F-HRE-02

Home Loan Calculations

Objective of this chapter

• This chapter gives you a basic understanding of how home loan is calculated, what is EMI and how is it determined.

Agenda

1. Basics of Home Loan– Types of Home Loan– Some salient features of home loans are

Process– Sanction– Disbursement

2. Interest Ratea) Principleb) Interest

What is EMI?

• Usually we take loans when we are running short of money and the need is very important. The need may be for purchasing a vehicle – bike or car, own home, an education loan for children so on & so forth.

• Whenever you take loan, you need to pay a fixed amount every month to the bank in form of repayment of the loan. This is called Equated Monthly Installment or EMI.

Defination of EMI

• A fixed payment amount made by a borrower to a lender at a specified date each calendar month is called EMI. Equated monthly installments are used to pay off both interest and principal each month, so that over a specified number of years, the loan is paid off in full.

The Components of Equated Monthly Installment (EMI)

What is a Home Loan?

• A home loan is a loan taken for buying or constructing a home or to make improvements to a residential property. You can get a loan from banks and registered housing finance companies

• Your home loan is secured against the property that you buy. This means that in case you are unable to repay the loan, the lending bank will have the right to take possession of your home

Home Loan Types

• Basic home loan1. For new properties2. Resale3. Resale- Re-finance4. Balance Transfer (BT)5. Loan against property (LAP)6. Commercial loan

Some Salient Features Of Home Loans

• Loans are available for salaried, self employed and Non Resident Indians (NRIs)

• Loans are available for builder flats, under construction properties, and residential plot with construction due to start

• Flexible repayment options, ranging from 12 months – 300 months (1 year – 25 years)

• Repayment with easy Equated Monthly Installments (EMI)• Loan transfer facility in case you want to change your lender• Pre-payment facility in case you want to pay back more of

your loan

Home Loan Process

SANCTION1. Collection of documents2. File checking and Inward3. Loan A/C No generation

(CIBIL)4. Verification (Office and

Residence) 5. Sanction: System

generated SMS & e-mail6. Sanction Letter

DISBURSEMENTOriginal Property docs1. Technical site visit2. Disbursement Date Fix 3. Disbursement

Interest Rate

1. Principal amount:This is the total loan amount that the lender gives you

2. Interest rate:This is the cost of the loan that you pay to the lenderThe amount of the loan, i.e. the principal, that you can avail of is decided by the lender based on:– Your income– Your loan repayment capacity– The house (property) you wish to purchase

Interest Rate

As a borrower, you can choose the type of interest rate that you will pay. You can either pay:– Fixed rate: Where the interest rate remains fixed during

the life of the loan– Floating rate: Where the interest rate floats or changes

depending upon market interest rates

Rate of Interest Factors

• Fixed rate: A loan in which the interest rate does not change during the entire term of the loan. opposite of adjustable rate

• Floating rate: Any interest rate that changes on periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate

Rate of Interest Factors

– Prime Lending Rate (PLR) or Retail Prime Lending Rate (RPLR)Both, PLR and RPLR, are the same. PLR is a bank's benchmark interest rate. Based on this rate, banks fix rates on various loan products. For instance, let's assume a bank fixes its home loan floating rate at 0.5 per cent above its PLR. So, if the PLR of the bank is, say, 10 per cent, then the floating rate on its home loan will be 10.5 per cent.

• Rate is depend on RPLR - (spread) = rate` 16.50% - 6.00% = 10.50% (Floating)

NOTE : Spread is applicable @ the time of disb & it is fix for entire tenure.• In future if RPLR goes up or down u will get effect on rate of interest• For example RPLR - 15.50% -6.00% =9.50%• For example RPLR - 13.00% -6.00% = 7.00%

Summary

• Basics of Home Loans• Interest Rates• Process of Home Loans

Agenda

• Session 1– Home Loan Transaction Cycle– Enquiry– Call– Fix Meeting– Home Loan Requirement– Queries Solution

• Session 2 – Sanction Eligibility

• Session 3 – Disbursement Eligibility

1. Home Loan Transaction Cycle

• Enquiry• Call• Fix Meeting• Home Loan Requirement• Queries Solution

2. Sanction Eligibility

It depends on monthly income.

Formula:Loan Amount =Monthly Fixed Income*50% / Per Lac EMI

Sanction EligibilityRatio divided into 2 Parts• IIR• FOIR

What is Installment to Income Ratio (IIR)?

Installment to Income Ratio is also used by the lender. It is used to generally used by the banks or the lender companies to evaluate the eligibility of the borrower. It is very similar to FOIR. But it is presented in the form of percentage. Under IIR, there is a percentage of installments of home loan paid each month. This is normally near about 50%.

IIR Formula = Monthly EMI / Gross Salary

What is Fixed Obligation to Income Ratio (FOIR)?

• It is type of ratio which is done through bank or company providing loans. Through FOIR, they lender tries to evaluate the eligibility of the borrower. This ratio refers the EMI to be paid by every month by the borrower. PF, profession tax, LIC premium, Recurring Deposit scheme, charity to a trust etc. are not included in it in the form of default EMI (Fixed Obligation).

FOIR Formula= Present EMI + All EMI /Gross Salary

3. Disbursement Eligibility

• Financial Institute disburse the amount against 80% of Cost of Property.

Cost of Property = Agreement Cost (Area x Rate) + SD + REG + MSEB + PARKING + STAX + VAT

Summary

1. Home Loan Transaction Cycle.-Enquiry-Call-Fix Meeting-Home Loan Requirement-Queries Solution

2. Sanction Eligibility3. Disbursement Eligibility

Assignments1. Aasif takes a five year loan for buying a sports bike which will cost Rs.

1,00,000 where he has to pay annual payments at a rate of 10%. Calculate his annual payments and prepare the amortization schedule for loan repayment.

2. You are planning to buy a 200 square meters of land for Rs. 40,000. You will be required to pay twenty equal annual installments of Rs. 8,213. What compound rate of interest you would be paying?

3. A finance company advertises that it will pay a lump sum of Rs. 8,115 at the end of 6 years to the investors who deposits annually Rs. 1,000 for 6 years. What interest rate is implicit in this offer?

4. Babita is planning to buy a house that will cost her Rs. 90, 00,000. The bank has agreed to give loan at 12% p.a. but bank would finance only 85% of the cost and rest Babita is able to arrange rest through her past savings. If Babita chooses a term of 15 years, what would be her annual instalment of loan repayment?

5. You are going to take a loan of Rs. 65,750 which is repayable in 5 years. If the rate of interest charged, is 10% p.a. What would be your instalment, prepare the amortization schedule.