FOIR (Fixed Obligations to Income Ratio) is a popular parameter which banks use to determine loan eligibility. In this case, a bank takes into account the instalments of all other loans already availed of by the applicant and still due, including the home loan applied for.
FOIR (Fixed Obligations to Income Ratio) takes into account all the fixed obligations that a borrower is supposed to meet regularly on a monthly basis. The fixed obligations do not include statutory deductions from the salary such as Provident Fund, professional tax and deductions for investments such as insurance or a recurring deposit.
As per bank's eligibility criteria, the borrowers should restrict all their fixed obligations including the currently applying loan EMI to 50% of his monthly income. Or in other words, considering that 50% of your income is required for your living, banks would see that all your monthly loan obligations / liabilities should be only 50% of your monthly income.
For example, if your income is Rs.75,000 per month, and you have an auto loan running for which you are paying an emi of Rs.5000 and another personal loan of Rs.7500 per month. Considering that 50% of your income can be paid towards your loans,
We have,
50% of 75000 = Rs.37,500
Auto Loan Emi = Rs.5000
Personal Loan Emi= Rs.7500
So, your disposable income for this fresh loan is:
37,500-5000-7500 = Rs.25,000
Thus, a backward calculation of the repayment capacity is made to find out the amount to be given as loan.
Loan Eligibility = Gross monthly income * FOIR% - all other obligations / per lakh EMI (EMI calculated on the basis of applied tenure and rate of interest).
FOIR ratio vary from bank to bank and from case to case, but on an average it would be with 40% to 55%. The lower this ratio, the better are your chances of getting your loan application approved. If a borrower's FOIR is high, lenders or banks take this as a negative. This is because it means that your disposable income after paying EMIs will be low and this in turn means that the credit risk for the lender is higher.
Interest rates are different from institution to institution and generally range from about 9.25% to around 12 %. The interest on home loans in India is usually calculated either on monthly reducing or yearly reducing balance. In some cases, daily reducing basis is also adopted. Annual reducing
In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender. This means the EMI for the monthly reducing system is effectively less than the annual reducing system.
Monthly reducing
In this system, the principal, for which you pay interest, reduces every month as you pay your EMI.
Daily Reducing
In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.
You can now prepay property loans without any penalty or charges if:
Your loan has been sanctioned at a floating rate of interest and not a fixed rate. The loan is sanctioned in the name of one or more individual borrowers and not corporate entities. Neither the borrower nor the co-borrower is a corporate entity (ltd. or pvt. ltd. company) or a partnership firm .
For loans from banks and NBFC's, refer to RBI circulars RBI/2013-14/ 582/ DBOD. Dir.BC.No. 110 /13.03.00/2013-14 dated May 7, 2014 and RBI/2014-15/121/ DNBS(PD).CC.No.399/03.10.42 /2014-15 dated July 14, 2014 for more details.
For loans from Housing Finance Companies, refer to NHB circulars NHB(ND)-DRS-Policy-Circular-63-14-15 dated Aug 14, 2014 and NHB-ND-DRS-Policy-Circular-No-66-2014-15 dated Sep 03, 2014for more details.
When a home loan for the first time, it is based on the home loan eligibility upto which bank can lend. If you have consumed that full limit, then you are not eligible to get any further loan immediately, but over the years when you have paid back some part of your loan and if your income has also increased, then it may happen that your loan eligibility has gone up. At that point, you are eligible to take up a topup loan which is over and above your existing home loan. A top-up loan is an additional amount that you can borrow from your bank if you are an existing home loan borrower.
Top-Up Home Loans can be used to meet your personal requirements (other than for speculative purposes) which includes furnishing your home, higher education, purchase of furniture, business requirements, children's marriage, to buy another property, medical emergency etc.
Top-Up Home Loans are generally available to existing home loan customers who have good repayment track record of the home loan.
Generally the top up loan cannot exceed the original home loan amount . Some banks have an upper limit defined for the top up loan, which can range anywhere from 15-40 lacs and some banks have a policy where by you can get a maximum of your initial home loan amount as top up loan amount.
The main advantage to the top-up home loan is that it can be used for multiple purposes just as a personal loan, but with a lower interest rate than the 14-20% generally charged for a personal loan. Additionally, top up loan does not need you to mortgage some asset, because its given on top of your home loan and anyways your home documents are with the bank. So one important point to note here is that even if you close your original home loan, you need to also close your top up loan before you can ask back your original house papers from the bank.
It is important to keep in mind that, although top-up home loans are relatively easily granted, they can be difficult to pay back in addition to the existing mortgage and should not be considered a primary solution.
Home Loan Transfer (also known as Refinancing or Balance Transfer) is a facility offered to transfer the outstanding principal balance of the loan availed from other banks/ Financial institutions for more favorable terms & conditions. Balance Transfer is a common practice in the Loan industry where a customer transfers his outstanding principal loan amount to another bank or financial institute. Home Loan balance transfer is done primarily for a better rate of interest and also better features.
| Advantages of Balance Transfer | Disadvantages of Balance Transfer |
|---|---|
| You can reduce the cost of borrowing on the mortgage and save on interest costs. | You might have to pay existing bank a pre-payment penalty, which can be anywhere between 2-5% of the outstanding principal at the time of balance transfer. |
| You can free up cash by encashing the increased value of your home. | A processing fee needs to be paid to new bank, which can be between 0.25%-1% of the amount of the loan for which you have applied. |
| You can lock yourself in a fixed rate of interest if rates are lowered. | A considerable amount of work involved for balance transfer. The bank where your loan will be transferred will do a credit background check and if they are not satisfied with your credit worthiness, there is every chance of your balance transfer being refused. Also, you will have to get the documents of your house released from the bank where your loan was originally sanctioned and this involves considerable to and fro. |
Your debt to income ratio (DTI) can be as important a determinant in deciding your loan eligibility as your credit score. DTI is nothing only the total quantity of debt you are servicing as compared to your income.
Lenders calculate your DTI by dividing your total debt payments in a month (this includes your auto loan, personal loan, credit card payments etc. as applicable) with your total income.
It is advisable to keep the DTI ratio below 35%. A low DTI is an indication that you are financially sound and therefore increases your prospects of qualifying for a home loan quickly. Lenders do scrutinize the DTI ratio when you are applying for credit because it's an indicator of your ability to repay your debts.
When you buy property which is under construction, loan amount is partially disbursed to the builder. When a loan is partially disbursed, only interest payments are made on that amount. These interest payments are known as pre-EMI. So the longer your builder takes to complete construction, the more interest you pay to the bank, adding on to the cost of your property.
There are tax benefits available on Pre EMI Interest after the completion of construction. Once the construction is completed, you can claim tax deduction in five equal annual installments. However, any principal repayments made during this period are not liable for tax deductions. But this should not stop you from making repayments as it brings down your loan burden considerably.
Even though paying pre-EMI seems more lucrative in the short run, as you have to pay only the interest component, opting for full EMI payment is more beneficial in the long run. This way you start repaying principal amount even before you get possession, reducing total cost by reducing the tenure of home loan.
For example, in the case of pre-EMI, if loan tenure is 20 years, and the builder takes 4 years to complete construction, you will actually end up making interest payments for 24 years. However, for an investor, who plans to sell the property soon after getting the possession, taking a pre-EMI is a better option.
Amortization has several meanings. In relation to loans, amortization is the process of paying down the loan by making payments which include both principal and interest.When we take a loan the same is paid back mostly in monthly installments . The monthly installment paid comprises of 2 components; one is the Interest component and other is the Principal. An amortization schedule is often used to show the amount of interest and principal for a loan with each payment.
Amortization is also related to the concept of depreciation. While depreciation expenses the cost of a tangible asset over its useful life, amortization deals with expensing an intangible asset or liability, like a home loan.
In simple words, if you are making regular repayments on your loan, a portion of your payment is covering the principal amount and the other portion is covering the interest component. If you are 'amortizing' your loan properly, with the passage of time a greater portion of your loan will cover the repayment of your principal, and the interest payment will be reduced.
A amortization schedule is a table or chart showing each payment on an amortizing loan, including how much of each payment is interest and the amount going towards the principal balance. There are many freely available websites and calculators that create amortization schedules automatically.
The downside to this is that lot of people are less informed on the mathematical calculations involved in creating the amortization schedule. This note provides a step-by-step calculations below for a simple fixed-rate home loan.
My friend purchased a a new home for 12,000,000/- with a 20,00,000/- down payment. His bank provided a home loan for 10,000,000/- at 10.5% per anum for 20 years. What is his monthly payment? How much money is he paying towards interest and principal each month? Let's find out.
The total number of payments comes out to be 20*12 (20 years * 12 Months) = 240.
It is important to note the 10.5% is an annual interest rate. Since all the following calculations are based on a monthly payment schedule, the annual rate needs to be converted to a monthly rate. The monthly interest rate would be 0.875% (10.5% / 12 = 0.875%).
Monthly payment formula for a loan
A is the monthly payment, P is the loan's initial amount, i is the monthly interest rate, and n is the total number of payments.
Using our numbers:
Principal P = 10,000,000/-
Interest i = 0.875%
No of Payments n = 12*20=240
The monthly payment comes out to be = 98,937.99/-
Determining the Interest and Principal Components in Installment payment:
For the first payment, we already know the total amount is 99,837.99/-. To determine how much of that goes toward interest, we multiply the remaining balance (10,000,000) by the monthly interest rate: 10000000 x 0.875% = 87500/-. The rest goes toward the home loan balance (99837.99-87500) = 12337.99/-. So after the first payment, the remaining amount on the home loan is 10,000,000 – 12,337.99 = 99,87,662.01/-
The second payment's breakdown is similar except the home loan balance has decreased. So the portion of the payment going toward interest is now slightly less: 87392.04/- (99,87,662.01*.875%).
This process of calculating interest based on the remaining balance continues until the mortgage is paid off. So each month the amount of interest declines and the amount going to paying off the home loan increases. After 240 installment the home loan is fully paid off.
The loan to value ratio is arrived at by dividing the loan amount by the agreement value of the property. LTV denotes how much of the property value a bank can lend to a borrower. A 80% LTV indicates that the buyer will have to pay only 20% of the property value and the rest 80% amount can be financed through banks.
If the value of the property is Rs 50,00,000 and the lender is giving you a loan of Rs 40,00,000, the LTV is 90%.
LTV= Loan Amount/ Property Value
LTV = 4000000/5000000 = 80%
The LTV is governed by RBI, as per current norms :
| Loan Value | LTV |
| <= 3000000 (30 Lacs) | 90% |
| >3000000 and <=7500000 | 80% |
| >7500000 | 75% |
LTV is used by banks and financial institutes to assess their risk in lending a mortgage to you as a borrower. The main purpose of loan to value ratio from a lender's perspective is to see that lender is not lending more money than actually worth of the property. As the LTV increases, so does the perceived risk for the lender in case of a default.
Limiting the loan eligibility on the basis of LTV is very natural because the hypothecation or mortgage is based upon the property itself. By limiting the home loan eligibility to 75% to 90%, the lender actually protects himself from the possible downturn in the property cycle and the reduction in the property value in case the borrower is not in a position to repay the loan.
While calculating the loan to value, please note that the banks do not include documentation charges in the cost of the property such as stamp duty, registration, etc. RBI has now made it mandatory to exclude such charges from the loan to value of the property. Though this means you will have to cough up a higher down payment, it means you take a smaller loan and pay lesser EMIs. However, a housing finance company may find you up to 90%, including the stamp duty and registration charges of the property.
As evident from the name, the fixed rate loan comes at a pre-specified interest rate for a certain period, after which it is repayable at a floating rate.
Safety from Fluctuations for a predetermined period of time: There could be instances when economic conditions result in an increase in interest rates in general. Opting for a fixed rate gives you a shield against such fluctuations initially and you will be paying a fixed amount of EMI each month during the fixed term. However, after the fixed term is over, your rate of interest will move to a floating plan, e.g., if you have opted for a 10-year fixed term plan, then from the 11th year onwards, your home loan will be subject to the current floating rate of interest. So during the time your interest is fixed, you do not have to keep watching over your shoulders to see where the interest rates are headed.
Higher Rate of Interest : Fixed rate of interest is that it is at least 1-2.5% higher than a floating rate of interest floating rate of interest.
EMIs remain same when rate of interest comes down: If the interest rates decrease significantly, a borrower who has opted for a fixed rate of interest does not get any advantage.
As a borrower, you must also cross check with your bank whether you are allowed to fix your interest rate for the entire loan tenure or only for a few years. If you perceive that the interest rate cycle will be on the rise for the next few years, it’s a good idea to be locked under the regime of a fixed interest rate on your home loan.
The floating rate of home loan is linked to its base rate or its Benchmark Prime Lending Rate (BPLR). As per RBI's direction the base rate system has been introduced in all Banks to replace the BPLR system with effect from July 1, 2010. The base rate makes pricing more transparent as banks are not permitted to lend below base rate and also base rate has to be disclosed publicly. BPLR has now lost its importance and is normally applicable now for loans which have been sanctioned before the introduction of Base Rate.
The floating rate is arrived at after a margin is added to the base rate (for instance 50 bps). Each bank has a different base rate because it arrives at the calculation after considering factors such as cost of funds etc. This base rate is reviewed each quarter depending upon the macroeconomic situation following which the floating rate of interest may change and impact your EMI as well. There are two things to remember about the relationship of the floating rate with the base rate.
While the base rate may change, a bank cannot lend below its base rate. Once a bank offers a spread or margin to a customer, it cannot change that. So, assuming that a base rate of a bank drops from an existing 10% to 9.75% the interest rate for a customer (who has been offered a margin of 50 bps) will come down to 10.25 from the earlier 10.5%.
As the name suggests in the case of a floating rate loan, the rate can vary throughout the loan tenure. The rate of interest in case of Floating rate loan is tied to a reference interest rate which changes based on economic compulsions.
Floating Rate of Interest are Marginally cheaper: Floating rate loans generally carry a slightly lower rate of interest since there is a fluctuation dependency on economic conditions like inflation or growth factor etc. The lender hikes or reduces the rate based on the market conditions. So a floating rate can turn out to be most beneficial during low inflation period.
Lower EMI when rates fall: If interest rates remain static or are on a downward trend, you could save money in a floating rate loan as you benefit from the fall in interest rates.
Higher EMI when rates increase : If the rate of interest increases the EMI will go up which might disturb your monthly budget. In some cases the banks don't increase the EMI in which case you may end up repaying substantially higher due to an increase in your loan tenure (EMI remains same).
EMI, which stands for equated monthly installment, is the monthly amount payments you make towards a loan opted for. "EMI payments include contributions towards both principal and interest on the loan amount. EMI is a series of monthly payments that you make to the lender towards fulfillment of your loan obligations. This amount stays fairly constant over the tenure of the loan unless there is a major change in the interest rates or you have pre-paid a part of the loan principal.
EMI is a combination of principal repayment of the loan and the interest on the same. In the earlier years of a loan, interest forms the major component of the EMI. However, this proportion gradually reverses over time as the principal amount goes on diminishing with every EMI payment.
EMI payments are made every month on a date that is stipulated by your bank till such time that the loan has been completely repaid. The three variables that go into the calculation of an EMI are:
Loan amount Rate of interest Loan Tenure
The most popular method of computation is that of monthly reducing loans. In the monthly reducing cycle, the principal is reduced with every EMI and the interest is calculated on the balance outstanding. The majority of the retails such as Home loans, auto loans and personal loans are computed on a monthly reducing basis.
The interest component constitutes the major portion of the EMI payment in the initial stages. As we progress along the loan tenure, the portion of interest repayment reduces and contribution towards the principal repayment increases.
Mathematically the following convention is applied for the calculation of an EMI:
EMI = (Lxi) X (1+i) ^N / { (1+i) ^N}-1
L=Loan amount
i=Interest Rate (rate per annum divided by 12)
^= to the power of
N=loan period in months
The EMI payments are directly proportional to loan amount and interest rates and are inversely proportional to the tenure of loan. The higher the loan amount or interest rate, the higher is the EMI payments and vice versa. In case of tenure of loan, though the amount of total interest to be paid increases with the increase in tenure, the EMI payments decrease with the increase in tenure.
The down payment also referred to as Own Contribution is the difference between the cost of the property and the loan amount approved by the bank or the NBFC. Banks typically lend less than the total cost of the property being purchased, the self funded portion is referred to as Own Contribution (OC).
Although there is no upper limit that has been set on how much you can put down as a down payment, such payments usually range between 10-25 % of the value of the property one intends to purchase. Ratio of loan amount to value of home is called Loan to Value (LTV) ratio. LTV ranges from 75% to 90% for home loans depending upon loan amount. LTV may vary from time to time based on policies of each bank and advisories of the Reserve Bank of India.
The more the down payment made by you the better it is since it will result in a shorter tenure of a loan and easier EMIs. However, you need to consider that the down payment does not include other costs such as stamp duty, registration, transfer charges, etc.
There are two types of insurance you should think of availing:
Home Insurance A home insurance policy is a guarantee provided by the insurance company that combines insurance on the home and the personal possessions of the homeowner, as well as insurance covering accidents like fire and natural calamities.
Home Loan Insurance The home loan insurance enables you to get your loan insured so that the insurance company would repay your loan, and your family doesn’t face any hardships in case of any eventuality during the loan tenure.
