Loan zone : Margin money regulations

Q.What is the margin on a home loan? Are there any stipulations regarding the percentage of the cost of a dwelling unit to be financed by a bank? kuldeep kumar, ambala

The margin on a home loan refers to the percentage of the cost of the home that is not covered by the lender providing you with the home loan.

Though 20 per cent margin is the industry average, lenders may increase or decrease their home loan margins on a case-by-case basis.

Generally, banks do not provide a loan for 100 per cent of your house’s cost. You are expected to contribute a percentage of the cost, called 'margin money', from your pocket.

Any lender, be it a bank or NBFC, finances around 75 to 90 per cent of the total of the property cost. The loan to value (LTV) is guided by the RBI.

According to a Reserve Bank of India (RBI), directive lenders have been allowed to provide loans only up to 80 per cent of the cost of property.

In order to check speculation in the real estate sector, the RBI has made it tougher for banks to provide high value loans for properties costing more than Rs 75 lakh, besides raising the provision requirement for loans provided at ‘teaser rates’(a low interest rate at the start of a loan designed to encourage people to take out the loan. The rate usually increases later.)

However, in case of small value housing loans up to Rs 20 lakh, banks can provide loans up to 90 per cent of the property value.

Factors that affect margin money: The margin money amount can vary depending on the following factors:

The market value of the property, the total amount of the home loan and the length of time it takes to repay the loan.

If the home loan is for construction, the stage of construction affects the margin money and the borrower’s credit score also has importance in deciding loan amount.

A higher margin money can help reduce the monthly EMIs and repayment obligation. It also acts as a sign of trust between the lender and the borrower, which can lower the risk for the lender.

To refinance

or not

Q. I have a current home loan from a bank. But I want to purchase a new property, can my existing home loan be transferred to the new purchase. What other options do I have?

vinod kumar, patiala

If you want to move to a new house and have a current home loan, you can transfer your loan to a new lender or refinance your existing loan.

Transfer your loan: You can transfer your loan to a new lender that offers better terms. This process is also known as a ‘home loan balance transfer’ or ‘home loan refinancing’.

Here are some steps that you need to take:

• Borrowers need to scrutinise prospective lenders initially. They need to compare interest rates offered by various lenders, the terms and conditions, and select the most suitable option.
• Finalising a lender will allow borrowers to move ahead with the transfer process of that specific financial institution.
• Get a No Objection Certificate (NOC) from your current lender. Submit the required documents to the new lender, including:
• KYC, property papers, loan balance Interest statements. Pay any required fees to the new lender. Wait for confirmation from your current lender that the loan has been closed. Start repaying the new loan under the updated terms.
• Besides, you can also refinance your existing loan with your current lender.

Before transferring your loan, you should:

• Check for any prepayment penalties with your current lender.
• Check your credit rating. A poor credit score may make you less eligible for a loan transfer.
• Your best option is to apply for a home conversion loan. Using this type of loan, you can add to your existing home loan and purchase the new one without having to opt for a second home loan.
• If a major portion of the home loan remains unpaid and you get a lower interest rate with a new lender, it makes sense to transfer the home loan. On the other hand, if unpaid home loans are just 5 to 10% of the total amount, it won’t be a wise decision to transfer your home loan.
• Interest rates have a significant impact on the overall cost of your home loan. By securing a lower interest rate through a balance transfer, you can potentially save a substantial amount on interest payments over the course of your loan repayment period. This is one of the significant benefits of home loan transfer.