Taking a Home Loan-Tips to Save Money

After deciding on a property,the next big thing one does is to look for a good home loan. While people think that there is no big deal in getting a home loan with Bank waiting in queue to offer home loans, there are few things which you can do to save some more money.

This article comes out of my own experience dealing with ICICI Home Finance Corporations (HFC) and my builders.Here are the few tips

 

Tip 1: Advance Direct Funding
If you are booking a brand new house/apartment for which construction is about to begin or just started then builder’s expect you to pay stage wise payments based on the construction stages.This is good for builder and Bank but not for you. The reason being PRE-EMI.

Imagine for a loan of around 20 Lakhs for a project which runs for 2 years you would pay anywhere between 1 Lakh to 1.3 Lakhs as PRE-EMI. Hope you must know that PRE-EMI payment does not go into in PRINCIPAL component but just the interest for the amount Bank disburses to the builder time to time.

So the first thing i ask my bank is ADVANCE FULL FUNDING. If i want 20 Lakhs, i ask them to release 20 Lakhs at one stretch irrespective of project’s current stage. A lots of Projects are pre-approved by major HFC’s (i.e Banks have completed legally verifying the project documents, patta etc) so demand for full funding. The idea behind this is, you are going to anyway pay the EMI after full disbursement, so start now itself instead of starting your repayment after 2 years.

The builders would be more than happy to receive the entire money. I negotiated with my builder in such a way that they agreed to Pay me 18% interest rate for the money i paid in advance. So i got back around Rs 75000 when the project was completed. If you are wondering which builder does these things, mail me i can give you details. If builder does not agree for this then try negotiating on per sq ft rate or some additional work to be done for you apartment like Tiles, Wood work, False ceiling, Grill Work etc, free open car park,free registration etc . ASK and You Should get Something.

 

Tip 2: Don’t put all your eggs in one basket.
Nothing complicated here. The basic rule when you go for home loan,you have to pay 10% -15% of the project cost and 85%-90% is funded by HFC’s. This depends on your Salary, take home and other factors.
So if you are buying a apartment for Rs 30 Lakhs , you should shell out around Rs 3 -4 Lakhs. Assume that you had more money in hand say Rs 6 Lakhs. You would obviously go for less loan amount and pay out the rest from your Hand. PLEASE DON’T DO THIS.

The golden rule is try to take maximum loan from bank, say up to 90% and keep as much money as possible in Hand. What do i gain?. Save the additional money for HOME LOAN REPAYMENT. I hope you know that Banks have a 6 months lock in period from the start of first EMI till which you can’t do any part payment. Not sure if this is relaxed now.

So wait for 6 months and do a part payment with the money you had. Do you know, you would pay around 50 Lakhs in total for a 21 Lakh/15 years loan. And just by paying 1.25 Lakh towards part payment you can save up to Rs 15 Lakhs in Loan Interest. NO JOKE, just check your Amortization Schedule and you should see how many month’s you are by-passing for a 1.25 lakh part payment.

A loan prepayment helps in preserving the capital appreciation your apartment had and also its always advisable to finish loan earlier. Don’t waste money on costly wood work or additional work which would eat your finances, rather spend sensibly on loan repayment. Remember the earlier you prepay, the less interest you pay.

 

Tip 3: Money spinning Ideas for prepayment
If you are short of cash here are some ways you can to get additional money for home loan repayment. Of course Remember the golden words ‘NO PAIN NO GAIN’.

a) Go for Personal Loan: More loans, more headaches, but when you have a big headache in the form of Home Loan , this should be fine. Take a personal loan for say Rs 1 lakh and prepay your home loan. You can do this if you have a cushion of around Rs 3000 in your monthly budget. Oh!. Did you say you got a good appraisal HIKE this year,then its a right time

b) You Car: Not sure how it works in India, if you are in US, then you can contact your bank and take a loan on your CAR. Interest rates are as low as 5% for a 3 year Loan period. If you take $5000 loan then you would pay an interest of only $300 max in total. Thats works Rs 12000 for a Rs 2 Lakh loan ( 5000 * Rs 40). Thats cheap when compared to personal loans in India. I am very sure Personal loans are costlier in India.
c)Encash Other Saving Instruments: See if you can encash PF, Pension funds, Stocks, Dad’s money ( ASK HIM AFTER ALL, YOU ARE NOT GOING TO SPEND IT ON YOUR GIRL / BOYFRIEND)

Also Read Raising money for loan payment

The chennai property market has fallen a bit with prices down 15% . Not sure how much more it can fall, but Builders are desperate for new customers, So negotiate.

 

If nothing works out, CHILL OUT with a glass of cool Beer. :) Good Luck

If you like this article, Please comment. If you saved money Please SHOUT.

 
 

26 Comments

  1. Satheesh

    Hi Uday,

    Thanks for the info. Yes, I did this with the builder and they paid me around 13%(but the loan interest was 8%) back then. I am in US as you. But, I google and couldnt find one thing for sure is that whether you can take tax deduction in US if you get from CITIBANK. I am sure ICICI doesnt issue the docs needed, but heard citi could do as they are US based. Any idea? I think it would very cool to get US $ loan considering the $ value nowadays. What do you say?

  2. Dear Satheesh,
    At present i have no idea of doing a loan here in US. But it really seems to be good idea if it works out with Tax deduction. But not sure if this can be done. Well check and let you know if i find something

  3. Satheesh

    Thank you very much Uday. I will do some more research and will post back if I find any such update. Keep the good work.

  4. sriram

    Hi,
    It is a very good article, hats off to Uday. I am going for a housing loan, can anyone suggest me some Amortization Schedule Tool (it should support our EMI calculation), so that i can find when is the good time for part payment and all those details.

  5. Sriram,
    thanks for the comments, you can find amortization tool of apna loan

    http://www.apnaloan.com/loan-advice-india/amortisation.html

  6. Satheesh

    Can you please share how easy to apply as NRI? Currently, I dont have any NRI account, so far managed just doing the money transfer only when and if required. Any pointers? Also, I saw the floating rate@12% and fixed rate 14%? Is it true? I am thinking of buying a flat sometime in the next 3-6 months. But, considering this interest rate and $ going down the drain in value, it makes it even complicated. sigh..

  7. Dear Satheesh,
    At present i have no exp taking an loan as NRI. Rates are currently on a high. There is a possiblity of slight decrease for loans under 20 lakhs, but have to wait. Yes its a complicated decision but Go for loans now and once banks reduce the loan, change the bank or decrease the payment period. GOOD LUCK

  8. Satheesh

    Thanks much Uday. I would be pretty soon applying for a loan and will update you if I have any info to share. thanks.

  9. Dr. S. Sinha Roy

    Dear Uday,

    Would you please tell which builders are amenable to bargaining? Please give the details. I am specially interested in Chaitanya for the Sunnyvale project at Ayanavaram. Should you advise to meet their top rank officer or the project in charge available at the site?
    Thanks much

  10. Mr Roy,

    In the current market every builder is amenable. Any particular reason you are interested in a project n Ayanavaram?.

    Go directly to the chaitanya marketing office and talk to them. Just remember what i had said in this article. Site in charges wont help much.

    Remember if the project is not sold out then every builder can be bargained.

  11. jeyapraksah

    Hi Uday

    Nice article and very informative. I have a queru on Tip 2. You are asking us to go for maximum amount of loan and advising us to prepay that loan with the extra money in hand. Both are contraditing to me. Instead of taking a bigger loan and pre paying it with the money on hand, why dont you go for a smaller loan in the first place? Am I missing something here?

  12. uday

    Jeyaprakash,

    Thanks and here is my explaination. Assume you have 10 lakhs and need 20 lakhs loan for 30 lakh property. If i were you i would take 25 laks loan and 5 lakhs initial payment and rest 5 lakhs in bank for 6 months. After 6 months i would do a bulk payment of 5 lakhs towards my home loan.

    It is know fact that banks loots (robs) customers money in the intial years. First 5 years. So the moment you do a prepayment, you interest rates would have drastically reduced. It looks like you pay more interest if you take more loan but this is not the case. If you have money in hand i prepay in the first 2 years a huge sum then the entire loan’s interest would be drastically cut.

    Take my example, for a 10 lakh for 20 years tenure, i would have paid 13 lakhs as interest. But i did part payment of only 4 lakhs and the still if i continue my EMI, i am paying 1.5 lakhs interest for the rest of 6 lakhs.

    People do the mistake of spending the entire cash in hand and rest thro loan. I would say spending only the money which is absolutely required , that 10-15% of property value, (your contribution) and go for loan for the rest of property.

  13. Dr. S. Sinha Roy

    Hi Uday,

    My work interests lie within the city as I am not an IT guy. So this project at Ayanavaram is located at a convenient place for me. I will go to their marketing office today. Will report back later.

    Bye.

  14. Bar

    Hi Uday,
    It a real good article. Btw kindly confirm which banks offer full Advance payment when property is under construction. I checked with HDFC and they are not willing to do so?

    thanks

  15. Hi Friends,

    Let me add to the excellent suggestions made by Uday.
    1. Do not miss out on Property Fairs organised by Banks, if you are looking for a housing loan. The reason banks sponsor property exhibitions is that they have internal pressures to achieve home loan targets- so mostly they offer you a lesser interest rate.
    2. Generally, people forget about their housing loans after moving into their new homes. Most often the payments are paid off directly from bank accounts by way of post dated cheques or by ECS Payments. But if you notice you will find that banks offer LOWER INTEREST RATES to people who book housing loans after you- especially when there are loan melas!Call the Official who arranged your loan and ask him for a reduction- most often for a small fee the Bank will oblige.I have personally done this many times for my clients in the past. I have managed to reduce my own home loan payments this way.
    3. People generally request for Interest and Principal Statements once a year. Ask for statements every quarter. That way if there is a interest hike or adjustment you would be able to spot it sooner. It would be very difficult to argue with adjustments after 5 or 10 years because our memories would have become obscured by then, on the incident.
    4. Contrary to logic do not go to established home loan players. Look out for newer players ( but select big ones). They are generally eager to please and you can get a better deal.
    Bar, you were asking for banks which are willing to give full advance payment.I may suggest Reliance Capital ( Reliance in case you didn`t know are entering the financial markets in a big way- I suspect they may upset the apple cart the way they did it in Telecom sector.) Talk to Ramnath- His mobile number is +919380005437/9894205550-but please do your due diligence.
    Another source of help is your Builder himself. Remember your Developer, if they are big enough in terms of number of apartments they offer, will be very important to the sales department of the Institutions offering Home Loans. The Sales Head of your Developer should be able to help you get a bargain with the bank- or at least improve the lending terms.
    5. Finally as Uday says it is smarter to shift banks if the interest rates are lower. In the long term you really pay a lot of money by way of interest. To facilitate easy shifting please see that all your documents continue to be in order.I have seen people become careless with documentation as soon as the home loan is inked.I know cases where people have not collected their Mortgage Agreement copies from banks!
    Thanks

    Suresh

  16. uday

    Thanks Suresh for adding additional points. Hope it benefits our readers

  17. Suneel

    Is any one aware of Chennai pattinam by Cee Dee Yes builders. Their sqft rate is 2250/- and they will take care of the interest part. We don’t have to pay any thing till the project is complete, in 2010 April. It looks like a good arrangement.
    They are reducing the price to 2075 per sqft if the money is disbursed immediately.

    Can some one suggest which option is better? I would go for the second option because in the second option, you end up paying 20% as interest by 2010 April, which works out to Rs 400 per sq ft.

  18. Gladwin

    Thanks guys for the excellents inputs on home loan

  19. Pad

    Those are great tips Uday with detailed information. Thanks others as well sharing their valuable inputs.

  20. Srinivas

    Hi,
    I am quite confused with this point.
    “So if you are buying a apartment for Rs 30 Lakhs , you should shell out around Rs 3 -4 Lakhs. Assume that you had more money in hand say Rs 6 Lakhs. You would obviously go for less loan amount and pay out the rest from your Hand. PLEASE DON’T DO THIS.”

    1. It doesnt look logical taking a loan from the bank for higher amount (additional 2~3 lacs here) when u have it.

    2. You will end up paying interest for the entire amount. By taking less loan, u may save some interest amount. (@ 10% interest rates, its approx 900 per month or 16200 for those 6 months on 3 lacs that you are asking us to wait)

    3. Also, those 3 lacs in ur bank savings or fxd deposit will end up fetching less interest than you pay on home loan. (the banks have to protect their fat margins)

    4. The only Benefit I see out of this is u will get interest benefits on tax computation. But, keep in mind, u need to spend 1 re to get 33 paise benefit.

  21. Jagdish

    Hi Uday,

    Thanks for the information and it’s very useful.

    Need few clarifications,
    Planning to go for composite loan, 25L for plot(excluding down payment – 10L) and 20L for house construction (total investment: 55L)

    In this case planning to take 25L loan first, wait for 6 months and do 5L + 5L down payment for next 2 qtrs. Then start the house construction and again have prepayment of 5L 6 months down the line.
    Please comment on this. is my decision makes sense? else go for complete funding of 45L and complete the house construction,then start the prepayment?

    Kindly educate me on this and let me know the benefits of the case you suggest over the other.

    Another question, is to good go for short term loan like 10 or 15 yrs instead of 20 yrs and continue to do the repayment else go for 20 yrs tenure with prepayment?

    Thanks in advance.

    Regards,
    Jagdish

  22. unni

    Hi Roy what was the outcome, does a visit to the marketing offfice help, you mentioned in your case you were interested in sunnyvale did it work for you

  23. saranya

    hi uday…. this article is superb and i need to buy a flat within 30lakhs… and i am looking for home loans for remaining 20lakhs amount
    please suggest some tips to do my task….

  24. Vinay

    Hi uday yr article was very informative . I need some clarifications I have planned to buy a fully constructed apartment or villa which cost around 35 to 40 lakhs ,my gross salary is 60k per month what is the initial down payment should I invest if I am taking a house loan in Hdfc n I already have a car loan monthly emi is 7000 n how much loan will i get.i want to take a maximum loan from bank can u pls help me out .

  25. I feel very glad to post my message to this blog and we are very thank full to the blogger who post this info

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