Housing finance companies consider the following factors before making any financial assistance for housing:
1. Loan Amount
3. Administrative and processing costs, etc
4. Pre-payment charges
6. Value Addition
7. Sources of finance like HFC’s and Banks
8. EMI calculation methods.
The Loan Amount:
The amount of loan that any HFC decides to provide to a loan seeker depends on the following variables:
(i) Customer’s repayment capacity
(ii) Rate of interest charged
(iii) Term of the loan
Repayment is done through EMI, which includes principal and the interest. As a rule, HFC fixes the EMI between 30 and 40 percent of the customer’s gross monthly income, or 50 percent of the net monthly income. For instance, considering a loan of Rs10,00,000 for 10 years, at 13 percent flat interest rate, the EMI would be Rs 19,166.66. This way the gross earnings of the loan seeker must be Rs 54,761.88 per month, where the installment to incomer ratio is 35 percent. The general trend in the market is that customers try to obtain loans for longer tenures, without realizing that the longer the duration the more will be the amount paid by them. An increase in the tenure from 10 to 15 years increases the amount payable by 28 percent. In case the tenure of the loan is decreased from 15 years to 10 years, the monthly EMI becomes Rs 16,388.77.
The effective cost of the loan depends on the type of method used by banks or finance companies. Based on the method, the principal component, which is paid monthly, is deducted from the outstanding principal amount. The two methods, which banks and finance companies generally follow are:
Monthly rest system: Under this system, the principal amount is deducted every month from the outstanding principal.
The above example illustrates that for the same amount and for same rate of interest, the amount of EMI varies with the type of method used.
Fixed and Floating Rate:
Customers should check whether the rates offered are fixed or floating (varies with PLR). Floating rates are better in a falling rate scenario, but expensive in an increasing rate scenario. The borrower should check whether it is viable to shift the loan from fixed rate to the floating rate in a decreasing rate scenario by carrying out a cost benefit analysis.
This is an important factor to be considered, especially, especially in situations where the ability to repay the loan matters. There are certain HFCs which charge pre-payment, in case the loan is repaid before schedule. This pushes up the cost of fund of the borrower. Borrowers who are desirous of repaying ahead of schedule should approach HFCs which do not have a pre-payment charge.
The value addition includes supplementary services that HFCs provide, such as fast disbursals of loan, legal services meeting with brokers, builders and so on.
Housing Finance Institutions in India:
A number of institutions exist in the house financing services sector. A brief account of the more dominant of them is presented below:
The National Housing Bank (NHB):
The National Housing Bank (NHB) was set up in July 1988, under an Act of Parliament and is wholly owned by RBI, NHB, at present, has a paid up capital of Rs 350 crores. It was conceived and promoted to function as the apex institution in the housing sector. The need to set up this institution stemmed from the fact that the housing sector had not received the attention it required, not only in terms of finance for individual loans, but also in terms of buildable or serviced land, building materials and cost effective technology.
The NHB was set up to accomplish the following objectives:
1. To promote a sound, healthy, viable and efficient housing finance system to cater to all segments of the population.
2. To establish a network of housing finance outlets to adequately serve different regions and different income groups.
3. To promote savings from housing.
4. To make housing more affordable.
5. To promote appropriate technologies for housing
6. To augment the supply of land and building materials for housing.
7. To enable public agencies to emerge, primarily as facilitators and suppliers of serviced land.
8. To augment and upgrade the housing stock in the country.
9. To strengthen the backward and forward linkages of the housing sector with rest of the economy.
10. To augment the financial resources for the sector.
11. To enable the housing finance system to access the capital market for resources.