EMIs – understanding the math

EMIs are a big part of our home purchase decision. We explain how a percentage of your monthly income pays the home loan. 

If you are about to take a home loan, you are justifiably worried about the ‘EMI’ you have to pay the bank every month. The higher the EMI, the higher is the deduction from your monthly income till the loan is completely repaid. The EMI computation can also get slightly tricky, so it is best to understand how your bank calculates the numbers.

The EMI (Equated Monthly Instalment) is an amount of money calculated by the lending institution after taking certain factors into account. These factors include, and are a combination of, the principal amount (P), interest payable (I), and total number of instalments (N). The loan tenure is calculated on the basis of the number of years chosen but in terms of the number of months.

Do note the formula that your bank uses to compute the EMI:

[P x I x (1 + I) x N] ÷ (1 + I) x (N-1)

Now suppose you seek a home loan of Rs 40 lakh (P) at an interest rate of 12% (I) for a tenure of 10 years, i.e. 120 months (N). You may use the formula above to arrive at the EMI calculation. Or if you don’t want to be bogged down by the mathematics of it all, simply use your bank’s online home loan EMI calculator to arrive at the estimated EMI payable per month.

Points to note about the EMI calculations:

1. The EMI does not comprise equal parts principal amount and interest. In the initial years of the loan, the interest component is higher. It gets correspondingly lower as the loan progresses, while the principal amount is higher.
2. Thus, you cannot think that half of your loan is repaid after 5 years out of a total tenure of 10 years.
3. The EMI structure is liable to change during the repayment tenure, for three reasons:

• You may opt for a floating rate of interest, which can reset the interest periodically.
• You choose to pay differential or staggered EMIs, i.e. lower amounts for a few years and then larger EMIs later. This option is offered only by a few financial institutions in India.
• You repay incremental amounts in addition to the regular EMIs. The prepayment amounts reduce the principal amount of the loan and the interest is recalculated on the balance amount.

Premier banks and housing finance institutions offer an online home loan calculator that makes the EMI calculations easy. All you have to do is fill in the numbers as prompted for a close estimate of the EMI you will pay for your home loan.

Important Mortgage Tips for Home Buyers in 2016

According to an article published in The Economics Times on October 5, 2016, the Reserve Bank of India (RBI) has reduced the repo rate from 6.5% to 6.25%. The repo rate is the rate at which the RBI lends money to commercial banks, in case they run short of funds. It is believed that this action will promote a good borrowing environment in the country, especially for retail customers, which will ultimately increase the demand for personal and home mortgage loans.

Getting a home loan is not a bumpy ride anymore. Here are some tips that can get you the best deal for the most important investment of your lifetime.

10 Smart Mortgage Tips for Home Seekers

1. Work on Your Creditworthiness

Nothing works better than your creditworthiness when you are applying for a home loan. It is the valuation performed by certain agencies, considering factors like repayment history and credit score. If you're managing your current debt responsibly, paying your bills on time, etc., then you are most likey to be eligible to for the desired loan amount.

2. Always Save for the Down Payment

It is believed that paying 20% as down payment on a mortgage is ideal. The down payment will highly affect you and your family, so it is strongly advised to stay prepared.

3. Seek Advice from a Professional

It is not necessary to be an expert in homebuying, instead look for assistance from qualified professionals. They will answer all your questions about your financing needs too.

4. Look for the Best Mortgage Lender

Taking on a loan is much more than just getting a favourable interest rate. You should get the loan estimates from multiple lenders before reaching any decision.

5. Understand the Loan Types

A fixed-rate home loan doesn't suit every home buyer in the same way that an adjustable-rate mortgage isn't right for every home buyer either. An ideal situation is a 30-year loan, if you are buying the house to raise a family. If you are opting for a 10-year loan, an adjustable-rate mortgage is preferred, which is fixed for the first few years and then starts reducing for the rest of the tenure.

6. Consider Preapproval

It is recommended to have your funding preapproved even before you start looking for a house. After determining the amount of money that you are qualified to borrow, your house-hunting process will become much more realistic and fall within your budget.

7. Nest amongst Like-Minded People

Humans, being social animals, are highly affected by their surroundings. Interestingly, your house plays a key role in all aspects of your life. Consider the community, extracurricular activities and nearby facilities before narrowing down your search.

8. Don't Forget Your Budget

You have to take into account the additional burden of monthly expenses on other non-negotiable expenses, such as property taxes, insurance and other household expenses. Stick to a budget when finalizing a home mortgage loan.

9. Negotiate on Closing Costs

When you receive the loan estimate after applying for the mortgage, you'll get a rough idea about the closing costs or “cash to close”. Hence, shop for the best closing costs.

10. Strengthen your Saving Account

It is not wise to spend your savings on down payment or closing costs, ignoring emergencies. A golden rule is to save money worth 3 to 6 months of your living expenses beforehand.

Home loans – The answer to your house purchase question

If you are still on the fence about taking a home loan, we give you four reasons to tilt your decision in favour of taking one.

The never ending escalation of real estate costs in India has made it practically impossible for first time home buyers to buy a house. Every time you decide to take the plunge, interest rates increase or construction costs shoot skywards and raise the overall house costs. Ultimately, you realise that there is no way you can raise the capital to make a full payment on a house you like. So you continue living in rental accommodation, because you do not want to take a home loan.

This is why you should consider taking a home loan, if you want to make that all-important first home purchase.

1. Prices keep increasing! Most people feel that they can save money and take a lower loan amount to buy a house in the future. But real estate prices normally show an upward trend, unless there is a severe economic downturn. So even if you save money for a year, you will still be short of funds when prices rise and you try to buy a house. So take a home loan now, not later.
2. Your finances may change at a later date. Those who have a stable income at the moment can afford to take a home loan and repay it in a reasonable amount of time. It may become impossible to take a loan if you have to take a pay cut or if your spouse quits working to take care of your child. Your financial life will keep changing as the needs of your family change, so postponing the home loan decision for later might not be such a good idea.
3. Your eligibility changes as you age. Home loan insurance companies compute your home loan eligibility basis your current income, age and overall repayment capacity. Thus, the tenure of the home loan is higher if you are younger, to account for the number of working years you still have left. It is better to take a home loan at age 25 rather than do the same at age 35, because your loan tenure will automatically be reduced by about 10 years. You can use a home loan eligibility calculator to find out how much loan amount you can get basis your income and age.
4. You can always sell at a later date. There is every chance that the house you can afford to buy today may not suit your needs tomorrow. Since property is quite liquid in nature, you can sell the house you bought today to buy a bigger one in the future.

Only a home loan from a reputed financial institution can help you buy your dream home. So why wait to make your dream come true?

Tip of the day: How to buy your dream home sooner rather than later

Buying your own home is now easy and hassle-free with the best loan product making the purchase possible.

In the hurly-burly of life, we strive for a semblance of security and comfort for ourselves and our loved ones. All we expect is that at the end of the day, we may have a place to call our own and our family members with us till the end of time. This entails owning a home that we can craft with love and ingenuity.

But in India, many people today are forced to make their peace with rental accommodation. Real estate prices have spiralled out of control in recent years, so most people are unable to take the plunge and buy their own homes. The home purchase dream remains a dream for years: but you can bring it to reality with a home loan.

If you are sceptical about taking a home loan, don’t be. It is the best way to finance your dream home purchase, in which you must raise only a small percentage of the overall home value from your own resources. Besides, a bevy of premier housing finance companies in India have several home loan products to suit your needs. So whether it is a first home purchase or a home renovation loan, you will always find a product that suits you.

Choose the most reputed housing finance institutions for the home loan – they simplify the process and reduce application processing times so that the loan amount is disbursed quicker. They also follow a stringent background check on each applicant’s credentials as well as inspect the property/land you wish to buy so that there are no legal lacunae to be faced at a later date. 

Meanwhile, you can get up to 80% of the property value as the home loan, or even higher, depending on the housing finance institution.

The best news is that many financial applications now have an online home loan option, which cuts both time and processing charges for the applicant. You can apply for both pre-approval and online home loan, attach the approved list of documents (self-attested) and pay the fees via credit/debit card or Internet banking. Once the documents are verified and the property is inspected via on-site inspection, the loan application is processed further. 

Within days, you get the loan approval and the amount you seek is disbursed to you. It’s so quick and easy – and it gets you the dream home you always wanted.

What is the difference between term and life insurance?

Though both are life insurance products, there are some significant departures between term and life insurance policies. Let’s take a look at these differences.

The main purpose of any person’s existence is to create a stable life for himself and his loved ones. To this end, he gets an education, a good job and tries to grow his wealth by picking up extra shifts at work and making timely investments. For any responsible family person, his loved one’s comforts and the realisation of their dreams are the biggest priorities and to this end, he works hard all day to create a peaceful and worry-free life.

A major step in this direction is also taken with life insurance. Taking insurance helps protect our loved ones from future financial setbacks in our absence. However, those taking insurance are often faced with the prospect of taking term insurance over whole life insurance policies. This decision is influenced partly by the affordable premiums entailed in term insurance, as also the higher sum assured. But life insurance policies also have their own benefits – so which one should you choose?

We help you decide. Take a look at this chart below:

Parameter	Term insurance	Whole life insurance
Tenure of the insurance policy	A fixed term of time (say 10, 15, 20 years)	Valid for life time of the policy holder
Benefits offered	Death benefit only	Maturity benefits
Returns	No returns offered	Low returns offered
Affordability of the plan	Very affordable, with low premium payments	Expensive, with high premium payments
Good investment?	Not an investment policy	Yes, especially when timed with major life events
Market-linked?	No	Yes, especially with ULIPs
Bonus potential	NIL	Good, especially with claim-free policies
Tax benefits?	The premiums are not taxed	Premiums may be taxed
Surrender value	NIL. Policy is terminated when premiums are not paid	There may be a surrender value based on when the policy is surrendered
Revision option	NIL	Yes

Does this explain the essential differences between term insurance and whole life insurance? We hope the above comparison helps you decide whether you need to take term insurance or whole life insurance. Whatever you decide, it is a step in the right direction – after all, isn’t it your job to protect your loved ones, even in your absence?

Equity funds: The right path to a safe financial future

Equity funds are varied and reliable investment options for the investor who is confident about his financial goals and how to achieve them.

If making investments was easy, everybody would be an investor! However, the investment universe is not as unfriendly or mysterious as an inexperienced person would assume it to be. When dealt with intelligently and with an eye on market trends, an investor can actually realise his financial goals beyond his wildest expectations.

But choosing the right investment instrument is important. Many investors look to invest in shares and equities, and this is a sensible choice. Investing such that the portfolio is a mix of shares of large and small companies in both established and new sectors of business can help create diversity and get excellent returns over the long run. In this context, it is important to mention that investing in equity funds can get investors good returns safely and reliably.

Though no market-linked investments are devoid of risk, diversified equity funds provide long term capital growth by investing in the highest performing sectors and industries. Thus, long term capital growth is assured by capitalising on key moments in the market cycle. Often, the best equity funds invest in the markets without bias but with a keen eye on established and lucrative industries, as also upcoming sectors that are likely to see a major boom.

Thus, equity funds provide ample opportunity for investors to create wealth over a long period of time. It also helps the investor hold on to a large bouquet of securities for the future.

If you are a novice investor that is unsure or unable to read the market trends correctly, you can enlist the help of a fund manager who can advise you on building your portfolio. The fund manager will invest your money on your behalf and track the fund’s progress to ensure that your investment goals are met.

There are excellent options in equity funds in the country today. While making your choice, it is prudent to go with a fund that invests in IPOs and emerging sectors that have the potential for future growth. Also, it is possible to purchase equity funds online and track the fund NAV on a daily basis. Besides this, your fund manager can monitor the markets’ daily working and appraise you about your fund’s performance regularly. If you are about to invest in the markets this year, you can choose frontline equity funds and diversified equity funds for the best returns.

Home redesign need not be a lengthy, stressful process. The right ideas, a visual balance between colour and scale and sufficient funds at your disposal can help.

Your home is important to you. It is your refuge against the outside world, a place where you can be yourself. But over a period of time, your precious home begins to acquire a patina of age. The plaster cracks, paint begins to peel off, tiles become loose and the faucets start to leak. With these signs, your house indicates that it is time for a makeover.

You would like to break down a couple of walls, put in an extra loft, refurnish the bathroom entirely and carry out myriad other improvements. But you are sceptical about refurnishing your home, since it is often an expensive process. However, you can effect a remodel if you take a home renovation loan from a reputed financial institution. The home renovation loan pays up to 70% of the total estimate of repairs and refurbishing and can help you carry out the desired changes without further delay.

After you get your finances in order, you can consider the following ideas to redesign your home décor:

Explore odd corners and niches. In space starved homes, the odd-shaped nooks and spaces around pillars are often waste areas. Instead, put the space to good use: create seating around the pillar, put a quirky table put in the corner with a reading lamp, or simply highlight the space using a Chinese paper lamp or a whimsical painting.

Throw out your old furniture. The best way to redesign your home is to replace all your old furniture with new forms and colours that reflect your personality. Explore materials such as cane, metal and teak wood for your chairs and couches, and look for tables with in-built storage and seating options to save space. There are many innovative bed designs available in furniture shops and online portals, so be sure to check these out.

Get planters. Nothing infuses a calming touch to the home like the presence of a potted plant. You can use a variety of planters around the house, based on the space and overall proportions of the room. You can even hang plants in your windows, and add a pop of colour with little pots of flowering plants wherever possible.

Boudoir beauty. The bedroom is an intimate, private space that can be made lively with new bedding, added storage for extra sheets and pillows, colourful cushions on the bed, and also unusual reading lamps on your nightstand. Change the curtains and blinds to suit your overall colour scheme, and paint the walls in a muted or pastel shade – you don’t want loud colours in the bedroom.

Unusual showpieces. Your house now has all the requisite furniture and fittings. So you can proceed to the next stage of design: beautifying the home with little touches. Start by buying a centrepiece or an unusual bronze statue that you can place on the floor. Or you can arrange a series of coloured vases in a corner of your living room. Or better yet, you can simply install a little fountain in a corner of the house to attract positive energy. 

How will you fulfil your child's longstanding foreign education dream?

Taking a mortgage loan will provide you with sufficient funds to finance your child’s most important ambitions.

You will always remember the moment you first set eyes on your child. You gazed on his beautiful face, counted ten perfect fingers and toes, marvelled at the soft tuft of hair on his head…and you resolved that you would love your child till the last breath was left in your body.

Over the years, this promise translated into buying everything your child ever wanted, enrolling him in the best school, encouraging him in his sporting and musical pursuits, and ensuring that he had the best advantage in life. But now, your child is growing up fast and he has recently professed a desire to finish his education abroad.

Instead of meeting his announcement with joy, you are saddened – and a little frightened. Your precious baby is now grown up enough to go abroad and study, but you do not have the financial resources to help him do so. You do have some money saved up in the bank, but it is only a fraction of the total sum needed to finance his foreign education dream.

What can you do? Will you crush his dream and have him resent you forever? Or will you look for another avenue to raise sufficient funds – such as taking a mortgage loan?

Why take a mortgage loan?

A mortgage loan is a loan against property. It is a loan that uses one’s owned property as collateral or security to furnish the funds against it. It is easily available and quickly processed by major banks and financial institutions in India.

You can use the large fund of money provided by a mortgage loan to pay for your child’s foreign education. The corpus is sufficiently large for your child to study abroad and even specialise in the stream of his choice. So whether he wishes to become a doctor, an actor or even an artist, he can rest assured in the knowledge that his parents have set aside an adequate corpus of money for his education.

But while you go ahead and make your child’s dream come true, there are some points you have to keep in mind. Take the mortgage loan only if you are sure of repaying it. Checking your loan eligibility before you proceed will save a lot of time as well. 

The best investments for today’s times

An endowment policy steadies you in times of rising inflation and growing financial uncertainty.

The more each day goes on, the more you realise that rising expenses and high inflation only serve to drain all your resources. It feels like you are on a perpetual treadmill – you work so hard all day, you meet every possible deadline, but all your dreams remain just out of reach. You strive to save money but you cannot, you wish to make investments but you are left with insufficient funds. At some point in time, you begin to worry if you will ever be able to achieve any of your goals.

Your bigger worry is for your loved ones. How will they survive if something happens to you? In the face of insufficient money, how can they meet their expenses and realise any of their dreams?

At this juncture in your life, it is worthwhile to examine a useful financial product known as the ‘endowment plan’. This is a savings and investment plan that helps you grow your residual funds into a large savings corpus for the future. You might have considered investing in a bank fixed deposit or taking life insurance so that you may have surplus funds for the future. However the endowment policy is a better option in view of your financial goals.

Your endowment policy investment helps you grow a robust savings portfolio through periodic savings made over the long term. Additionally, there is the prospect of receiving life coverage at the same time.

How it works: The policy holder makes monthly or annual payment, as the case may be. One part of the monies paid is diverted towards the plan premium, while the remainder is invested in equities or other market instruments. This latter component gets the policy valuable returns over the long run – these returns are accrued in the form of bonuses and are sourced from profits that companies (that the policy holder has bought shares in) make. These returns result in an appreciable savings fund for investors.

While the policy holder creates a large savings fund, he also ensures his loved ones’ well being with an endowment plan: the policy comes with a death benefit as well as a maturity benefit. Hence, whether the policy holder is present in the future or not, the policy takes care of his family’s future needs. Meanwhile, the maturity benefit is counted vis-à-vis the terminal bonus and reversionary bonus therein.

Apart from the concept of encouraging savings to create a fund for the future, one can also get excellent tax benefits on investing in endowment plans. The tax benefits are granted under Sec 80C of the Income Tax Act, 1961 – this is further saving for you.

Why Should One Opt for a Loan Against an Insurance Policy?

The insurance sector has large market value in India, with the industry having seen incredible growth ever since liberalization. In fact, experts predict even higher growth in future. According to India Brand Equity Foundation, the insurance sector will reach the $280 billion mark by 2020!

There are two types of insurance plans to choose from, life policies and non-life covers. The life insurance sector is primarily seen as offering protection for the insured, but lately its role has moved beyond the traditional death benefit to also providing additional benefits, such as tax savings, investment and even a source of credit.

Life insurance policies can now be used as collateral against which loans can be raised. That is to say, you not only get long term benefits from life cover but it also solves your short term financial worries.

Features of Loans Against Insurance Policies

·         Such financing can be obtained only on the cash value of the life insurance policy. This means a loan through this method cannot be raised using a term plan. The acceptable policies are money back, unit linked and other plans where there is an investment angle involved.

·         The amount you can raise through your life cover depends on the value and number of premiums you have paid. The higher, the better is the general rule.

·         Any life plan is only eligible for use as a loan instrument only when it has reached its surrender value stage. This is generally 3 years. This surrender value decides the amount that will be sanctioned as loan. Usually 80%-90% of the surrender value is granted.

·         You are surrendering the rights of your policy to the lender, which the lender can use in case of any payment default.

How Your Policy Can Help

·         Interest Rates: The primary concern while selecting the source of credit is the amount of interest that will accrue. Compared to personal loans, the rates charged here are drastically low.

·         Risk Margin Calls: As opposed to raising credit against gold or shares, the value of the insurance policy remains unchanged. This minimizes margin value risks.

·         No Crunch in Equity: While using other forms of debt instruments, your property, assets or equity can be used as collateral, which then restricts your finances. With insurance policies, you continue to enjoy the benefits from your plan and raise a loan without any liquidity crunch.

·         Easy Processing: These loans are sanctioned in a very short time, generally in about 2-3 days.

Loans against an insurance policy are a safe bet for short term money needs. Just remember, the repayment is done within the policy duration and default in premiums for the policy should be avoided, since the insurance cover itself might be foreclosed by the insurer.

How does my credit score affect my home loan application?

A good credit score increases your chances of getting loans. Improving it is an important exercise for those seeking credit from lending institutions.

For a salaried or self-employed person with a regular income, it would seem like the easiest thing in the world would be to get a loan. One may need to borrow from the bank or a financial institution from time to time, and to fund a variety of personal and professional initiatives. With all lending institutions laying out the red carpet for customers looking for loans, it would appear that one merely needs to fill out the application form for the loan request to be processed.

But things are never as easy as this. There is an important factor known as the ‘credit score’ that is inherently at the root of all loan approvals. Even when one has the financial wherewithal to make repayments on a home or a business loan, lending institutions might reject the loan application or sanction far less funds. The applicant’s credit score is often to blame for this.

What is a credit score? It is a number derived based on a number of factors in a person’s credit history. These factors include the applicant’s age, the type of credit taken in the past, repayment history and patterns, if any new credit is being applied for, length of credit and total credit repaid. These determine the applicant’s credit score, which lending institutions examine in detail before deciding on approving the loan request. Hence, when you apply for a home loan, the lender will immediately pull out your credit score before proceeding further.

What weakens the credit score? A poor credit history is detrimental to your chances of securing a loan. Unpaid debts on loans and credit cards, erratic repayment patterns, property seizure in response to unpaid debts, etc. can all weaken your credit score. An applicant with a poor credit score is known as a ‘credit risk’ and lenders are cautious about extending credit to them. If the loan application is approved, one might be sanctioned a lower loan amount despite a high income, and at a higher rate of interest.

Can you improve your credit score? Remember that the credit score comes into play before the loan application is processed further, and it is often the starting point of the loan application process. Hence, it is important to clean up your credit history before you apply for a home loan. You can do this by repaying older loans before their tenure is up. Applicants who pre-pay loans are considered low risk individuals. Also take care to repay all credit card bills or cancel those cards that you no longer use – they are also counted in your credit history. Not defaulting on older loans is a key factor – lenders study repayment patterns and are satisfied when repayments are regular. The lender will also check if the applicant has any cheating or forgery cases lodged against him, or if there have been incidents of improper property papers being submitted, or if the documents submitted for the current loan request are genuine or not.

If you are applying for a home loan for the first time, the lending institution will examine if you have any owned assets that you can use as collateral, and what the quality of these assets is.

Are You Looking to Buy a House in a Tier 3 City?

Did you know that the 2013 Planning Commission report said that by 2031, 30%-40% of the urban population will be living in small or medium-sized towns? The rapid development spreading to tier 2 and tier 3 cities has led to a spike in real estate prices. People living in tier-3 cities in India may still find it difficult to afford a house if they fall in the middle or low income group. To solve their specific needs, specialized products are needed, such as a rural housing loan.

Qualities of Home Loan for the Rural Populace

• Target Customer Base: This type of financing is suitable for people residing away from major urban centers. The customers are generally agriculturists, blue collar workers, agriculture related workers, self-employed people and salaried individuals from remote areas. 
• Loan Amount: Since the need for financing is associated with real estate purchase in tier-3 cities, the amount offered as loan is governed by the prices applicable to the area. Since the market rates of properties are much lower here than the in tier 1 and 2 cities, the amount extended as loan is also not very high. Generally, rural housing loans range from Rs 50,000 to Rs 10 lakhs. This figure is within the affordability range of a majority of the people in the area.
• Usage: The amount raised through a rural housing loan can be used for a variety of purposes. The borrower is not only free to utilize the money for purchasing a property in the area but can get other important things done, like reconstructing, repairing and home improvement.
• Loan to Value Ratio: The value you receive on raising these loans generally hover around 70% to 80%, depending on whether the house is fully ready for purchase or whether the loan is obtained for the completion of construction undertaken for home improvement.
• Eligibility: Different banks require different types of checks before they agree to grant a loan to an individual. The criteria may be judged according to the gross annual income of the household (which is usually around Rs 1,20,000), surrogate income proofs and inquires carried out by the lending institution on the field.

Rural housing loans are created specifically to solve the problems of a specific target customer base. This type of product will help people from small towns acquire valuable long term assets, without having to shell out a majority of their savings or being burdened by an unaffordable repayment amount.