Spotlight

The Ins and Outs of Home Loan

Home loans are like those extended family members whom we don’t interact with our whole lives until at a certain point in our lives we require their help. Home loans are ubiquitous, yet we hardly bat an eye at it. It’s only when we reach a particular career high that we start thinking of home loans in depth. It’s just then when we start researching financial institutions (FI) like banks and leasing companies to get the best possible deals on home loans.

So what factors are taken into consideration when these FI’s dish out home loans?
A multitude of factors needs to be taken into consideration for these types of loans such as your repayment capabilities or credit score, monthly net disposable income, age, nature of job/business, number of family members, etc.
Let’s look at the main components in details:

• Age – Your chances of getting a home loan application granted will be higher when age supports you. Those who are young and are periods away from retirement have more chances of pleasing the lenders to get a loan approved.
• Profession & Income – Applicants who aren’t working in the traditional industries (that follow a corporate structure) seem less suitable to the lenders. It’s the repayment capacity of such applicants that remains questionable since unconventional jobs involve with regards to security and safety. Moreover, if you are someone who loves to swap jobs frequently, be sure to earn negative points as it posits that your ability to hold down a position is further questionable. On the other hand, a regular source of income enhances your home loan eligibility. You may also qualify for a higher home loan amount if you’ve held the same job for over a couple of years.
• Number of dependents – The number of dependents (such as retired parents, children, or spouse) you have is another factor the lenders will take into consideration. Having more dependents may earn you sorry scores to be eligible of loan repayment capacity.
• Property Age – Property Age – Home loan eligibility is inversely proportional to the age of the property. Lenders conduct separate evaluations to determine your home loan eligibility in the property under consideration is very old. A high loan against property eligibility improves your home loan eligibility as well.
• Existing debts – As the largest loan you’ll likely ever have, a mortgage is a lot of debt to take on. Therefore, banks typically get nervous about other large debts that you might have. Avoid opening new lines of credit and pay down debts before applying for a home loan to prove you won’t be financially overwhelmed.

TRENDS
In 2016 private banks provided 55% of home loans while the state banks disbursed 22% of the same. This is reflected in the fact that Bangladesh’s banking sector has been seeing an influx of home loans for the last two years due to interest rates being under 10% and a rise in per capita income. According to a study, total outstanding home loans from banks and financial institutions stood at BDT 56,290 crore, which was 9.1% of total credit to the private sector, as of last year’s June.
Default loans in the home loan are low due to commendable recovery: it was 3.12% in 2016.
Of the total outstanding home loans, private commercial banks provided the largest portion of 55%, amounting to BDT 30,920 crore, followed by the state-owned banks at BDT 11,930 crore.
High competition among banks in attracting home loan borrowers pushed down the interest rate, the study said. The interest rate for home loan currently is a minimum of 8% and a maximum of 15%. The credits ranged between BDT 2 lac and BDT 1.2 crore.
The minimum debt-equity ratio stood between 10:90 and 50:50. Most of the banks provide the loan at the debt-equity ratio of 30:70 for locals and 50:50 for expatriates. On top of that, according to the research findings, a home loan is comparatively safer for a bank as opposed to business-focused loans.
Even though home loan disbursement has increased, it is significantly concentrated in urban areas of Dhaka and Chittagong. In 2016, over 85% of the disbursements were in urban areas, according to the study.
The study found that the most substantial portion of home loans in 2016 was of construction: 66%. Flat purchase accounted for the other 34%.
While home loan disbursement is grossly concentrated in Dhaka, yet according to Irteza Ahmed Khan, CEO of Meridian Finance and Investment Ltd.: “demand will continue to grow for Home Loans in the next ten years due to rising population in Dhaka as well as surrounding area. Most of the city may have already filled up, so it is expanding in the circular ways”.

CHALLENGES
While trends suggest that there has been an increase in home loans in recent years, home loans by no means are a straightforward procedure. Getting a home loan is quite cumbersome and with it comes certain challenges. Most prominent of which are:

• Turned down in the first stage – Many of the home loan applications are screened off right at the beginning, due to incompatibility between the borrower’s qualifications and lenders requirements.
• Processing fee not refunded – With every application form for home loans, banks require about 0.25% to 1% of the loan amount to be submitted as the processing fees. This processing fee is not refundable. In simple words, this means that whatever reasons if the bank finds that you don’t deserve the home loan, this payment won’t be returned.
• The interest rate dilemma – Almost all home loan borrowers are unsure about whether to opt for floating or fixed interest rate. Even after deciding on a particular loan regime, the home loan terms, and fine condition prints can create havoc with your interest rates.
• The difference in property valuation – The bank has its experts for legal, technical and financial appraisal of the property in question and evaluates the property as per its standards and puts a value on it. This worth can be considerably lower than the quoted price of the property. In such a scenario the bank will only lend you up to the amount it valued
• Down payment – Banks require the borrower to fund at least 10% to 20% (varying from bank to bank) of the entire loan amount as the down payment for the home loan. If this amount is not deposited before the disbursal of the home loan, the bank will refuse the home loan to the borrower. Even though the problems mentioned above are prevalent, they can be easily avoided if the borrower follows accurate procedure, prepares sufficiently before applying and takes care of correct documentation.

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