Fundamentals of a Home Loans

"Home is where the heart is", a place that gives you emotional and spiritual warmth. The growing real estate prices have made buying a property a daydream for most of us. Home Loans is a way, which brings you closer to your 'dream home'.

Types of Home Loans

You can avail if for constructing a home, purchasing a ready built house / flat (from builder or a resale property), residential plot, LAP etc.

Types of Home Loans interest

Loan interest rate normally depends on the amount of loan you wish to avail. It too depends on the type and term of the loans. Banks will offer you with an option of fixed rate or Floating rate of interest.

Fixed interest rate it allows the repayment in fixed equal monthly installments (EMI) over the entire tenor of the loan as it does not change with market fluctuation. But essentially this is not the case. All the banks include the reset clause on fixed interest rate in their Home Loans agreement papers which clearly denote that the bank can revise the rate even during the period of agreement because of unforeseen alteration in the money market condition.

Floating interest rate it refers to interest rate that depends on market and varies according to economic condition of the country. A customer can always prepay a part loan or repay the entire loan any time during the tenor based on the lenders norms for the same.

Documents required

·         An application form duly signed by the applicant

·         Age proof

·         Identity proof

·         Address proof

·         Income documents

·         Bank statements

·         Employment details

·         Proof of educational qualifications (if applicable)

·         Details about the property (if finalized)

·         A processing fee cheque

Processing Fee

It is a non refundable fee normally charged by all banks for every home loans application. The same varies from bank to bank and is generally between 0. 50% to 1% of the loan amount.

Home loans eligibility

The income of an individual establishes his loan amount eligibility. However, banks have their own set methods to estimate the eligibility. The loan tenor and the interest rate too play an important role in calculating the loan amount. A good employment, repayment track record increases the probability of getting a housing loan. Customers meet the grade of availing the best rates depending on their profile, income, turnover, repayment history, builder profile etc.

How much would the bank finance?

Banks mostly finance 80% to 90% of the market value as a loan. The customer initially needs to make a down payment (the difference between the actual property cost and the loan amount), on his own. Banks sometimes even fund the registration cost and the stamp duty as a part of home loans.

Insurance

All leading banks like ICICI, HDFC and others cover the loan with insurance to protect the family from loan liabilities in case of unfortunate demise of the borrower.

We in Money Laxmi help you to cherish the dream of owning your "owned home". We here have tied knots with ICICI, HDFC, Citibank, Standard Chartered and Axis Bank to take the hassle out and assist customers with the most expedient Home Loans plan. We here guide you with attractive rate of interests, simple documentation, fast processing and transparent information.

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The Buying Process

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Are Home Loan Interest Rates Really Low?

Lowest home loan rates in 50 years...

"Lowest home loan rates in 50 years" scream the headlines. Best time to borrow and buy property claim the real estate agents. With an increased home savings grant for first home buyers, it's easy to believe that there will never be a better time for existing renters to stop paying "dead money" and buy their own home.

And many baby boomers, who created a lot of their wealth by jumping into the residential market in the 1970's and early 1980's, are probably now encouraging their children to take the plunge because it worked well for them.

But while home loan interest rates are "low", the question that should be asked is "Are they "cheap"?"

Home loan interest rates are low but not cheap...

With regard to whether interest rates are historically low, the red line on the chart below of the standard bank variable home mortgage rate since 1970 certainly supports that claim. As at March 2009 the rate was lower than it had been at any time since September 1970.

standard_bank_home_loan

But what borrowers should be concerned about is not the level of interest rates, but their relativity to the inflation rate. High inflation is good for borrowers because it erodes the real value of the amount owed. At an inflation rate of 6% p.a., the real (i.e. after inflation) value of an initial $100,000 borrowing reduces to $55,840 over 10 years, but to only $74,409 at an inflation rate of 3% p.a.

The blue line in the chart above shows that inflation was historically high during the 1970's and early 1980's and actually exceeded the home loan interest rate through much of the 1970's. High inflation over long periods significantly reduced debt servicing pressures.

The real or after-inflation interest rate is a much better guide than the actual rate as to whether interest rates are "cheap". The chart below provides a measure of the real interest rate by reducing the standard bank home loan interest rate shown above for inflation:

real_home_loan_rate

It reveals that while real home loan interest rates are now much lower than they were during the 1990's, they are nowhere near as "cheap" as they were in the 1970's and early 1980's. And the difference in actual cost of a home loan now and when many baby boomers were buying their first homes is massive.

To illustrate this, the table below looks at annual and total payments, in today's dollars, on a $100,000, 25 year principal and interest loan under three real interest rate scenarios i.e. 3% p.a. (representing now), 0% p.a. and minus 3% p.a. (representing the 1970's):

Payments on a 25 Year P&I $100,000 loan

Real Interest   Rate Annual Payments            Total Loan Payments

(% p.a.)              (Today's $)            (Today's $)

3.0                     5,743                     143,570

0.0                     4,000                     100,000

-3.0                    2,628                      65,706

The servicing costs of a loan at 3.0% p.a. are more than twice those of a loan at minus 3.0 p.a.!

The message...

Home loan interest rates are not cheap, relative to inflation - they are about 1% p.a. below the average of the last 38 years, but much higher than the experience of the 1970's and 1980's.

Advice proffered by anybody who successfully entered the property market in the 1970's and early 1980's and is based on that experience should be ignored.

If you are going to borrow at today's interest rates, don't rely on a severe bout of inflation to help you manage your loan repayments. It is unlikely to happen. And even if it does, it is unlikely the Reserve Bank will allow real interest rates to go and remain negative for an extended period, as occurred in the 1970's.

Make sure your loan to valuation ratio is not excessive and that you can continue to handle your repayments, even if real interest rates again rise to 6-7% p.a. for a number of years (as was the case through most of the 1990's), from the current level of 2.5 - 3.0% p.a.

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How to Get a Home Loans When You Are Self-Employed?

You may have noticed that most self-employed individuals have to struggle a lot more with lenders/credit providers when applying for home loans. But, it does not mean that all self-employed borrowers have to struggle with getting finance. It just means you might need the services of an expert finance broker on your side, who is a specialist at providing loans for self-employed persons. Choose a finance broker who is willing to work on your behalf with the lenders/credit providers and who will help you in securing a loan package. Not to mention, he/she should also get you the right home loans that suits your needs and budget.

Why You Need Expert Advice?

Before you think it is impossible for self-employed borrowers to get home loans, you need to sit down with an expert and professionally qualified finance broker, who will:

>> Establish what taxable income level you need to apply for a loan

>> Establish your borrowing power (i.e. how much you can borrow), and

>> Determine your eligibility for a loan

When assessing your eligibility for home loans, the finance broker should be able to see if your business is maintaining a level of income that is suitable to meet the minimal "servicing" requirements.

Income Verification Requirements for Self-Employed Individuals

To confirm your income and qualify for self-employed home loans, lenders/credit providers will require from you:

>> Your most recent two years Personal Income Tax Returns

>> Your most recent two years Business Income Tax Returns, and

>> Your last two years Financial Statements (Detailed Profit and Loss Accounts and Balance Sheet)

What if I have been Self-Employed for under a Year?

Well, it is not impossible to get home loans with your employment status; it just means the finance broker will have to work hard to secure your eligibility for the loan. For example, you are now self-employed as a sub-contractor carpenter. But, you were employed in the same industry (i.e. line of work), and you worked for someone else for five years before you became a sub-contractor. You can still be considered for home loans. Because, you are still working in the same industry and you are doing the same work. The only thing that has changed is the manner in which you are being paid.

Choosing the "Right" Home Loans

There are a wide range of home loans suited to you as a self-employed borrower. So, whether you are looking at a traditional or low doc loan. Here, is a list of home loans suitable to you:

Interest Only loan - This loan is perfect for investors who want to maximize the cash flow on their property.

Standard Variable Rate loan - This is the most popular type of loan as it offers you plenty of useful features and flexibility. You can link your variable rate home loans to an offset account, thereby helping you to reduce your overall interest.

Standard Fixed Rate loan - This loan is popular with investors, as it offers you the security of a fixed rate. You will have the peace of mind knowing that your repayments will not change for the term of the loan you have selected and will also assist you when you are budgeting.

Basic Variable Rate loan - This loan is ideal if you are looking to make minimum payments and you require less flexibility than with standard variable rate home loans.

Line of Credit - This loan allows you to utilize the equity in your property, and you will only pay interest on the money you actually use.

Low Doc loan - This loan also called a low documentation loan is ideally suited to self-employed borrowers who are unable to provide evidence of income. A Low Doc home loans requires an "Accountant's Declaration" form/certificate or BAS statements for the past 12 months and an ATO Lodgement Reference Number.

Construction loan - This loan is a great option for investors wishing to build. Construction loans are normally interest only for the building period. But, after the construction period is over, you are then able to select from a variable rate, fixed rate or line of credit loan.

Buying a home at any stage of life can be an overwhelming process in itself. Not to mention having to navigate through the options and to determine what mortgage suits your requirements. All of this can be a challenging and time-consuming task, so, having a finance broker on your side will save you lots of time and heartache.

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6 Tips For Getting A Home Loan

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