How Mortgage loans work?
01 Nov 2019
Home loan or Mortgage loans is without a doubt the longest loan a person takes in his lifetime. Most other loans like personal, education and automobile loans are of shorter duration but a home loan can last for as high as 30 years. It is thus very important to understand all aspects of this loan.
Whenever one buys a home, the lender will use the home as collateral against a possible default in the future. The term Mortgage means passing the Charge on the property to the lender as a security.
Home is one of the few assets whose price does not fluctuate as much as of other financial assets. In fact, in a growing economy, the price of the home moves higher gradually every year. Hence, in this case, banks are relatively assured of recovering their money in case of a default. In most cases, banks do not ask for any other security when they disburse Mortgage loans.
There are various components of a Mortgage loan. First, the maximum amount of loan that a lender disburses is restricted by regulators. Some lenders consider the taxes, statutory charges, and insurance under the total value on which loan can be available. A borrower will thus have to clarify with the lender on the total amount that will be considered for calculating the loan value.
The amount that the bank will disburse will be the amount on which it will be charging interest. The consumer will have to repay the loan amount plus the interest that is charged over the years.
The interest that is charged on the loan is floating. This interest is normally calculated on a reducing balance basis. In the initial years, the lender would take more as interest and less of capital from the equated monthly installments (EMI) as the loan amount outstanding is almost full in the initial years of loan.
Consider a person has taken a loan of Rs 50 lakh from a bank for a period of 25 years. His EMI would work out to be Rs 41,000. When this Rs 41,000 is deducted from the borrower on a monthly basis, in the initial years less than 10 percent of the amount is deducted from the –Principal of Rs 50 lakh. A major chunk of the interest that a borrower pays on his loan is deducted in the first half of the tenure.
It is thus advisable to repay part of the mortgage loan or foreclose it in the first half of the loan tenure if one can afford the same.
Every month the interest is charged on the reduced Principal that is left over from the previous month. In banking terms, the remaining Principal is called the outstanding loan amount.
In India, there are no charges applicable for foreclosing a home loan. In other loans pre-closing a loan carries a charge.
At the time of availing the loan lenders generally give an amortization sheet which clearly mentions the interest and principal that will be deducted every month for the entire tenure of the loan.
How does an EMI on debit card work?
With the exponential growth and increase in online shopping and the number of products available, the modes of payment for these purchases have also evolved. It is no longer necessary to pay upfront in cash. One very popular option that people use is to convert purchases into installments on their credit card. This system has become one of the preferred ways to buy consumer durables. However, for those people who do not have credit cards or who do not have a high limit on credit cards, there is another option; EMI on a Debit Card.
A debit card is like carrying your savings or current account with you. It is directly linked to the account and every purchase made debits the account directly. This means a debit card does not have any limit as such. The amount available to be spent in the bank account is the amount available to be spent for purchase.
With an increasing number of debit card holders, merchants and banks have come up with an option to convert high value purchases into an EMI on the debit card. If you’re wondering how to get EMI on debit card, this is the guide for you.
How EMI on debit card works?
The EMI process is extremely simple. Each bank has a certain minimum amount of purchase that has to be made. Once the total purchase amount at a merchant exceeds this defined amount, the cardholder gets an option on merchant’s Platform to make payment through Debit Card EMI.
After you select your EMI option, you need to enter your card details and validate them with an OTP. After the OTP is entered, your purchase will be made through an EMI.
Then the customer is given an offer based on Pre- approved Limit showing the approved loan amount, Rate of Interest , down Payment by the customer and Tenure. This offer needs to be accepted along with giving consent for Standing instructions for loan EMI recovery from Debit card linked savings account. The merchant charges some convenience fee to the customer and once this convenience fee and down payment is made by the customer to the merchant, the purchase will be completed.
One important point to note about EMI on Debit Card is that the bank charges interest for this facility. The rate of interest on EMI will differ from bank to bank. It also depends on the balance in your account and your relationship with the bank.
If you’re wondering how to avail EMI on debit card, then you should know that banks auto approve customers for this facility. Flipkart customers can send a message on a number which checks if you are eligible for this feature or not. If you’re eligible for this feature, it will appear as a mode of payment at the checkout page. It is pertinent to note that you must use the same email ID and mobile number with the e-commerce portal as you do with the bank for them to verify and make that option available to you on checkout.
The interest on EMI is not the only charge associated with this account. Some Banks also charge a processing fee for this. Some banks may charge a foreclosure fee as well. This schedule of charges varies from Bank to bank. It is best to inquire with the bank about these charges before converting your purchases into EMIs.
All major e-commerce portals offer you the option to convert your purchases into EMI. But before you avail this facility, check if there is a no interest or low interest EMI option. If you’re ready to pay interest on these purchases, you can opt for this facility.
How much home loan can I get as a salaried employee?
Real estate rates are rising with every passing day. It is no longer feasible for one to purchase a home simply with the help of their savings. You need to approach a bank to take out a home loan. But lenders need to be sure that you have the capacity to repay the loan, before passing your loan. To ensure you have the repayment capacity, they take a few important factors into consideration such as your net monthly income, credit scores, and credit repayment behaviour. If you are a salaried employee thinking how much home loan I can get on my salary, you need to read this article.
The role of your net salary
The key prerequisite for a bank to sanction your loan is your salary. Banks need to be convinced that you earn enough to be able to afford the monthly EMIs. This is why your gross monthly income is the most important factor for lenders sanctioning loans. Your net (in hand) income helps the lender assess the equated monthly instalment you can afford. Let’s look at it with the help of an example.
Let’s say your age is 30 years and monthly salary is ₹60,000 but you receive a net income of ₹55,000 post deductions. In this case, the ₹55,000 becomes your net monthly income and you would be sanctioned your loan based on this amount.
Now to answer the question how much home loan can I get, let’s build on the above example. Let’s say you approach Bank of Baroda to finance your home loan. On a net monthly remuneration of ₹50,000 and above, total deductions, including proposed EMI not to exceed 65% of the Gross Monthly income as per Bank of Baroda norms for Housing Loan,i.e Total monthly deduction of Rs.39000/- is allowed in your case and since there is already a monthly deduction of Rs.5000/-, you are left with Rs.34000/-for the proposed Home Loan EMI. The Bank may find you eligible for a Housing Loan of Rs.44,00,000(rate of Interest taken at 8.40%(otherwise applicable as per CIBIL score of applicant), present BRLLR of bank and loan Tenure is taken as 30 years maximum Tenure offered by Bank of Baroda) if you wish to purchase a flat/plot anywhere in India. , As you can see, Bank of Baroda would base your loan approval amount on following main factors: i.e. your age, your monthly income, your CIBIL score and the actual value of the property.
The role of your repayment capacity
Your net salary may answer the question how much home loan can I get on my salary, but is in not the only determining factor. A high monthly income does not prove to the lender that you have the capacity to repay the loan. To this end, they conduct their own assessment of your repayment capacity by looking at your bank statements. They prefer to check your typical monthly expenses, your credit card debt, your credit history and other EMIs you are paying and so on, to ensure that you are eligible for the home loan. Your monthly expense report helps lenders understand the amount of income you are left with every month after mandatory expenses and your income to debt ratio. They typically require you to have anywhere between 50%-75%income available for total deductions including your existing deductions plus EMI of proposed Home loan depending upon your Income slab to calculate your eligibility for the proposed Home loan. You have an option to add co-borrower who can be any of your earning close relative to enhance your loan eligibility. It is suggestible to have the co borrower as co-owner of the proposed property as well to avail Income Tax benefits available for Home Loan borrowers.
The role of your credit scores
The answer to the question how much home loan can I get and at what price (Rate of Interest) is incomplete without a mention of your credit scores. Also known as CIBIL score, your credit scores allow lenders to assess your credit repayment behaviour. It helps them check if you have defaulted on paying EMIs, how frequently you are using your credit card and whether you are paying your credit card bills on time, without defaulting. You typically require a credit score of 725 points or higher for your home loan to be considered.