Accessibility To Housing Loan - An Analysis
Food, dress, living space is the basic needs of every human being. In India, Right to shelter is the constitutional right. And home is the integral part of an individual, who since his / her childhood, dreams to have a living space of his own. Once in a lifetime investment requires loan to complete it, and that is how the housing loans comes into the scheme of things. So in our country, banks and financial institutions give loan to the peoples, who want to apply a loan for their own house building, purchasing, extending, etc.
Housing loan is the sum of money a bank or financial institution lends to help the person to buy or build their dream home. By taking housing loan from a bank or a housing finance company, the person who applies for loan has to pledge the home as the lender’s security for repayment of the person’s loan. The bank or financial institution will hold the title or deed to the property till the loan has been paid back with the interest due for it. Housing loans are generally taken for long periods, as the loan amount is usually a huge sum. The amount of loan one is eligible for is dependent on the individual’s credit profile.
Housing loan for both Government and private employees are offered by the Housing Finance Companies which range from buying / building a house either from the developer - built, un-built or under construction or from a second owner or for the improvement and renovation of the existing building structure. With so many private sector banks, and private as well as public sector’s housing financing companies lending their shoulders out, it’s becoming gradually uncomfortable for the consumers to choose the best deal as well. In this socio-legal research the government and private employee’s accessibility to get a housing loan is analysed.
Formulation of Problem:
Housing loan is given by the banks and financial institutions. Many institutions such as HDFC, ICICI, IDBI, HSBC, SBI, etc., are providing housing loans. All these banks and financial institutions are having variety of schemes and interest rates for housing loan. Generally housing loan providers have a regulation given by RBI and also should include their own rules and regulations. And the EMI (Equated Monthly Installment) is calculated in different ways.
The loan provided by them is based on the person’s salary, assets, etc. Compared to government employees, the private employees do not have a job security. However, the banks and financial institutions give housing loans to private employees, but at the same time they follow a lot of rules and regulations.
Whether the private employee easily gets the housing loan? No, it’s not an easy one. Because, the reason is job security and salary of the person is not easily considered and accepted by the lenders. What is the present situation of housing loan? And what is the situation faced by the employees? Is it really helpful in timing? These questions are clearly explaining the situation of the applicants of housing loan.
Legal Provisions Relating To Housing Loan:
I. RBI Directives:
The Reserve Bank of India has in the latest directive asked the Indian banks to be more “fair and transparent” while signing their agreements with the consumers. This has come following complaints from various consumer sections regarding housing loans. It has emphasized on the fact that while giving a housing loan, the banks should not tie their loans with their own prime lending rates which often results in pro-bank and against consumer interest.
Ø Households should get credit counseling before signing any loan agreement. In such case, banks should give credit counseling to customer before giving a loan. Any non-governmental organization can also give independent credit counseling to small borrowers.
Ø Consumers often complain of not receiving benefits of falling interest rates as banks tie their floating rate loans with its PLR and even when rates fall, the banks kept the PLR unchanged. But when interest rates are hiked, the banks increase the benchmark rate, thus making customers pay a higher rate and consequently increase the number of EMIs too. The RBI has asked the banks to mend rules for the same.
Ø Individual borrowers should ask for the exact tenure and EMI while taking a fixed rate loan. The RBI has also resolved to look into all consumer complaints if it is bought to the regulator’s notice.
Ø The IRDA (insurance regulator) has powers to take action against banks if a customer feels cheated while buying an insurance product. On its regulatory role, the RBI is trying to maintain a balance between the extent of freedom granted to the banks and the objectives of governance.
Ø RBI has made it mandatory for all banks - including private and foreign banks - to offer a passbook to their customers with the address and telephone number of the nearest branch.
Ø Customers have often been harassed by banks’ call centers where there is no accountability of the query made. The “do not call” registry has also been flouted by banks as customers are bombarded with unnecessary product offerings. The RBI has directed the Indian Banks’ Association to come out with a single “do not call” registry or when a customer adds his name to a single bank registry it should then stop unsolicited calls from all banks.
Ø On rising credit card frauds and wrong statements given by the banks, the RBI has asked the customers to approach the ombudsman to redress their problems. This way the RBI feels would inculcate more consumer friendly practices among Indian banks.
Housing loan eligibility depends upon the repayment capacity of the loan applicant. The maximum loan that can be sanctioned varies with the banks and other housing finance companies and generally, the maximum loan amount granted is 80 to 85% of the cost of your home. Home loan eligibility corresponding to repayment option is based on the following factors. Even though, the eligibility criteria may vary according to the HFCs regulations.
Home loan Eligibility Criteria:
Ø Age: 21 Years (Minimum)
58 Years (salaried) (Maximum)
60 (Public limited / Government Employees)
65 (self employed)
Ø Qualification: Graduation
Ø Income: Stable source of income and saving history
Ø Dependents: Number of dependents, assets, liabilities
Ø Other income sources: Spouse’s income
As home loan rates increase, the loan eligibility for a borrower becomes stiffer. In such a scenario, some home loan borrowers might have to re-evaluate their options on account of the new eligibility criteria. The Home loan eligibility can be enhanced by:
A. Increasing the house loan tenure - One of the basic process of enhancing the home loan eligibility is by opting for a higher tenure. This is so because the EMI, which an individual has to pay, starts to decline as the tenure increases while the interest rate as well as the principal amount remains the same. Since the individual is paying a lower EMI now, his ‘ability to pay’ and therefore his loan eligibility automatically increase.
B. Repaying other outstanding loans - There might be adverse effect on home loan eligibility for individuals with outstanding loans like car loans or personal loans. Industry standards suggest that existing loans with over 12 unpaid installments are taken into account while computing the home loan borrower’s eligibility. In such a scenario, individuals have the option of prepaying in part/full their existing loans. This will ensure that their eligibility for the home loan purpose is unaffected.
C. Clubbing of incomes - Home loan eligibility can also be enhanced by clubbing incomes of spouse, children (son or daughter) staying with the applicant and having regular income and even earning parents (father or mother) living with the applicant. The eligibility in such cases will be calculated on the clubbed income of both the applicants enhancing the individual’s eligibility to the extent of the co-applicant’s income.
D. Step-up loan - Individuals can also enhance their loan eligibility by opting for step-up loans. A step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced during the rest of the loan tenure. HFCs usually consider the lower EMI of the initial years to calculate his/her loan eligibility, while the initial lower EMI helps increase the individual’s ‘capacity to borrow’.
Every housing finance companies or banks have customized repayment options to suit every individual’s requirement and also repaying capacity with some tax benefits. The objective of step-up repayment is to provide the borrower with a repayment schedule, which is linked to expected growth in income. It helps in:
Ø The customer gets a larger amount of loan, compared to the normal housing loan;
Ø The customer can pay lower EMIs in the initial years, which can be subsequently accelerated proportionately with the assumed increase in his / her income.
They have thereby come up with more flexible and Multiple Repayment Option. A few among them are:
A. Flexible Loan installments Plan: This repayment option offers a customized solution to the needs of customers whose repayment capacity is likely to alter during the term of the loan. In cases when a borrower is nearing retirement, the loan is structured in such a way that the EMI is higher during the initial years and subsequently decreases in the latter part proportionate to the reduced income of the customer. This option helps such customers combine the incomes and take a long term home loan where in the installment reduces upon retirement of the borrower.
B. Tranche Based EMI: Customers purchasing an under construction property, need to pay interest (on the loan amount drawn based on level of construction) till the property is ready. Tranche Based EMI is a special facility offered by some banks to help customer save this interest. Customers can fix the installments they wish to pay till the property is ready. The minimum amount payable is the interest on the loan amount drawn. Anything over and above the interest paid by the customer goes towards principal repayment. The customer benefits by starting EMI and hence repays the loan faster.
C. Accelerated Repayment Scheme: Accelerated Repayment Scheme offers you a great opportunity to repay the loan faster by increasing the EMI. Whenever you get an increment, increase in your disposable income or have lump sum funds for loan prepayment, you can benefit by:
Ø Increase in EMI means faster loan repayment;
Ø Saving of interest because of faster loan repayment;
Ø Or invest lump sum funds rather than use it for loan prepayment. The return from the investments also gives you the comfort of paying the increased EMI.
D. Home loan tenure: Home loan tenures fixed by RBI are available up to a term of 15 years. Some financial institutions have home loan tenures in the range extending up to 20, 25 and 30 years if the applicant fulfils certain criteria. However, you cannot opt for a term that extends beyond your attaining retirement age or 60 years of age (whichever is earlier).
|Type of Property
|Plot of land
|Against Existing plot of land
IV. Tax Benefits:
This is a very important criterion to be kept in mind, while taking a Home Loan. There are certain tax benefits for the resident Indians based on the principal and interest component of a loan under the Income Tax Act, 1961.
The tax benefit on home loan is governed by different sections of the Income Tax Act:
Ø Section 80C: Tax benefit on Home Loan (Principal Amount)
a. The home loan must be for purchase or construction of a new house property.
b. The property must not be sold in five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell.
Ø Section 24: Income Tax Benefit on Interest on Home Loan
a. The home loan must be for purchase and construction of a new property.
b. The loan must be taken on or after 1 April, 1999.
c. The purchase or construction must be completed within 3 years from the end of the financial year in which the loan was takens
Ø Section 80EE: Income Tax Benefit on Interest on Home Loan (First Time Buyers)
|Tax Deduction allowed for
|Basis of Tax Deduction
|Quantum of Tax Deduction allowed
||Self Occupied Property –
Rs. 2, 00,000.
Non Self Occupied Property: No Limit
|Purpose of Loan
||Purchase/ Construction/ Repair/Renewal/ Reconstruction of a Residential House Property.
||Purchase / Construction of a new House Property
|Eligibility for claiming Tax deduction
||Purchase/ Construction should be completed within 5 years
|Restriction on Sale of Property
||Tax Deduction claimed would be reversed if Property sold within 5 years
Documentation refers to the specific documents to be submitted by Resident Indians as they apply for home loan. Those documents include but not limited to income proof, property documents and personal identification documents, etc. which varies based on the borrowers financial status and the type of loan to avail. These documents are very much necessary to avoid any dispute and uncertainty.
However, there are some standard documents made mandatory for a loan applicant to produce such as the loan applicant’s profile, earning life of the applicant and present financial status proof etc.
Ø The profile varies for Salaried Customers, Self Employed Professionals and Self Employed Businessman;
Ø The Applicant’s Profile refers to the bio-data of the applicant, mentioning his address, age, Identity and Residence Proof and detail information;
Ø Latest Salary-slip, Education Qualifications, Certificate and Proof of business existence;
Ø Form 16, Last 3 years Income Tax returns (self and business) and Business profile;
Ø Bank statements (last 6 months), Last 3 years Profit /Loss, Balance Sheet and Income Tax returns (self and business);
Ø Processing fee cheque and Bank statements(last 6 months)
Ø The Earning Life of the Applicants’ proof clarifies the capability of the loan payment;
Ø The Present Financial status gives the present capability of handling the own contribution and other expenditures. This includes the mortgage to be deposited against the loan amount.
Proof of Individual’s Identity (any one of the following):
Ø Passport, Photo PAN Card, Defence Identity Card, Voter’s Identity Card, Driving License, Photo Ration Card, Government Identity Card.
Proof of Residence (any one of the following):
Ø Passport, Ration Card, Telephone (Land/Mobile) Bill, Electricity Bill, Driving License, Voter’s Identity Card, Life Insurance Policy;
Ø Only Passport can be used as both Proof of Individual’s Identity and Proof of Residence.
Proof of Age (any one of the following):
Ø Passport, Valid Driving License, Voter’s Identity Card, Birth Certificate, School leaving certificate, LIC Policy or Premium Receipt clearly indicating the applicant’s age, Letter from the employer stating the age of the employee, Ration Card.
The basic need of the shelter is common to all human beings. Under our constitutional this right should be fulfilled by everyone. Housing loan is the way to fullfil their need of shelter. Banks and financial institutions are doing this in a good manner. All the institutions give loans under their salary and job security basis only, despite this, some institution give loan to all employees. But this percentage is not sufficient for the present situation. The opportunity and percentage of private or self employers getting a loan, compared to government employee is low still.
The financial institutions and banks should relax their rules in the accessibility to housing loan thus helping the private employees and self employers. The consideration will help our country develop in its basic needs step by step.
1. Dr. M. Moses Antony Rajendran, “Housing ana Housing Loan”, Lulu.com
2. V.K. Kohli, “Housing Finance Agencies in India” Deep and Deep Publications, 2007
3. Prashant Das, Divyanshu Sharma, “Real Estate Finance in India”, SAGE Publications India, 2013
4. Prof. H. H Singh, “Marketing Case Studies (with hints)” Nirali Prakashan