Sukanya Kumar, Founder and Director, RetailLending.com | Mumbai | January 27, 2015 16:34 IST | IndiaInfoline.com
For most people, applying for a home loan can tedious and stressful period, and in the process, prospective borrowers may end of ignoring certain aspects of their mortgage in a rush to get the process completed. These aspects may end up being a cause of great anxiety in the future, and it is better to be aware and abreast at the outset of the process. Let’s take a closer look at things you just cannot ignore while applying for a mortgage!
How did you compute the Amortization Schedule?
Everyone, who has in-depth knowledge of mortgages, should be able to explain to you how the equated monthly installment (EMI) is calculated and the relevance of an amortization schedule. It is just not another excel spreadsheet which is shared with all new trainees so that they can forward the same to you to win your business over! This is important for you, as you must understand the ratio in which the principal & interest is spread over the sheet. This will help you decide your interest paid every financial year & save tax. Not saving correctly is a loss and constitutes as a ‘charge’.
Is this loan a Daily Reducing or Monthly Reducing Balance?
Many years ago, when there were only a couple of lenders in mortgage industry, annual reducing rate was the only choice. This meant whatever principal you pay throughout the entire year will be deducted from your principal after completing one year! This meant paying interest on the paid loan amount too! The same is the difference between daily & monthly reducing balance. Are you getting the principal repaid amount adjusted the very next day of your making the payment, or after your next monthly payment date? Paying interest for already paid loan amount is terrible. Don’t you think you should find that out before you choose your lender to save this cost? You sure do.
How does part pre-closure happen in your bank? If I prepay 500 Grand’s on 22nd Jan, when do you reduce my outstanding principal?
Many a times you will find that while closing down your loan, you are forced to pay interest till the next EMI date, or sometimes the closure amount claimed by the lender specified in their foreclosure letter is- “Same for the next 15 days”. Well, how can that be? The closure amount should be different for different dates as interests are calculated daily. Your closure amount cannot be same on 16th & 30th of the same month. Then what you are paying on 16th must be including the next 15 days’ interest. Isn’t it?
When does my EMI start if I draw down my loan on middle of a month?
This is a very interesting question, please do calculate and check how many days of interest are you paying before your actual EMI starts! For example, if you are drawing down your loan on 25th of January, ideally you will be asked to pay simple interest (Pre-EMI) for balance 6 days of the month and then your EMI should start. Question is when does your EMI start? If it starts in February, then how much of that EMI is principal and how much is interest? Some lenders will start EMI from March. So, how is that math done? You need complete transparency on this one!
How do you calculate Pre-EMI for an under-construction property? When does the lender issue the pay-order & when does your developer receive it? If delayed, who pays for the delay in delivering it?
Please note that it is you who always ‘pay’. It is neither the lender nor the developer in any circumstance. So, it should be planned enough, for you not to lose any of it. The Pre-EMI (simple interest) is calculated on the number of days you remain drawn down, before you actually start the EMI. On the other hand, if the amount is not delivered in time to the builder, you may face consequences of delay-penalty, losing builder-subvention interest or something more. So, the gap between the pay-order being prepared by your lender (when your clock starts) to the delivery to developer needs to be monitored by you or your adviser, so that you do not pay interest just like that which is an unnecessary ‘cost’ to you!
What are the charges for switching loan from Fixed to Floating option or vice-versa? Or, switching between different mortgage products?
In India, the loan rates are extremely volatile. We have experienced a range between 7 – 13.50% within 6 years on a home loan! One might laugh saying ‘why didn’t you do something about it on your own mortgage!!’, the answer is- “This is exactly what has given me the life’s bitter experience to be able to advise today.” 🙂 I was asked to pay a 2% switch fee to be able to shift between products. Floating to Fixed, or simply Floating Standard to Floating Overdraft! Please do not make the mistake I made, of not asking your lender’s rep or adviser on this ‘hidden’ fact.
Is there any Documentation Charge in any stage?
Often lenders ask you to do fresh ECS or sign new loan kit while altering rate/margin/product/product-variant, out of the turn. This might involve a fee. Not knowing about it in advance will constitute it to be termed as ‘hidden’. This is generally a very nominal cost, but in my opinion, lenders can easily do away with it.
Does your company follow same rate norms for new & old borrowers? What is the past two-year trend on the differential rate, if any, and why is the difference?
Lenders reduce the offer rate in the market by two ways-(a) By reduction in their base rate or prime lending rate (PLR) and (b) by fluctuating the margin for the new borrowers. Wherein the first one is always welcome as it offers transparency to the existing borrowers, you may sometimes just get a shock to find that the new borrowers from the same lender is getting a better rate than yours. Studying the history of the lender will help you understand the trend with the particular one. The lender who is prompt in reducing base/PLR should be your choice. Servicing loan at a higher rate for even one month is going to matter and obviously it is an outflow from your pocket, hence a ‘hidden charge’.
What are the associated fees like legal, valuation, documentation, administrative, mortgage origination, intimation of registration etc.?
Lenders generally speak about the fees levied directly by them like processing fee. You will find advertisements claiming ‘nil processing fee’ during festive seasons, year-end closure for the lenders or may be while wanting steep rise in portfolio etc. Please understand that processing fee isn’t the only fee you pay for acquiring your Mortgage. Seek complete transparency in all ‘charges’ even if the lending institution does not levy it directly. So, a lawyer fee, technical evaluation fee, Govt. levy, other charges & expenses should be clearly explained to you before you land up thinking ‘I don’t mind paying, but why was I not told?”
Does your chosen lender give Provisional Tax Certificate in advance?
Not receiving provisional tax certificate means you will have to allow your employer to keep deducting tax every month from your pay & when you receive it from your lender at the fag end of the financial year, submission date to your office may be over. All you can do now is to wait for tax refund after filing your ITR. To avoid is craziness, your lender should give you the provisional projected interest and principal outflow statement in advance, which you should submit, in your office immediately to avoid getting deduction on your pay slip every month. The final tax certificate, if has any differential amount, will only have to be paid by you, without having to wait for any refund. Not receiving it upfront will be a ‘costly’ affair!
Cost of stress, having to follow up, coordinating between lender, builder/seller and you, worrying day-in-and-out also costs!
Your business is to get a stress-free mortgage and ours is to make sure you get that. If you are the one is picking up the phone every-time to call the lender or your adviser to know what is happening on your loan application, and not being responded to, I can imagine what is happening on your work-life and how stressed you are even at home! Please do not ignore the ‘price’ you pay for not getting any service. Choose a lender who has good market reputation of customer-orientation and choose the adviser and service-provider that has knowledge, experience & an infrastructure to support you every time you need service.
There are plenty individual loan agents floating in the market who sell all types of loans, credit cards, insurance, holiday package……all at a time! Think before you engage them for a promise of a good ‘deal’. You may not find him after your application gets logged in his code in the bank or he may even not have a direct agreement with the bank at all and working with another person of an agency! The agency may not even know this guy and you can’t even report him! The signs will be: he will be desperate for your business, will offer you the moon, will always assure you that he will do ‘whatever you want, sir’.
The stress of not having a good mortgage-lender and adviser can be as bad as not having a supporting partner. Ultimately, you are getting into a 15-20 years of commitment! It should be from both sides. Isn’t it?
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