More loan at higher rate or lesser loan at lower rate?

Youngsters whose incomes are likely to increase can opt for loans where their equity is lower even if the rate is slightly higher

Have you put your plans to buy a house on hold because you don't have enough funds to make the required 20-25 per cent down payment for the property? Don't worry. Soon, you will be able to get higher loans from Housing Finance Companies (HFCs), but at a higher cost, since these loans will be guaranteed by a mortgage guarantee company.

Currently, for loans up to Rs 20 lakh, the loan-to-value (LTV) ratio is 90 per cent, for loans of Rs 20-75 lakh it is 85 per cent and for loans above Rs 75 lakh, it is 80 per cent. Now, HFCs can give loans with LTV ratio of 90 per cent for loans above Rs 20 lakh, provided the loan is backed by a mortgage guarantee company. NHB issued a circular to this effect last month.

LTV is the percentage of the property value that the lender will give as loan. The borrower pays for the rest of the property price from his/her own funds.

For a property worth Rs 1 crore, earlier the borrower had to pay Rs 25 lakh from his own funds, as he would have been eligible for a loan of Rs 75 lakh. Now he can avail of a loan of Rs 90 lakh and has to pay only Rs 10 lakh of his own funds.

“With lower contribution, borrowers can buy bigger properties than they were planning to. Youngsters who have not been able to save a lot can also consider buying property,'' says Deo Shankar Tripathi, President and COO, DHFL.

The cover or guarantee will be provided by India Mortgage Guarantee Corporation (IMGC), a company promoted by NHB, ADB, IFC and Genworth Financials. HFCs like DHFL and Indiabulls Housing Finance are in talks with IMGC to come out with new loan products.

Since the lender has to incur an additional cost as premium for the guarantee, this will be passed on to borrowers.

The extent of the cover, whether it will be 20 or 30 per cent of the amount is still being worked out. Depending on that the loan rates could go up. “The interest rate may go up by 35 paise per Rs 100 if the cover is for 30 per cent of loan amount, or 27-28 paise if the guarantee is for 20 per cent of the loan amount,'' says Tripathi.

For instance, if today a home loan is available at 10.15 per cent without the guarantee, it could go up to 10.45 per cent with the cover.

Assume the amount is Rs 50 lakh for a loan without guarantee and the rate is 10.15 per cent, for a period of 25 years. The Equated Monthly Instalment works out to Rs 45,965. For a loan with guarantee and higher rate of say 10.45 per cent, the EMI will increase to Rs 47,031. But you could opt for a longer-tenure loan to manage the EMI.

Another option could be that the premium is paid upfront by the borrower at the time of the loan disbursal. “This is a cost incurred by the HFC, as single premium payment to the mortgage company. How the borrowers will pay is yet to be worked out,” says Sachin Chaudhary, business head, Indiabulls Housing Finance.

However, not everyone may be eligible for such guarantee-backed loans. IMGC will do its own due diligence and evaluate the customer separately, says Amitava Mehra, CEO, IMGC.

In case your personal contribution towards the home purchase is limited, a higher loan amount would definitely be crucial. “Then a slightly higher rate is not material. You can always prepay the loan and/or switch to another financier,” says Rahul Soota, Executive Director of mymoneymantra.