CHAPTER 1 AN INTRODUCTION Housing is a primary human need next in importance only to food and clothing. A first priority for a youngster who begins life is therefore to plan for a house. This takes precedence over other household expenditure and creature needs. Housing, however, is a major expenditure and cannot be funded out of a family's normal monthly income or savings. The prospective homeowner must look for a loan substantial in size and so structured that he can repay it over a longer period of time, in many cases almost one's entire working life. Loan is offered to a borrower to purchase or build a new house on the basis of his/her eligibility and the bank's lending rules. One of the important basic human needs is shelter. House is the ultimate dream of every middle class family. Government gave encouragement for house finance subsidiaries by offering number of tax concessions to individuals. With the overall encouragement given to this sector, a number of players entered in housing finance. One of the most important benefits of taking a home loan is the interest rate that is allowed on the home loan. Fixed and variable interest rate options are also available for home loans. Many financiers also offer home improvement loans at the same interest rate as they offer the home loans.
ABOUT THE REPORT
•TITLE OF THE STUDY: The present study is titled as “A PROJECT REPORT ON ICICI HOME LOANS”. The study is made with special reference to ……bank……branch •OBJECTIVE OF THE STUDY: The following are the objective of the present study: 1. The main objective of doing this project is to study the
To analyze Indian home loan market and its growing
To analyze various methods of operating a home loan
4. To gain knowledge about various home loan products 5. To know various rates available while providing home loan. •Data and Methodology: For the purpose of the present study both primary and Secondary data were used.
Primary data collected from bank visits, interviewing with staff etc. secondary data collected from books, websites and newspaper. •LIMITATION OF THE STUDY: The present study has got all the limitations of case study method of data collection.
Chapter Layout :
1 2 3 4 5
Introduction to the title and the project Profile of the bank Theoretical view of home loans Analysis of the study Conclusion to the project
A THEORETICAL VIEWHOME LOAN
The section 5 (b) of the Banking Regulation Act 1949 defines Banking as," Accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise." A "home loan" is a credit to a consumer for the purchase or transformation of the private immovable property he owns or aims to acquire secured either by a mortgage on immovable property or by a surety commonly used in a Member State for that purpose." A home loan requires you to pledge your home as the lender's security for repayment of your loan. The lender agrees to hold the title or deed to your property until you have paid back your loan plus interest. In simple words a home loan is a fund or the loan which the buyer has taken from any financial institution or bank to purchase a new home at an agreed rate of interest specified during the contract. Home loan is the finance borrowed from a bank or financial institution to buy or modify a residential real estate property. Any Resident or Non-resident individual who is planning to buy
a house in India can apply for a Home loan. If you have decided to buy a property in the near future you can even apply for a loan before you select your property. SCHEMES OF HOME LOANS: 1) Home loans for construction of new house / flat, purchase of old house/ flat, etc: Initially, lenders approved a home loan for family/own residence only. After gaining experience and more importantly to be competitive, lenders now approve loans even when the applicant has more than one house or flat/apartment. Today there is no general restriction on the number of houses owned by an individual. The only stipulation is that the home loan funds should not be used for commercial purposes. 2) Home extension loan: These loans are given for expanding or extending an existing home. These are some of the instances for which you could take an Extension Loan. To construct an additional room or floor by getting additional Using grills or sliding windows to enclose the balcony. Construction of a garden or garage in the building vicinity.
3) Home improvement loan:
Home improvement loans for repairs /renovation including waterproof, plumbing, compound wall, digging of well/tube-well, flooring/tiling, additions like built-in cupboards /shelves, internal repairs including replacing doors/windows, etc. A loan for purchase of household furniture including space-saving furniture (kitchen racks, cupboards, etc) may also be sanctioned as a home improvement loan. 4) Home loan for purchase of housing site: Here again, initially many banks did not approve such loans. However, market forces have now made this a universal feature of the home loan market. However, care has been taken in structuring the schemes for avoiding financing for purchase of land for speculative lation purposes. 5) Home equity loans: A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.
Home loans for construction of new house / flat
Home equity loans
Home extension loan
SCHEMES OF HOME LOAN
Home loan for purchase of housing site
Home improvement loan
Rate of Interest: The lender decides the rate of interest chargeable on the home loan, taking the following into consideration:
1. Cost of funds: The cost of funds is different for each lender, depending upon the mix of liabilities, liability-raising costs (based on the image of the bank in the market) and with different costs in different maturity buckets. 2. Tenor of the loan: Generally, banks have borrowed funds with maturities up to 5 years, and some capital fund surpluses, which may be available for allocation to home loan assets. 3. Capital allocation costs: Banks are required to allocate capital based on the risk weight of each class of asset taken on to the balance sheet. 4. Costs of administering the specific scheme.
5. Swap costs, other funding costs 8
6. Profit margin 7. Tenure of the loan is an important factor in pricing the loan 8. Special considerations like group lending, which may bring down the administration or monitoring costs. 9. Competition: The lender may have to levy interest at market rates, even if his cost plus margin is higher than competition. SECURITY: 1) A simple registered mortgage or equitable mortgage on the property acquired out of the loan is taken as security. This is the primary security for the loan. 2) In case of flats of a group housing society, triparilite
agreement shall be entered into. 3) In case of jointly owned properties, it should be ensured that all the co-owners and co - Applicants execute the documents. STEPS INVOLVED IN GETTING HOME LOAN: STEP 1: Submit an Application form along with relevant documents:
The finance company will process customer’s application to check the loan eligibility based on the persons income and personal profile. Usually an up front (non –refundable fee) of about 0.5-1% of the loan amount must be paid before processing begins. STEP 2: Verification of the property and supporting documents: (Usually takes 5-7 working days after Step1) A company representative may visit the property as well as the residence to vary information submitted in the persons application form. Further, a property valuation maybe carried out by the company to determine the maximum amount they are willing to lend you. Any references submitted by the person in the Application Form may also be contacted. The person may be personally interviewed and any further clarifications in the documents submitted maybe sought. STEP 3: Sanction of the loan: (Usually on the 7th working days after Step 1 A sanction letter is issued which the customer will have to sign. This letter will contain the amount and the terms of the loan. Some companies specify the period for which the loan sanction is valid. The person will have to pay a Commitment fee
(normally 1% of the unutilized loan amount) if you do not draw on the entire sanctioned amount before that period.
STEP 4: Submission of the original Property documents and signing the loan Agreement (Usually on the 8-10th working days after Step 1) The customer will be required to leave the title deed of the property with the company as a security for the loan. He will be required to go to the company’s office to execute the legal loan papers. STEP 5: Disbursal of the Loan Cheque (Usually on the 10 –15 working days after Step 1) The person can draw the loan in parts depending on the stage of construction of the building. Until such time that the entire sanctioned amount is NOT drawn, you will pay a simple interest on the Actual Amount drawn (without any principal repayments). The EMI payments will commence only after the entire Sanctioned Loan Amount is drawn. EQUATED MONTHLY INSTALLMENTS (EMI): The monthly repayment by the applicant is related to his cash
flow. There is an element of interest and of principal in the monthly payments. The interest payable over the period of the loan is calculated and added to the loan amount to arrive at the total payable amount .this amount, divide by the total number of monthly installments is called equated monthly installment (EMI). CHARGES IN HOME LOAN: Acquiring a Home Loan doesn’t only involve the cost of home loan interest rates but it also includes other charges & fee accompanying at various stages of taking the Home loan. You must consider all these charges while comparing the cost structure across banks. Following is the detailed fee structure incurred by banks at different loan stages: • Processing Charge: It is a fee payable at the time of submitting the loan application to the bank which is normally non-refundable. The fee ranges between 0.5 per cent and 1 per cent of the loan amount. • Administrative Fee: It is a fee incurred by banks at the time of loan sanction; there are few banks who have removed this fee so you must check it with all the banks. • Prepayment Penalties:
When the borrower pre-pays the loan before the loan tenure, banks charge a penalty which usually varies between 1 per cent and 2 per cent of the pre-paid amount. • Legal Charges: Banks also incur some charges from the customer for legal and technical verification of the property. • Delayed payment Charges: When there is a delay in the payment of your EMI, banks charge a late payment fee from the borrower which normally ranges from 2% to 3% of the EMI. • Cheque bounce charges: Banks charge between Rs. 250 and Rs. 500 for every bounced cheque towards the loan payment because of lack of funds in your account.
POINTS CONSIDERED BY BANK WHILE GRANTING HOME LOAN: The borrower’s eligibility of getting a home loan depend upon his/her repayment capacity & the banks establish this
repayment capacity by considering various factors such income, spouse's income, age, number of dependants qualifications , assets, liabilities, stability and continuity of occupation and savings history. IMPORTANT POINTERS IN HOME LOAN: • Increase your Loan eligibility • Credit History: Your chances of getting a home loan are increased if you have a good credit history which is known by banks by checking the borrower’s Cibil score. Now it is very hard to get a loan from another bank when you already have a bad debt with one bank. • Clubbing of income: Your eligibility to take a home loan will augment when you club your income with your spouse’s income, bank in this case will calculate your eligibility on the basis of the clubbed income of both the applicants. You can club incomes of spouse, children & parents staying with you and having regular income. • Enhance your loan tenure: Longer is the loan tenure, lower will be the EMIs which further increases the repayment capacity of the borrower & in turn
enhances the loan eligibility. • Step-up Loan:
In this type of loan EMI's remain low in the beginning & increase gradually as and when the borrower’s spending power increases. Therefore lower EMI's in the initial years enhances the borrower’s ability to pay & further increases the loan eligibility • Increase the down payment: You must know that in a home loan bank finances only 85 to 90% for the property & the rest amount has to be funded by the borrower. You should increase the down payment if you have more than required amount which will mitigate your debt considerably. TAX BENEFITS IN HOME LOAN: Past record: The home loan borrower enjoys Tax Benefits on both Interest paid & the Principal re-paid. Under Section 24(d) of Income Tax, the deduction of interest payable on the home loan is up to a maximum of Rs. 1, 50,000. Under Section 80(c) of Income Tax, Principal amount for the
repayment of loan along with other savings & investments is eligible for tax deduction up to a Maximum limit of Rs. 1, 00,000. Recent changes: According to the new policy changes of the direct tax code bill introduced in the parliament in the month of august 2010 only upto Rs 1.5 lakh deduction is allowed on the interest paid on the housing loan and there is no deduction available on the principal amount. So if your equated monthly installment is Rs 1.50 lakh, comprising interest and principal outgo of RS 75000 each, you can avail deduction of only the interest.
The home loan market in India has grown at a rapid and alarming rate of over 40% over the period of the last four years. And from the reports from some of the industry experts, it is evident that there is very little chance that there will be any significant decline in growth rates in the future. Therefore it becomes important at this point in time to examine the key factors that have been instrumental in triggering this high growth period. There are several reasons that can be considered as having attributed to the growth of the home loan market. On the demand side, the first and the most important factor for the growth has been faster rise in incomes as compared to property prices, thus making housing more affordable. Most of the housing finance companies in India have introduced several new home loan products in order to meet the needs of a wide variety of customers. The various home loan schemes have their different interest rates in the market. The customer can choose those schemes which he feels is good for him and have the capacity to repay it on that specified time period. If
unwavering liability is what suits your profile, then fixed interest rate home loan should be the natural choice. On the other hand,
if you can handle risks and are willing to go the extra mile to benefit from any further fall in interest rates, floating rate home loans will be best suited for you.