Home loans: Young borrowers have age on their side

Rajesh Sinha, 25, purchased his first home in Mumbai last year. After finalising a property worth Rs 23 lakh, he approached banks for a home loan.

Since the building where he was buying was over 30 years old, most banks refused to sanction over 70 per cent of the loan amount. And Sinha, having just started his career, did not have the necessary cash flow to pay the rest of the money.

So, when he was approached by three banks, which were willing to fund 70-75 per cent of the loan amount, he candidly told them he could not accept their deal. Two banks backed out, but the third gave him over almost 90 per cent of the loan, that too, at a concessional rate of 10.25 per cent (50 basis points less than the rack rate).

This latter was achieved by giving him an amount that was just a bit less than Rs 20 lakh. This was because according to the Reserve Bank of India [Get Quote] guidelines, home loans below Rs 20 lakh now come under priority sector lending. Therefore, banks can charge a lower rate of interest.

QUICK TIPS

Get a co-applicant to enhance the loan amount
Take a loan from your employee provident fund
Pledge your financial assets
Opt for a Step-up repayment facility

The obvious question is that why would the bank go through so much trouble? The reason: Sinha has age on his side. "The negotiations continued for almost three months, but I stuck to my guns," admits Sinha.

That is not all. He even managed to get the rest of the money through a personal loan from another bank. That is, in spite of the other bank knowing that he already had a home loan.

There are many like Sinha, who are able to get their way with banks, as they are young. "While undertaking the credit appraisal of a prospective customer, younger age will itself put them in an advantageous position, making them eligible for the maximum term," says Renu Sud Karnad, joint managing director, HDFC [Get Quote].

The age factor is a big one because it allows banks to be flexible. That is, there are various options that you have as a young borrower.

"If the customers meet the basic eligibility criteria, there are different products that banks offer that home buyers can use to enhance their ability to garner the loan," says Jitendra Balakrishnan, deputy managing director, IDBI Bank.

However, many times when youngsters go to buy a house of their own, they face hiccups like inability to generate the initial down payment and lack of eligibility for the required loan amount.

The cure for the problem of raising the initial down payment is:

Personal loan: If you are confident about your repayment ability, pick up a personal loan of that amount. But financial experts would advise that you should do that, only if you not stretching your salary too much. Ideally, loan servicing should be capped at 40-50 per cent of your take-home salary

Pledging financial assets: If you have shares, fixed deposits or insurance policies, you can pledge them with the bank. You can obtain a loan against the surrender value of your insurance policy from the life insurance company or a bank.

Loan from EPF: If you can take a loan from your employees provident fund (EPF) account, go for that option.

Now there is the big question of how to raise your loan eligibility. For that, there are a few ways.

For starters, apply with a co-applicant. "The co-applicant's income could be considered for arriving at the loan amount.

The co-applicant can be the spouse, in case married, or a parent, but under certain conditions only. However, if there are any siblings then he/she would need to provide a no-objection certificate from them in order to make his parent the co-applicant," adds Karnad.

Then, if the customer is a young professional, there are structured repayment options available that provide flexibility thereby, making them eligible for the person with a higher loan amount.

For instance, there is the option of SURF or Step-up Repayment Facility, in which, the repayment schedule is adjusted to the customer's expected growth in income. Under this, the customer will be eligible for a higher loan amount and pay lower equated monthly instalments (EMIs) in the initial years thus, making it more comfortable for him/her to repay the entire loan.

That is, if you have taken a home loan of Rs 30 lakh for 20 years at the rate of interest of 11 per cent, your EMI would work out to Rs 30,900. Now, you can get an arrangement with the bank whereby you pay say, Rs 20,000 for the first five years and there is a rise in the EMI by 50 per cent for the rest of the years.

Also, opting for a higher loan tenure would help you to get a bigger loan. That is, some banks even offer home loans for a period of even 30 years.

However, getting a better interest because you are younger is not something that happens often. In India, most lending institutions approve loans based on the repaying capacity and the interest rates offered are same across customers.

But there is good news. As Karnad puts it, "Financial institutions are also planning to charge interest based on the credit history of the customers.

Customers with excellent credit history will be offered loans at special interest rate and terms." And that could mean great news for young borrowers, who are starting their career without loans on their balance sheets.

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