest on reducing balance.

The fixed or flat rate method involves calculation of interest on full amount of the loan throughout the tenure of the loan. For instance, Ajay takes a loan of Rs.1 lakh for 5 years at a rate of interest of 10%. In the flat rate method, Ajay will pay principal of Rs.20,000 every year (1,00,000/5) and interest of Rs.10,000 every year (10,0000*10%). In this manner, he pays an amount of Rs.30,000 every year. If you calculate on a monthly basis, he has a payout of Rs.2500 per month. His total interest payment over the tenure of the loan is Rs.50,000. The effective interest rate by this method of calculation is actually 17.27% per annum.

Caution: Do not confuse fixed rate method of interest calculation with fixed interest rate loans.

Now think that If Ajay’s loan was on a reducing balance method, his payouts would change. In this method, the repayments that you make are used to reduce the balance of your outstanding loan amount. The interest is then calculated on this reduced balance either on annual reducing balance or a monthly reducing balance.

Remember a simple formula for interest calculation in the reducing balance method –

Interest= Interest rate per installment*Loan outstanding

So for the first year, the interest will be= 10%*1,00,000=10,000. Second year interest=10%*83621=8362 and so on. For the monthly reducing balance method, the same formula can be used for calculating the monthly interest. The monthly reducing balance method thus results in the lowest rate of interest in effect.

Flat rate method is used in microfinance. Most of the bank loans like the home or vehicle loans use the monthly reducing balance methods of calculation.

However, In case of home loans which are generally high value and long in tenure, the monthly repayment or the EMI has a higher component of interest and lower principal. That’s precisely why a home loan does not seem to reduce at all during the initial few years, in spite of you making your EMI payments regularly. With passage of time the interest component reduces and your repayment goes towards the principle.

Before signing on the dotted line of the loan agreement, understand the method of calculation of interest. Because the rate quoted might be the same but now you know that the method of calculation makes the real difference.

Property-festival-offers

Despite real estate developers trying all kinds of marketing gimmicks like funding schemes with upfront payment as low as 5 percent of home price, interest waiver for 2-3 years and freebies, sale velocity has not picked up. The residential property market has been deserted- by investors due to slow moving market with stagnant or dipping prices and by end users because of unaffordable prices.

Even the unexpected 50 basis point repo rate cut by the Reserve Bank of India (RBI) may not see a significant improvement in demand in the festival season. Earlier, only a part of the multiple rate cuts amounting to 75 basis points effected this year before September 29, was passed on to the consumers by the banks.

However, within a week of the announcement by RBI, the hopes of real estate developers and home buyers seem to have been shattered as the banks have still not transmitted the cut to the borrowers.

The State Bank of India (SBI), which earlier announced a 40 basis points cut in its base rate, has now revised its decision by reducing the base rate cut by 50 percent to protect its margins.

Even more confusing is the SBI’s new policy to offer home loans at 20 basis points higher than the base rate to women and 25 basis points higher than the base rate to men in contrast to its earlier policy of offering home loans to women at base rate and to men at five basis points above base rate.

Although other banks had also announced 20-30 basis points cut in their base rates, home loan rates are still hovering well over nine percent. The inability of the banks to transmit the RBI rate cut to home buyers is sending negative signals across the market.

The extraordinarily high inventory and muted sales call for price rationalisation. RBI Governor Raghuram Rajan had also asked developers to cut prices to spur sales. Even Credai chairman Irfan Razack, advised developers to offload high inventory by rationalising prices. Developers however, are holding on to prices as steep rise in input costs and high cost of loan servicing lowers their margins to a great extent.

Domestic home buyers who form the bulk of customers, are therefore not enthused enough to jump in the fray. They are waiting for prices to fall and in the backdrop of interest rate dampner; it looks unlikely that this festive season will turn out to be a Savior for both developers and home buyers.

TREDA’s three-day property show

The effect of a cut in home loan interest rates by RBI last week was palpable at the Telangana Real Estate Developers Association’s (TREDA) Property Show. The exhibition which concluded at Hitex, Madhapur on Sunday, was a big hit with more than 70,000 prospective home buyers visiting it.

“This is the sixth time we have organised a property expo and the response was more encouraging than before. We received serious enquiries from buyers visiting the show. Builders and realty companies have got many registrations,” said an enthusiastic K Sankara Rao, a builder and secretary of TREDA.

I have been enquiring about various apartments and projects for eight months around Miyapur and the property show has really helped me. Also since the interest rate has been reduced, we will expedite our decision,” said Rajesh Reddy, a teacher from Miyapur. “

Even the rains could not dampen the spirit of enthusiastic visitors who were spotted going round the stalls, making inquiries and collecting brochures and other publicity material on properties hosted in the show. Bankers were flooded with queries on home loans and the new lending rates.

SBI sells 130 properties

Country’s largest lender, State Bank of India could sell only about 130 properties in its e-auction of 300 assets to release just about Rs 100 crore.

As per the senior official of SBI, “we sold around 130 properties, largely residential through the e-auction process to release just Rs 100 crore: The more he added that SBI may sell all of the 100 residential properties it had put on the block. According to data, SBI had put on block around 300 properties with the worth Rs 1,200 crore including shops, factory buildings, offices and residential apartments which are spread across 25 cities including four major metro cities through an e-auction last Saturday, as they had put out a public notice on Thursday.

Due to heavy traffic one of the real estate portal which was assigned to carry out the auction, SBI had extended the time for auctions by an hour. This was one of the best innovative ways by any lender that has been fighting a long battle to contain bad loans, to dispose of distressed properties through an e-auction.

According to statement of PK Malhotra, who is Deputy Managing Director of SBI, “Due to heavy traffic on assigned real state portal for e-auction, the site has become slow and we don’t want anyone to miss the chance. Earlier, the bidding time was till 5 pm and we are now going to extend it by an hour” The process was conducted by e-procurement solutions providers C1 India and Auction Tiger.

RBI eased norms for Home Loans

Harshil Mehta from DHFL believes that new guidelines of RBI may also get extended for middle income group (MIG) which costs around Rs 12 to 15 lacs in tier-2 and tier-3 cities. To provide a boost for affordable housing, the Reserve Bank of India (RBI) eased norms last week for home loans of up to Rs 10 lacs.

While speaking with CNBC-TV18, Harshil Mehta, CEO, DHFL stated that this is very much positive sign for his company and real estate industry. He believes that these guidelines may also get extended for Middle Income Group (MIG) that costs around Rs 12 to 15 lacs in tier-2 and tier-3 cities. As per the statement of Mehta, the new RBI guideline will largely benefit the Economically Weaker Sections (EWS) or the Low Income Group (LIG) segment where the stamp duty registration is anywhere between 12 -16 percent of the cost of unit which was earlier excluded from calculating the loan eligibility. Below is verbatim transcript of the interview:

• Could you take us through the positive side of this announcement? How it will be good announcement for your company as well as the real estate industry?
  This new RBI guideline will largely benefit the Economically Weaker Sections (EWS) or the Low Income Group (LIG) segment where the stamp duty registration typically goes up to anywhere from 12 per cent to 16 per cent of the cost of unit, earlier it was excluded from calculating the loan eligibility.
  Now, with this it for sure that it will help the borrowers to be a part of the loan so in that segment this is definitely good.

• What is your view on the other guidelines which passed with respect to disbursal of loan upfront for the government owned and backed real estate builder bodies’ such as; Maharashtra Housing and Development Authority (MHADA)?
  This is definitely good sign and has been a constant feedback to all the regulators especially for those who came to statutory housing projects either by government or by statutory housing boards as they work in a different way than the private sector so this is surely a welcome sign because when it comes from the regulator it makes things a lot simpler from process perspective when you have borrowers who apply for a loan and are looking at disbursals. So, this is a pretty good sign.

• In present, how much of your loan portfolio is sub Rs 10 lacs?
  If we look at our company’s portfolio, than more than 60 per cent of our home loans get sanctioned for loans up to the size of Rs 10 lacs and on the disbursement side we would be at 51 per cent of the loans to Rs 10 lacs.

• How do you see this benefiting your top line and subsequently the earnings for your company?
  This announcement leads to an enhancement in our disbursements because now you are including that in your loans. So, for sure it will helps us to increase your disbursements while the traction continues on the tier-2 and tier-3 cities so, this means that from a sanction perspective because you will now have more borrowers coming to you for loans and this will lead to higher sanctions. So overall, on the portfolio you can see a marginal increase on account of this.

• Do you see an extension to the ticket size of Rs. 10 lacs going forward to include the Middle Income Group (MIG) as well?
  While this new guideline of RBI is for loans up to Rs 10 lacs, we also need to keep in mind that in tier-2 and tier-3 cities even Middle Income Group (MIG) unit cost is in the range of Rs 12 to 15 lacs. So, this limit of 10 lacs may get extended to cover for the Middle Income Group (MIG) segment also which is up to Rs 15 lacs as it would surely benefit as all this falls under affordable housing but this is definitely a good move towards that.

• Can you quantify that?
  We would suspect that this would be in the range of anywhere from 2 to 6 per cent.

Home Loans

The Apex bank of India, RBI has eased the norms to get the fund for low-cost housing by permitting banks and other financial institutions to extend the loans against long-terms bonds of infrastructure.

However, earlier Reserve Bank of India barred the lenders from providing the loans against the infrastructure bonds on long term basis by other banks. In further addition from the circular of Central Bank, “These loans should be subject to a ceiling, like; Rs. 10 lakhs ((approx. $16,170) per borrower, whereas the tenure of loan should be within the bonds maturity period”.

In July, Reserve Bank of India (RBI), had allowed the long term bonds raised by banks for infrastructure lending to be exempted from mandatory reserve requirements.

A big raise of Rs. 750 crore for real estate sector by IDFC Alternatives Ltd, a private equity fund managed by India’s IDFC is raising eyebrows!  As per IDFC, this is their maiden real estate funding focused on residential sector in India. This fund called IDFC Real Estate Yield Fund is an indication of a precautious return of risk capital to the country’s anxious real estate market.

We all know that real estate sector is going through a rough phase, reduced home sales and high interest rates are causing too much pressure on debt-laden developers who are trying to raise funds for recapitalizing existing bank loans and investing in future projects.

Around 60 to 80 crores will be invest by IDFC with gross target of 22 per cent returns. The four year (extendable by one year) close-ended private equity fund will invest in on-going residential projects in prime locations across six major cities in India including Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Pune. Because of secured nature of underlying investments, this funding will pose a lower risk.

The IDFC Real Estate Yield Fund will capitalize on the opportunities by focusing on debt deals that generate high yields, while ensuring downside protection and adequate security cover.

IDFC claims that this fund has some unique differences – it is a more focused and investor-friendly debt fund that aims an even distribution of income to investors. The goal of the fund is to make a superior-quality portfolio by concentrating on reputable developers and brown field residential projects, which will help generate higher returns for the investors of the fund by engaging a balanced risk-return strategy.