How to qualify for a home loan

Home loan interest rates have inched up in the last few months. This in turn, has affected the loan eligibility for home loan borrowers.

Loan eligibility is inversely related to rates. As interest rates rise, loan eligibility becomes stiffer. In such a scenario, some home loan borrowers might have to re-evaluate their options (in terms of loan amount) on account of the new eligibility criteria.

We present 5 ways by which individuals can enhance their home loan eligibility.

1) Increasing the loan tenure

One very elementary method of enhancing the home loan eligibility is by opting for a higher tenure. This is so because the EMI (equated monthly instalment) per lakh, which an individual has to pay, starts to decline as the tenure increases.

The reason being that other factors like interest rate as well as the principal amount remain the same, despite the higher tenure. What changes though, is the net interest outgo, which rises with a rise in tenure. And since the individual is paying a lower EMI now, his 'ability to pay' and therefore his loan eligibility, automatically increase.

2) Repaying other outstanding loans

Individuals with outstanding loans like car loans or personal loans may face a problem with loan eligibility; the same might adversely affect their home loan eligibility.

Industry standards suggest that existing loans with over 12 unpaid instalments are taken into account while computing the home loan borrower's eligibility. In such a scenario, individuals have the option of prepaying in part/full their existing loans. This will ensure that their eligibility for the home loan purpose is unaffected.

For example, if the home loan seeker has an outstanding personal loan, where 16 EMIs remain to be paid, then he can prepay the same and approach the HFC with a clean slate. Alternately, he also has the option of prepaying 5 EMIs thereby ensuring that the existing loan liability doesn't impact his eligibility for the home loan.

3) Clubbing of incomes

Another way of increasing loan eligibility is by way of clubbing incomes of spouse/father/mother/son. An illustration will help in understanding things better.

Suppose an individual's loan eligibility, based on his income, works out to approximately Rs 1,000,000 for a given set of criteria. But the individual wants a loan worth Rs 20,00,000. Assume that this individual's spouse too is earning a similar annual income. In such a case, the individual can club his spouse's income along with his own income and then opt for a home loan.

The eligibility in this case, will be calculated on the clubbed income of both husband and wife- thereby enhancing the individual's eligibility to the extent of the spouse's income. In our example, the eligibility will now stand doubled at Rs 2,000,000 from Rs 1,000,000 earlier.

4) Step-up loan

Individuals can also opt for step-up loans and enhance their loan eligibility. Simply put, a step-up loan is a loan wherein an individual pays a lower EMI during the initial years and the same is enhanced during the rest of the loan tenure.

For example, a Rs 1,000,000 home loan at 7.5% for a 20-year tenure would imply paying an EMI of Rs 6,760 the first 2 years and Rs 8,340 for the remaining tenure. HFCs usually consider the lower EMI of the initial years to calculate his loan eligibility. The initial lower EMI helps increase the individual's 'capacity to borrow.'

5) Perks

Salaried individuals must ensure that variable sources of income like performance-linked pay among others are taken into consideration while computing their income. This in turn will imply that the loan amounts they are eligible for, stand enhanced as well.

As can be seen, there are many ways to increase loan eligibility. However, individuals need to keep in mind that increasing the eligibility can have an impact on their financial planning.

For example, if an individual decides to prepay an existing personal loan for the sake of becoming eligible for a higher loan amount, he might be faced with a cash crunch. Hence a detailed scrutiny of one's financial standing is warranted before opting for an inflated home loan.

The examples in this note should only be treated as illustrations. Individuals need to work out solutions best suited for their profile after speaking to their home loan consultant and only then consider acting on the options discussed.

Why you must insure your home loan

You always dream of owning a house. Most of us go ahead and even borrow the required funds to meet our dreams. But, have you ever thought of an unfortunate situation in which you would be unable to pay the outstanding loan amount.

You would certainly not want to put the burden of repaying the outstanding loan on your dependent family members. There's help at hand in the form of insurance cover on payment of a small premium.

For example, you avail a loan of Rs 15 lakh (Rs 1.5 million). In addition to the equated monthly instalments (EMIs), you can opt to pay an additional premium of Rs 500 to avail of an insurance cover. This cover ensures that the outstanding loan is repaid if the borrower dies during the term of the loan.

Banks like State Bank of India and Bank of India offer home loans which take care of uncertainties such as death of the primary borrower.

The life cover is equivalent to the outstanding loan amount as per the original repayment schedule of the loan. It protects the home loan borrower against death due to any reason except suicide in the first year of cover.

In the event of death, the insurance company pays the sum assured directly to the Bank. The borrower does not have to undertake any medical examination up to Rs 7.5 lakh (Rs 750,000) for borrowers in the age group of 18 to 60 years and Rs 3 lakh (Rs 300,000) in the age group of 61 to 65 years.

The State Bank of India has an arrangement with its insurance arm, SBI Life, to protect its home loan customers. Recently, Dewan Housing Finance Limited also tied up with SBI Life to offer a similar product. Bank of India followed suit by tying up with the leading private life insurance company, ICICI Prudential Life for the same.

The cover is basically group insurance negotiated by home loan providers for their borrowers. The mortgage term assurance provides insurance at up to 50 per cent lower rates than an individual policy. There is also a flexibility given to the customers.

One can either opt for payment of premium on a monthly basis or for a one-time payment. In the case of one-time payment, the amount is added to the home loan amount and equated monthly instalments are calculated on the total amount. In the case of monthly premium, the amount is added to the loan EMI.

The pricing of premium is determined by the borrower's age, the term of the loan and the quantum of loan. The minimum amount of premium is Rs 500.

Both individual and joint home loan customers are eligible for life insurance cover for a term between 5-20 years. In case of joint home loan customers, the younger borrower can get life insurance cover at 50 per cent of applicable premium. Borrowers in the age group of 18-60 years are eligible for this cover, and the maximum cover is capped at 71 years.

However, to drop a word of caution here.

It is a term insurance product. In simple words, a borrower will not get back the premium paid if he/she lives on beyond the loan repayment term. Home loan insurance cover is still a step worth taking for an individual.

The amount paid as premium over the term of the loan will aggregate to a meagre sum, but the protection it provides would be huge. If a borrower payers Rs 500 per month over 15 years for the insurance cover, the total premium paid will amount to just Rs 7,500.

Credit card reward points? Beware

It's raining rewards on credit card holders, thanks to the ongoing festive season. Banks are today cashing in on the fact that the modern customer is no longer debt-shy, is more imaginative and does not wince before swiping his credit card when he takes his family on a holiday.

Today, a credit card heavily loaded with reward points gives you the opportunity to enjoy holidays at exotic locales, shop for jewellery, fashion accessories, apparel, electronic equipment, cosmetics, et al.

However, as a cardholder, you need to be aware that there are no free lunches. Banks have a penchant for giving you a reward with their left hand, and simultaneously charging you for it with their right hand.

In any case, it always pays to be safe than sorry. You need to be aware of a host of complicated rules and regulations before you let yourself to be swayed away by these so-called lucrative offers. To begin with, banks do not conform to a uniform set of reward point schedules.

For instance, while in case of American Express Bank, card members receive one point for every Rs 40 charged on their credit card, ABN Amro Bank credits one point to the customer for every Rs 50 spent.

Standard Chartered credits one point for every Rs 125, whereas Citibank rewards you one point for every Rs 100 spent. Private sector ICICI Bank awards you one reward point for every Rs 200 charged on their card. Also, ICICI Bank links the reward points to the slabs of amounts spent, i.e. upto Rs 75,000 or above Rs 4,00,000.

The main hitch here is that you can seek redemption of reward points only after you have accumulated the minimum required points of 500.

This apart, banks also follow a pattern wherein they credit varying amounts on every point earned, depending upon the card categories. Citibank rewards cardholders Re 1 for every point earned on the Citibank Platinum Card, while the Diners' Club International and Citibank Gold cardholders receive only Rs 0.65 for every point gathered. The Citibank Silver cardholders on the other hand get Re 0.50 for every point they manage to accumulate.

The difference in redemption structures also creep in, based on the outlets offering you redemption facilities. Dutch-based ABN Amro Bank offers you redemptions via gift vouchers that can be redeemed at superstores, apparel, beauty and healthcare, et al.

As a credit card holder of ABN Amro Bank, you need to accumulate at least 1,000 points to be eligible for redemptions at Pantaloons, Lifestyle, Adidas, Allen Solly or Philips outlets.

Whereas to avail of vouchers, redeemable at Zodiac, Wrangler, Arrow or Titan, you should have accumulated a minimum of 500 points. Being a cardholder, it is mandatory that you find out the cash transactions that curtail your eligibility to these programmes.

Most banks restrict their customers from treating cash withdrawals, interest charges, card fees, demand drafts, service charge transactions, disputed transactions, purchase of foreign exchange, EMI transactions, travellers cheques and other insurance charges as opportunities to accumulate reward points.

The rewards points can also be redeemed online. This is how you can do it. You need to login on the concerned bank's Web site and visit the "Reward Points" section on the credit card page. To web-enable your credit card, fill up the account linking form available on the site.

You then need to select the rewards catalogue for the card you hold and accordingly, choose the products or vouchers for which an online order has to be placed. The product or the voucher is then delivered at your doorstep.

Card-issuing banks offer cardholders the facility to seek an annual fee waiver, by adjusting the amount against the reward points. HSBC for instance offers cardholders who have gathered a minimum of 500 points the facility to seek a fee-waiver of Rs 250.

One also should check on the available timeframe within which cardholders need to redeem their points. Cardholders cannot exercise redemption rights on expired or delinquent cards.

American Express Bank has a programme called "Points+Pay" option where customers can speed up their redemption. Amex cardholders, through this programme, can use their accumulated rewards points and pay the balance amount with their card.

For example, if he has reached 7,000 points and would like to redeem a holiday worth 16,500 points, he can do so by paying a certain to purchase the balance points required. The payment, charged to his card, will appear in his next statement.

But the issue really is are you getting what you want or is it that you are getting lured by a few offers made by banks to such an extent that you end up splurging huge amounts just to avail of an offer that is nothing monetarily beneficial.

So, the homework required is that read the card statement religiously, check the Web site for the offers and eligibility norms and also, check if you are charged indirectly for the so-called freebies.