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## Knowledge Centre

### GETTING BASICS RIGHT Terminologies & Fundamentals of Home Loans

What is an EMI? How is it calculated?

If you are planning to get a home loan, the EMI or the equated monthly installments will be your main consideration. EMI is the sum of money that you as a borrower will pay your lender to clear your outstanding loan. These payments are made every month on a date that is stipulated by your bank till such time that the loan has been completely repaid. The three things that go into the calculation of an EMI are:

The amount of the loan
The rate of interest
The tenure of loan

The most popular method of computation is that of ‘monthly reducing loans’. In the monthly reducing cycle, the principal is reduced with every EMI and the interest is calculated on the balance outstanding. The majority of the retails such as Home loans, auto loans and personal loans are computed on a monthly reducing basis.

Effectively, therefore, in the initial years of the loan, a major component of the EMI is the interest that is payable by you. As the loan tenure reduces, the interest component reduces too, as the principal gets paid. Mathematically the following convention is applied for the calculation of an EMI:

Home loan EMI = (Lxi) X (1+i) ^N / { (1+i) ^N}-1

L=Loan amount
i=Interest Rate (rate per annum divided by 12)
^= to the power of
N=loan period in months
(It is to be noted that an increase in the tenure of the loan will lead to an increase in interest rates and therefore, the interest component of your loan. As a borrower, you should try and pay as much of EMI as possible and shorten the tenure of the loan).

The Group has already completed & delivered approx. 1 million square feet of residential & commercial projects and presently undergoing 51 on-going projects at various stages of development.

### Down Payment

What is a Down Payment?

The down payment is the difference between the cost of the property and the loan amount approved by your lender. From a buyer’s perspective, it is a commitment you are making to enter into a home loan agreement with your lender. Although there is no upper limit that has been set on how much you can put down as a down payment, such payments usually range between 15-20 % of the value of the property one intends to purchase.

The more money you can put aside for a down payment the better it is since it will result in a shorter tenure of a loan and easier EMIs. However, you need to bear in mind that the down payment does not include other costs such as stamp duty, registration, transfer charges and the likes. While choosing a property, be mindful of the fact that banks are not very willing to finance properties that are considerably old and not in good condition.

What is my Home Loan Eligibility?

A lender needs ‘proof’ to believe that you are capable of making repayments on your loan. For this it will take a thorough look not just as your income statements, but also your assets and liabilities, your credit history to see how you handle repayments on credit cards and other existing loans, your education and work experience to see how qualified you are to meet your professional and financial goals and whether you can really afford a large debt burden like a home loan.

The standard method banks use to assess your home loan eligibility is the application of FOIR (fixed obligation to income ratio) of a borrower. This is an important calculation for the bank for this is the way to understand what your other obligations are as a borrower. To calculate the FOIR the lender takes into consideration all the other monthly installments a borrower is paying including the home loan that he has applied for. However, the statutory deductions from your salary like provident fund, insurance premium payments are not taken into consideration in this calculation.

Consider an example:
Income of a prospective borrower is Rs 50,000/- per month. He pays a car loan EMI of Rs 8000/- per month. He has just bought a gadget and pays an EMI of Rs 2000/- per month for the same. His proposed housing loan installment is Rs 15000/- per month. When all his loan installments are divided by his monthly income the FOIR is 50% or Rs 25,000/-.

Most lenders restrict the FOIR limit to a maximum of 50% of one’s monthly income. In other words, it means that if one needs around 50% of his income to meet his personal expenses, the other half is committed towards fulfilling his fixed obligations including the home loan.

What are the documents required for my Home Loan application?

The process of mortgage application is simple. Quite rightly so, because the lender has to scan every aspect of your life and assess your financial health before it decides that you are mortgage worthy. Further, it’s a sizable amount to be repaid over the long term by you and the lender must know that you will be able to service your loan diligently through the tenure.

In order to judge your creditworthiness, your prospective lender will therefore ask you to submit a whole host of documents. The documentation process is rather rigorous, but you must understand that this is an important part of your loan application, so it has to be done well. The following are the documents you need in order to put together an impeccable ‘home loan application file’.

General list of documents required: • Completed loan application
• 1 passport size photograph (including the one affixed in loan application)
• Proof of identification: Electoral ID Card / Passport / Driving License / PAN card
• Proof of residence: Electoral ID Card / Passport / Electricity Bill / Telephone Bill
• Proof of business address, in case of non-salaried borrowers
• Statement of bank account for the last six months
Documents specific to the following:
Salaried Individuals
• Salary slips for last 3 months
• Bank statement for last 3 months
• Copy of identity card issued by the employer
• Form 16 or IT Returns for the last 2 years

Self-employed Individuals
• Photocopies of IT Returns/Assessment orders for the last 3 years
• Balance sheet and Profit & Loss A/c for the last three years (Certified true Copy attested by Chartered Accountant)
• Proof of business (Registration Certificate of establishment, Trade License, Sales Tax Registration etc.)
• Certificate of Practice-photocopy
• TDS Certificates (Form 16A wherever applicable)

Property documents in case the flat is being purchased from the builder:
• Original copy of agreement for sale/ sale deed with the builder
• Search Report and Title Certificate
• Development agreement between owner of land and the builder
• Copy of order under the Urban land Ceiling Act (if applicable)
• Copy of building plans sanctioned by the competent authority
• Commencement certificate granted by the Corporation
• Building completion certificate (if you are purchasing ready flats)
• Latest tax receipts paid towards the land or property or flat to be purchased
• Partnership deed or memorandum of association of the builders firm

Putting together these documents may seem like an arduous task to you, but do go through the documentation process properly to ensure that there are no gaps from your end that may be the cause of your loan application getting rejected.

### Floating Rate of Interest

What is a Floating Rate of Interest?

As the name implies a floating rate of interest is one that varies according to the prevailing conditions in the market. Home loans that are disbursed on the floating rate of interest are done so in relation to the base rate of a lender. Therefore, if there is a change in the base rate, there will be an impact on your floating rate of interest as well.

Benefits of floating rate of interest: Floating interest on a home loan is cheaper than a fixed rate by at least 2 to 2.5%. Even if there were to be a case where a floating rate exceeds a fixed rate of interest it will only be for some period of your entire loan tenure as interest rates a cyclical in nature. Needless to say, floating interest rates bring in a lot of savings for the borrower when the interest rates soften in the market.

Drawbacks of floating rate of interest: The drawback of such rates is the impact they have on your monthly outgo as EMI. Given the uneven nature of floating rates, either your EMI may shoot up one fine month throwing your monthly budget out of gear or you may end up repaying substantially higher due to an increase in your loan tenure (EMI remains same). However, if you think that this aspect does not bother you, going in for a floating interest rate does indeed make sense.

### Pros and Cons of Fixed rate Home Loan

Benefits of opting for a fixed interest rate: Your EMI remains the same irrespective of the conditions prevailing in the market It is a great option for those who are good at budgeting and do not want their monthly outgo to go haywire because of market conditions. Gives the borrower a sense of security and peace of mind.

Drawbacks of opting for a fixed interest rate: The major disadvantage of a fixed rate of interest is that it is at least 1-2.5% higher than a floating rate of interest. The other disadvantage of such a loan is that if the interest rates decrease significantly, a borrower who has opted for a fixed rate of interest does not get any advantage. As a borrower, you must also cross check with your bank whether you are allowed to fix your interest rate for the entire loan tenure or only for a few years. If you perceive that the interest rate cycle will be on the rise for the next few years, it’s a good idea to be locked under the regime of a fixed interest rate on your home loan.

### Understanding the Cibil Score

Pawan Sharma is a 30 year old mid-level executive who lives with his parents in Lucknow. Unlike his father Mukul Sharma, who hates the idea of living on credit and has spent his life savings to build a retirement home, Pawan like most others of generation uses credit cards, has taken a car loan and is now preparing to take a home loan before he gets married in 2018.

Easy access to credit and the ability to repay debt in small amount through EMIs has made life a lot simpler for the likes of Pawan. But there is another side of the coin. If you are irresponsible with your debt you will end up having a poor Cibil credit score, which will in turn thwart your chances of getting a loan when you need one.

A CIBIL credit score represents an individual's financial stability, and helps lenders assess his or her financial credibility. CIBIL is India’s first credit information bureau. CIBIL is a repository of information of your repayment track record on your loans and credit cards.

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Ashoka Group has already completed & delivered approx. 1 million square feet of residential & commercial projects and presently undergoing 9 ongoing projects at various stages of development.