INTRODUCTION

In pursuance of National Housing Policy of Central Government, Reserve Bank of India has been facilitating the flow of credit to housing sector. During last few years, the housing sector has emerged as one of the sectors attracting a large quantum of bank finance. The current focus of RBI's regulation is to ensure orderly growth of housing loan portfolio of banks.

DIRECT HOUSING FINANCE

Direct Housing Finance refers to the finance provided to individuals or groups of individuals including co-operative societies.

INDIRECT HOUSING FINANCE

Banks should ensure that their indirect housing finance is by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc

HOUSING LOANS UNDER PRIORITY SECTOR

The following housing finance limits will be considered as Priority Sector Advances: 1. Direct Finance (i) Loans up to Rs. 15 lakh in rural, semi-urban, urban and metropolitan areas for construction of houses by individuals, with the approval of their Boards. (ii) Loans up to Rs.1 lakh in rural and semi urban areas and Rs. 2 lakhs in urban areas for repairs to damaged houses by individuals.

2 Indirect Finance(i) Assistance given to any governmental agency for construction of houses, or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.

(ii) Assistance given to a non-governmental agency approved by the National Housing Bank for the purpose of refinance for reconstruction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.

GROWTH OF HOUSING FINANCE

Earlier marketing scenario

Walk-in customers Passive marketing, belief that word of mouth from a satisfied customer was the best form of advertising

Current marketing scenario

With increased competition, buyers became more demandingCustomers want door-step serviceUse of direct selling agents (third party distribution channels) Captive distribution company Property fairs and exhibitionsCross selling products and services

HOUSING FINANCE SERVICESHome LoanHome Improvement Loan/Repairs/renovation to existing flats/houseHome Extension LoansLand Purchase LoansTop Up LoansPurchase of flats/houseConstruction

HOME PURCHASE LOANTHIS IS THE COMMON LOAN FOR PURCHASING A HOME.HOME IMPROVEMENT LOANTHIS LOAN IS GIVEN FOR UNDERTAKING REPAIRS, RENOVATIONS AND/OR UPGRADATION TO YOUR HOME.HOME CONSTRUCTION LOANTHIS LOAN IS AVAILABLE FOR THE CONSTRUCTION OF A NEW HOME.HOME EXTENSION LOANHOME EXTENSION LOANS ARE GIVEN FOR EXPANDING OR EXTENDING AN EXISTING HOME. FOR EXAMPLE, ADDITION OF AN EXTRA ROOM, ETC.

HOME CONVERSION LOANAVAILABLE FOR THOSE WHO HAVE FINANCED THE PRESENT HOME WITH A HOME LOAN AND WISH TO PURCHASE AND MOVE TO ANOTHER HOME FOR WHICH SOME ADDITIONAL FUNDS ARE REQUIRED. THROUGH A HOME CONVERSION LOAN, THE EXISTING LOAN IS TRANSFERRED TO THE NEW HOME, INCLUDING THE ADDITIONAL AMOUNT REQUIRED, ELIMINATING THE NEED FOR PRE-PAYMENT OF THE PREVIOUS LOAN.LAND PURCHASE LOANTHIS TYPE OF LOAN IS SANCTIONED FOR PURCHASE OF LAND FOR HOME CONSTRUCTION.

BRIDGE LOANTHE 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.BALANCE TRANSFER LOANBALANCE TRANSFER LOANS HELP YOU PAY OFF AN EXISTING HOME LOAN BY AVAILING A NEW LOAN FROM ANOTHER WILLING LENDER INSTITUTION.REFINANCE LOANTHIS 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.

STAMP DUTY LOANTHIS LOAN IS SANCTIONED TO PAY THE STAMP DUTY AMOUNT THAT NEEDS TO BE PAID ON THE PURCHASE OF A PROPERTY.LOAN TO NRISTHIS LOAN IS TAILORED FOR THE REQUIREMENTS OF NON RESIDENT INDIANS (NRIS) WISHING TO BUILD OR BUY A HOME IN INDIA. THESE LOANS ARE PROVIDED BY ELIGIBLE FINANCIAL INSTITUTIONS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY RESERVE BANK OF INDIA FROM TIME TO TIME.

Eligibility conditions for a home loan

To qualify for a home loan, most of the lending institutions in India require you to be:a) An Indian resident or NRIb) Above 21 years of age at the commencement of the loanc) Below 65 when the loan maturesd) Either salaried or self employed ande)Worthy of credit facility.

Interest rates offered for home loansInterest rates vary from institution to institution and presently range from 9% to 12.5 % for floating interest rate & 11.25% to 14% for fixed interest rate (for loan amount below 20 lakhs). The interest on home loans in India is usually calculated on monthly 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 through EMIs paid during the year. 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

What is a fixed rate of interest?

Fixed rate of interest means that the rate of interest remains unchanged for the specified duration of the loan. This means you do not benefit, if rates of interest drop in the market. Similarly you do not lose if rates of interest increase. Under fixed home loan rates also, banks/HFCs retain the right to increase the rate of interest after the prescribed interval. This provision is mentioned in the loan agreement. This is known as reset clause in the fine print.What is a floating rate?

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.

Fixed Rate MortgagesA mortgage in which the interest rate remains the same throughout the entire life of the loan isa fixed rate mortgage. These loans are the most popular ones, representing over 75% of all home loans. They usually come in terms of 30, 15, or 10 years, with the 30-year option being the most popular. While the 30-year option is the most popular,a 15-year builds equity much faster.The biggest advantage of having a fixed rate is that the homeowner knows exactly when the interest and principal payments will be for the length of the loan. This allows the homeowner to budget easier because they know that the interest rate will never change for the duration of the loan.

Not only are fixed rate mortgages the most popular of home loans, but they are also the most predictable. The rate that is agreed upon in the beginning is the rate that will be charged for the entire life of the note. The homeowner can budget because the monthly payments remain the same throughout the entire length of the loan. When rates are high and the homeowner acquires a fixed rate mortgage, the homeowner is later able to refinance when the rates go down. If the interest rates go down and the homeowner wants to refinance, the closing costs must be paid in order to do so. Some banks wishing to keep a good customer account may wave closing costs.

If a buyer buys when rates are low they keep that rate locked in even if the broader interest rate environment rises. However, homebuyers pay a premium for locking in certainty, as the interest rates of fixed rate loans are usually higher than on adjustable rate home loans.

Adjustable Rate MortgagesA mortgage loan in which the interest rate changes based on a specific schedule after a fixed period at the beginning of the loan, is calledan adjustable rate mortgage or ARM. This type of loan is considered to be riskier because the payment can change significantly. In exchange for the risk associated with an ARM, the homeowner is rewarded with an interest rate lower than that of a 30 year fixed rate. When the homeowner acquires a one year adjustable rate mortgage, what they have is a 30 year loan in which the rates change every year on the anniversary of the loan.

However, obtaining a one-year adjustable rate mortgage can allow the customer to qualify for a loan amount that is higher and therefore acquire a more valuable home. Many homeowners with extremely large mortgages can get the one year adjustable rate mortgages and refinance them each year. The low rate lets them buy a more expensive home, and they pay a lower mortgage paymentso long as interest rates do not rise.The loan is considered to be rather risky because the payment can change from year to year in significant amounts.

Unless the buyer plans to quickly flip the property or has plenty of other assets and is usingan interest-only loanasa tax write off, almost anyone taking adjustable rates shouldtry to pay extrain order to build up equity in case the market turns south.

Home loans usually attract following extra costs:a) Processing Charge: It's a fee payable to the lender on applying for a loan. It is either a fixed amount or may be a percentage of the loan amount applied.b) Pre-payment Penalties: When a loan is paid back before the end of the agreed duration, a pre-payment charge is demanded 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 documentation or consultant charges.e) Registration of mortgage deed.

repayment period options?

Repayment period options range generally from 5 to 20 years.How do banks/HFCs decide on the loan amount?

Usually, most companies give home loan up to a maximum of 85% of the cost of the house. Balance 15%, sometimes called 'seed money', has to be provided by the loan applicant upfront. 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.securities required for home loans?

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.

Requirement of a guarantor to get a home loan?

Some institutions ask for 1 or 2 guarantors.joint application for home loans?

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.tax benefits of home loans?

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 1961:

Interest paid on the home loanAs per Sec 24(b) of the Act, a deduction up to Rs. 150,000 towards the total interest payable on the home loan towards purchase / construction of house property can be claimed while computing the income from house property. The interest payable for the pre-acquisition or pre-contruction period would be deductible in five equal annual installments commencing from the year in which the house has been acquired or constructed.In case of self occupied property, this deduction is allowed only for one such self - occupied property. The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).

Principal repayment of the home loanAs per Section 80C along with section 80CCE of the Act, the principal repayment up to Rs. 100,000 on your home loan will be allowed as a deduction from the gross total income subject to fulfillment of prescribed conditions.