Download VTU (Visvesvaraya Technological University) MBA 3rd Semester (Third Semester) 16MBAFM302-Financial Services FS Notes Unit 3 Important Lecture Notes (MBA Study Material Notes)
Housing Finance
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
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Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
Role of NBFCs
? Promotes utilisation of savings
? Provides easy, timely and unusual credit
? Financial super market
? Investing funds in productive purpose
? Provides housing finance
? Provides investment advice
? Increase the standard of living
? Accepts deposits in various forms
? Promotes economic growth
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
Role of NBFCs
? Promotes utilisation of savings
? Provides easy, timely and unusual credit
? Financial super market
? Investing funds in productive purpose
? Provides housing finance
? Provides investment advice
? Increase the standard of living
? Accepts deposits in various forms
? Promotes economic growth
Growth of NBFCs
? 1980-90s NBFCs grew fast owing to public money through deposits
and IPOs
?1981 had 7063, 1990 had 24009, and 1995 saw 55995
?1991-97 saw deposits growth of 88.6% owing to high rates offered by
NBFCs
? Growth could not be sustained as loans extended turned sticky leading
to several NBFCs to default on deposit repayments.
? 1997-98 saw RBI coming out with stringent regulations which made
them difficult to raise deposits. Banks also turned wary of lending to
NBFCs leading to increased cost of funds to NBFCs. Private banks also
posed competition to NBFCs. Many exited business.
? 2001-02 saw recovery and strong growth
? Competition picked up again leading to decline of NBFCs by 0.5%
12740 by June 2009. NBFCs started depending upon banks and
debentures as against public deposits.
? There has been further reduction in number of NBFCs and growth in
asset management companies basically by way of re-classification of
these companies.
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
Role of NBFCs
? Promotes utilisation of savings
? Provides easy, timely and unusual credit
? Financial super market
? Investing funds in productive purpose
? Provides housing finance
? Provides investment advice
? Increase the standard of living
? Accepts deposits in various forms
? Promotes economic growth
Growth of NBFCs
? 1980-90s NBFCs grew fast owing to public money through deposits
and IPOs
?1981 had 7063, 1990 had 24009, and 1995 saw 55995
?1991-97 saw deposits growth of 88.6% owing to high rates offered by
NBFCs
? Growth could not be sustained as loans extended turned sticky leading
to several NBFCs to default on deposit repayments.
? 1997-98 saw RBI coming out with stringent regulations which made
them difficult to raise deposits. Banks also turned wary of lending to
NBFCs leading to increased cost of funds to NBFCs. Private banks also
posed competition to NBFCs. Many exited business.
? 2001-02 saw recovery and strong growth
? Competition picked up again leading to decline of NBFCs by 0.5%
12740 by June 2009. NBFCs started depending upon banks and
debentures as against public deposits.
? There has been further reduction in number of NBFCs and growth in
asset management companies basically by way of re-classification of
these companies.
Functions of NBFCs
? Brokers of loanable funds
? Mobilisation of savings
? Channelisation of funds into investments
? Stabilise the capital market
? Provide liquidity
Types of NBFCs
? Equipment Leasing Companies
? Hire purchase finance companies
? Housing finance company
? Investment company
? Loan company
? Miscellaneous non-banking company
? Mutual benefit finance companies
? Residuary non-banking company
? Non-banking non-financial company
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
Role of NBFCs
? Promotes utilisation of savings
? Provides easy, timely and unusual credit
? Financial super market
? Investing funds in productive purpose
? Provides housing finance
? Provides investment advice
? Increase the standard of living
? Accepts deposits in various forms
? Promotes economic growth
Growth of NBFCs
? 1980-90s NBFCs grew fast owing to public money through deposits
and IPOs
?1981 had 7063, 1990 had 24009, and 1995 saw 55995
?1991-97 saw deposits growth of 88.6% owing to high rates offered by
NBFCs
? Growth could not be sustained as loans extended turned sticky leading
to several NBFCs to default on deposit repayments.
? 1997-98 saw RBI coming out with stringent regulations which made
them difficult to raise deposits. Banks also turned wary of lending to
NBFCs leading to increased cost of funds to NBFCs. Private banks also
posed competition to NBFCs. Many exited business.
? 2001-02 saw recovery and strong growth
? Competition picked up again leading to decline of NBFCs by 0.5%
12740 by June 2009. NBFCs started depending upon banks and
debentures as against public deposits.
? There has been further reduction in number of NBFCs and growth in
asset management companies basically by way of re-classification of
these companies.
Functions of NBFCs
? Brokers of loanable funds
? Mobilisation of savings
? Channelisation of funds into investments
? Stabilise the capital market
? Provide liquidity
Types of NBFCs
? Equipment Leasing Companies
? Hire purchase finance companies
? Housing finance company
? Investment company
? Loan company
? Miscellaneous non-banking company
? Mutual benefit finance companies
? Residuary non-banking company
? Non-banking non-financial company
RBI guidelines for NBFCs
? Registration with RBI
? Inter-corporate deposits
? Maintenance of liquid assets
? Period of deposit for residuary NBFCs
? Accounting standards issued by Institute of Chartered Accountants of
India to be followed
Prudential norms for NBFCs
? Income recognition
? Income from investments
? Accounting standards
? Accounting for investments
? Provision requirements
? Disclosure in balance sheet
? Constitution of audit committee
? Capital adequacy requiremnets
FirstRanker.com - FirstRanker's Choice
Unit ? 3
Housing Finance
Introduction
? Financial arrangements made by the housing finance companies to meet the
housing requirements is called housing finance
? There were about 24million houses short in 1997 most of which were in
urban areas and among poor and low income people.
? This background led to the formulation of National Housing and Habitat
Policy (NHHP) in 1998. Stressing :
? Removal of barriers in housing finance
? Treating housing finance in par with priority sector
? Creation of surplus in housing
? Providing quality and cost effective shelters to the vulnerable groups and the poor.
? Draft National Urban Housing and Habitat policy 2005 further recognised the
need to enhance flow of funds into the sector and highlighted the growing
need of shelter in the years to come.
Need for Housing Finance:
? Social stability
? Economic development
Role of Housing Finance
? Creation of equitable economic growth through the
reduction of poverty and prevention of slum proliferation
? Housing has highly significant social implications as it
provides the shelter for family
? Plays an intermediary role between economy and
housing system
? It drives the real estate business in India
? It is an avenue to mobilise domestic savings in India
? It develops innovative instruments to mobilise domestic
savings
? Plays an important role in creating employment, maintain
health, social stability and decent human life.
Types of Housing Finance
? Home purchase Loans: Basic home loans offered by banks and
housing finance companies for purchasing new house
? Home construction loans
? Home extension loans
? Home conversion loans
?Land purchase loans: for both construction or investment purpose
? Stamp duty loans:
?Bridge loans: offered for selling the existing house and purchasing
another house
? Balance transfer loans: where the balance outstanding is transferred to
another loan either from the same bank or another bank to avail lower
interest rates
?Re-finance loans: banks can get housing loans re-financed from another
financal institution
?NRI home loans: meant for non-residents who wish to build or buy a
house in India
Institutions offering Housing Finance
? Housing and Urban Development Corporation of India (HUDCO)
? LIC Housing Finance Limited (LICHFL)
? GIC Housing Finance Limited (GICHFL)
? Dewan Housing Finance Corporation Limited (DHFCL)
? Can Fin Homes Limited (CFHL)
? Providend Funds
Banks offering Housing Finance
? Scheduled Commercial banks
? Scheduled co-operative banks
? Regional Rural banks
? Agricultural and rural development banks
? Housing Development Finance Corporation Limited (HDFC)
? State Bank of India Home Finance (SBI)
? IDBI Home Finance Limited (IHFL)
? PNB Housing Finance Limited PNBHFL)
? National Housing Bank NHB)
Interest Rates
Depends:
? Upon interest rate cycle
? loan amount
? Tenure of loan
? Profile of the borrower
? Credit history
? Credit score (CRISIl, CIBIL, CARE etc.
? Lending bank
Types of interest rates:
Fixed interest rates - interest rate remains fixed throughout the
tenure of loan. E.g. HDFC
Floating interest rate - rate of interest changes depending
upon changes in repo rates by RBI or any change in base rate
of the bank. Generally floating rates are lower. E.g. SBI
Housing Finance Schemes
? Home loan
? Rural housing
? Refinance schemes
? National Housing and Habitat policy
? National Urban Housing and Habitat policy
? National Rural housing and habitat policy
? Golden Jubilee Rural Housing Finace scheme
? Indira Awaas Yojana
Hybrid interest rate: Fixed in the initial years and floating for the remaining
years.
? Prepayment of loan lender can not levy any penalty as per the guidelines of
RBI
? Borrower can shift from fixed to floating interest rate without any charges
? Interest rates are expressed as certain points above Base rate and certain point
above or below PLR popularly known as Spread.
? Repayment by EMI, which includes both Principal and interest
? EMI (Equated monthly installments)
(p(1-dp)r) (1+r)n
EMI = ---------------------
(1+r)n -1
Where, dp= percentage of down payment
p= principal amount
r= interest rate
n= time
Or
(1+interest )n
EMI = (Loan amount * interest) ----------------
(1+interest )n -1
For e.g 1,00,000 loan repayment in 10 years having interest rate of 8%
compounded monthly. Down payment 10%. Calculate EMI.
Methods of calculating EMI
Flat rate system: interest is calculated on the initial loan amount for the entire
loan period and principal and such interest is divided equally into number of
repayment installments. Reduction in the Principal amount as and when the
installment is paid is not taken into account. This makes effective interest rate
quite expensive.
Reducing balance system: interest is charged only on the outstanding amount
of the loan after deducting the principal repayment. Here amount of interest is
less.
E.g. A loan of Rs. 2,00,000 with a flat rate of interest of 10% p.a. for 5 years.
Installment of Rs. 60,000 p.a 5,000 per month
Total paid Rs. 3,00,000. leading to an interest rate of 17.27%.
Reducing Balance with same example Total amount paid will be 2,60,000
instead of 3,00,000 in flat rate system.
Types of reducing balance system
Daily reducing balance method: principal is reduced
as and when the principal is repaid and the interest is
calculated on remaining balance.
Monthly reducing balance method: Principal amount
is reduced when repayment is made at the end of the
month and interest is calculated on the balance.
Annual reducing balance method: At the end of the
year the accumulated principal component is deducted
from the original loan amount and the interest for the
next year is calculated on the reduced loan amount.
Income Tax Implications
Deduction under Sec 80C ? Deduction upto 1,50,000
for principal repayment
Section 24 ? Deduction for interest payment
Section 80EE ? additional deduction for interest.
Reverse Mortgage
? A Reverse Mortgage is a loan available to senior citizens
? Reverse mortgage, as its name suggests, is exactly opposite of a
typical mortgage, such as home loan
? It is a home loan product designed for the senior citizens by
converting their fixed assets-their home or in banking terms their
equity in any housing property into an income channel in case of
any requirement.
How Reverse Mortgage works in India
? When the home is mortgaged to the bank, the bank arrives at the
fair value of the property based on condition of the house,
demand for the property, location, current prices, etc.
? Once the fair value is determined, the bank disburses a loan
amount in the form of periodic payments ? monthly, quarterly,
etc. The margin and interest costs are also factored in to this just
like any other loan.
Guidelines for Reverse Mortgage
? Loan Amount: Up to 60% of the property value
? Tenure: Generally 10-15 years (Some banks offer 20 year
tenure)
? Periodicity of Payments: Monthly, Quarterly, Annual or
Lump sum loan payment
? Property Revaluation: Undertaken once every 5 years.
? If valuation has increased the borrowers can increase the
loan amount. An incremental lump sum is paid.
? Equity: The equity or individuals interest in the house
decreases as they receive more payments. This is just the
opposite of home loan where equity increases with more
and more principal payments.
Providers?of?Reverse?Mortgage?Loans?in?India
? State bank of India
? Bank of Baroda
? Dewan housing finance limited
? Punjab national bank?
? Union Bank of India
? Interest?rate: Interest rates on reverse mortgage loans in India vary
from 12-15%. State Bank of India has a loan scheme that has a
fixed interest rate of 12.75%.
Features of Reverse Mortgage
? Dealing Parties
Borrower
Lender
? Security for the lender
? Payment of loan to the Borrower
? Repayment of Reverse Mortgage loan
? Home value Falling short
? Home value in Excess
? Freeing the property from reverse mortgage
Eligibility Criteria
? Age: House owner?s age should be above 60. If spouse
is a co-applicant, she should be above 58 years.
? Ownership and Clear Title: The property titles should
be clear and be free from encumbrances. The
prospective borrower should be the owner of the
property.
? Life of the property: Should be minimum 20 years
? Property should be self acquired and occupied
? Property should be the permanent and primary
residence : The property can be either a residential
house or a flat located anywhere in India. In addition to
the above each bank or lender could have additional
criteria in accordance with their lending norms.
Reverse Mortgage Advantages
??No?prepayment?penalty
??If?one?borrower?dies?his?or?her?spouse?can?continue?to?stay?in?the?house
??Regular?Income
??No?Repayment?worries
??Utilizing?Locked?Savings?
?Avoid?Sale?or?renting?
??Financially?Independent
Dis-advantages
? ?Pledge? the? property? to? loan? lender? means? officially? giving? loan?
provider?the?right?to?sell?the?house?to?recover?the?loan.?If?the?owner?of?
a?house?is?willing?to?transfer?the?ownership?to?someone?after?his/her?
death?then?this?loan?is?not?to?be?considered?as?a?source?of?income.
??High?rate?of?interest?compared?to?other?loans.
? Variation? in? interest? rates? and? loan? amount? during? the? time? of?
valuation?can?turn?into?serious?problems?at?times.
Criticisms of Reverse Mortgage
? It is expensive
? Customers are confused while entering into them
? Since no monthly payments are made by the borrower on a
reverse mortgage, the interest that accrues is treated as loan
advance
? Each month, interest is calculated not only on the principal
amount received by the borrower but on the interest previously
assessed to the loan.
? Recent reports seem to indicate that a very small percentage of
senior citizens only seem to have taken advantage of the facility
? The Indian Banking industry caps the available loan amount at 50
lakh instead of providing for an equitable percentage of the
property?s value and limits the loan period to a tenure of 15 years
Non-Banking Financial companies
? Began in 1960 to meet the existing need by the Investors
? Started with accepting Fixed deposits from investors and
work out leasing deals
? 1980s and 1990s began to attract large number of investors
? Activities expanded to underwriting, stock broking,
investment banking, asset management, portfolio
management
? The financial institution which provide the various banking
facilities but are not termed as banks because they do not hold
the banking license? are called NBFCs.
? Registered under Companies Act 1956
? Governed by the directions issued by RBI
?NBFCs undertake services like equipment leasing, hire
purchase, housing finance, investment, loan, stock-broking, etc
RBI (Amendment Act) 1997 defines NBFC as
? A financial institution which is a company
? Principal business is receiving deposits or lending in any
manner.
Company carrying on any of the following activities as its
principal business is not NBFC:
? Agricultural operations
? Industrial activity
? Purchase or sale of any goods or providing services
? Purchase, construction or sale of immovable property
RBI - A company can be treated as NBFC:
? If its financial assets are more than 50% of its total assets
? Income from financial assets is more than 50% of the gross
income.
? A company can not carry on business as an NBFC unless it is
registered with RBI.
Components of Non-banking sector
Non-banking financial companies
? Principal business is accepting deposits and lending in any manner
? Insurance/Stock-broking/Housing Finance
?EL/HP/LC/IC/Mutual benefit finance company/ Miscellaneous
non-banking company
Residuary non-banking company(RNBC)
? Receives deposits under any scheme by way of contributions or
subscriptions or by sale of units or certificates or other instruments
Non-banking non-financial company
? Is an industrial concern
? Principal activity is agricultural operation or
? Trading in goods and services or
? Construction or sale of real estates
? Not classified as financial or non residuary non-banking company
Role of NBFCs
? Promotes utilisation of savings
? Provides easy, timely and unusual credit
? Financial super market
? Investing funds in productive purpose
? Provides housing finance
? Provides investment advice
? Increase the standard of living
? Accepts deposits in various forms
? Promotes economic growth
Growth of NBFCs
? 1980-90s NBFCs grew fast owing to public money through deposits
and IPOs
?1981 had 7063, 1990 had 24009, and 1995 saw 55995
?1991-97 saw deposits growth of 88.6% owing to high rates offered by
NBFCs
? Growth could not be sustained as loans extended turned sticky leading
to several NBFCs to default on deposit repayments.
? 1997-98 saw RBI coming out with stringent regulations which made
them difficult to raise deposits. Banks also turned wary of lending to
NBFCs leading to increased cost of funds to NBFCs. Private banks also
posed competition to NBFCs. Many exited business.
? 2001-02 saw recovery and strong growth
? Competition picked up again leading to decline of NBFCs by 0.5%
12740 by June 2009. NBFCs started depending upon banks and
debentures as against public deposits.
? There has been further reduction in number of NBFCs and growth in
asset management companies basically by way of re-classification of
these companies.
Functions of NBFCs
? Brokers of loanable funds
? Mobilisation of savings
? Channelisation of funds into investments
? Stabilise the capital market
? Provide liquidity
Types of NBFCs
? Equipment Leasing Companies
? Hire purchase finance companies
? Housing finance company
? Investment company
? Loan company
? Miscellaneous non-banking company
? Mutual benefit finance companies
? Residuary non-banking company
? Non-banking non-financial company
RBI guidelines for NBFCs
? Registration with RBI
? Inter-corporate deposits
? Maintenance of liquid assets
? Period of deposit for residuary NBFCs
? Accounting standards issued by Institute of Chartered Accountants of
India to be followed
Prudential norms for NBFCs
? Income recognition
? Income from investments
? Accounting standards
? Accounting for investments
? Provision requirements
? Disclosure in balance sheet
? Constitution of audit committee
? Capital adequacy requiremnets
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This post was last modified on 18 February 2020