In the last few quarters, the scenario for home loan consumers has undergone a sea change.

The going for the home loan consumer was really, really good till mid-2004.

Property prices had been steady and home loan interest rates were at historic lows. Things have a moved a long way since then.

The government has added to the worsening plight of the home loan consumer by a controversial circular seeking to tax developers under the service tax regime.

Building material costs like cement and steel have also skyrocketed. All these factors have only added fuel to the considerable fire property prices have been on for the last 18 months or so.

In fact, the net impact of all these factors has been a steep 100% increase in property prices in many cases. And, at least 60% to 70% increase on an average across properties over the last 18 months.

To add to the woes of the home loan consumers, the home loan interest rates have also risen by around 2% in the same period.

This is a double strike against the consumer: when rates go up, the cost of loans go up too. To understand its impact, let us see an example of a typical consumer in a metro city.

• Saving for a home?

April 2005

Gross annual income: Rs 3,00,000

Cost of property: Rs 12,00,000

Loan amount sought: Rs 10,00,000

Down payment: Rs 2,00,000

Tenure: 20 years

Prevailing interest rate: Adjustable rate loan: 7.50%

Equated Monthly Installment: Rs 8,100 approximately   

EMI as percentage of the gross income: 32%

June 2006

Gross annual income: Rs 3,75,000
(increase of 25%)

Cost of property: Rs  20,00,000
(increase of 70%)          

Loan amount sought: Rs 15,00,000

Down payment: Rs 5,00,000

Tenure: 20 years

Prevailing interest rate: Adjustable rate loan: 9.50%

Equated Monthly Installment: Rs 14,000 approximately   

EMI as percentage of the gross income: 45%

Thus, the consumer gives away a much larger portion of his (increased) income (45% versus 32%). The upfront payment required is also higher (Rs 5,00,000 versus Rs 2,00,000 earlier).

No wonder the dream for owning a home is fast becoming a mirage for most middle class consumers.

• Home loans: Fixed or floating rate?

So what should home loan consumers do?

If you are buying a home for the purpose of your own residence, then it is futile to try and time the market.

If the dream property is out of your budget now, consider a smaller property in the same area or moving into a cheaper locality.

However, if you were thinking of buying a property purely from an investment point of view, I would advise you to urge caution. Wait for the overheated property market to cool (as it surely will) and then work out your cost and benefits before going in for a property as an investment.

You also need to keep the standard issues that crop up for any home loan consumer.

Here are the top six problems faced by home loan consumers during the pre-disbursement process.

1. Desired/ promised home loan amount not available. 

2. Promised interest rate not available.

3. Fixed rate of interest not available or is available at a higher rate vis-�-vis promised rate.

To safeguard against the above, obtain a promise in this regard that if you do not get the home loan amount offered you can press for a refund of your processing fee. Don't just go by someone's word, take it in writing or by mail. Ditto for assurances on the rate of interest too.

4. Non-refund of processing fee if the loan is not sanctioned or the loan is sanctioned but the individual does not want it.

Unless promised in writing in advance, this may not be possible

5. Loan amount getting restricted after being sanctioned due to lower valuation of the property by the bank.

Try and get your lender to get a valuation done even before the sanction of the loan so that this does not come as a surprise later on. Else, the bank will value it at one figure and you will be buying it at another. This problem will not arise if you are buying a property in a reputed project by a well known builder.

6. Non availability of title documents and/ or NOCs in the format desired by the bank. Or, problems with any other legal/ title document.

Most banks will be happy to do a due diligence of your legal documents if they are submitted along with your home loan application form. Check with the concerned builder/ society/ authority about the format of the NOC required. If they have a different format, get that cleared from the bank as well. This will ensure there are no surprises later on.

Harsh Vardhan Roongta is the co-founder and director of Apnaloan.com, an online neutral marketplace for home and personal loans. A chartered accountant by profession, he has over 21 years of experience in financial services, consultancy and personal finance matters. He is also the author of The Complete Home Loan Guide. His column tells you how you can be a shrewd and wise borrower.