To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A appears every other Monday.
I had applied for a home loan from a bank in April to buy a property worth approximately Rs10 lakh. At the time of application, the bank manager told me all my documents were in order. I had also paid the advance amount to the developer and got the property registered in my name. However, the bank was delaying my loan sanction for reasons not known to me. On following up with the bank several times, I was finally informed that it had rejected my application. I am disappointed. How can they reject my loan this late? Is it not the bank’s responsibility to explain why the application was rejected?
There could be several reasons for loan rejection, such as misrepresentation of facts provided by the customer, the property being unapproved by the lender on legal and technical grounds, etc. So, if a lender tells you, at the time of loan application, that your documents are in order, this generally means that all the requisite documents submitted by you are, on the face of it, in order. It is only during loan processing, when a thorough check is done, that the lender would find the discrepancies, if any.
Also, most lenders these days rely on Credit Information Bureau (India) Ltd (Cibil), an institution which helps them by providing credit information/credit history and repayment track record of the loan seeker. If the potential customer’s credit history reflects any defaults, which were not disclosed at the time of applying for the loan, the lender may ask for an explanation, or even reject the loan application outright. Having said that, a lending institution would generally give a customer the reasons for rejection of the loan.
I took two loans of Rs27 lakh and Rs12 lakh in 2006 to buy two properties (one self-occupied, the other rented out) in the same area. Both the loans were taken at a fixed interest rate of 9.25% per annum for 15 years. I prepaid part of the loans in the last two years and their current principal outstanding is Rs19 lakh and Rs3.5 lakh, respectively. I plan to prepay Rs2 lakh again. Which loan would it be more beneficial to prepay, the smaller one or the bigger one? When I did a simple comparison of the amortization schedule, it showed that the saving in the interest component will be higher if I prepay the bigger loan. But a friend of mine told me that it does not matter since both the loans have the same rate of interest. Is this correct?
Yes, you can prepay any of the loans since both have the same rate of interest. It will not make a difference as the amount prepaid will be adjusted against the outstanding loan principal, and will bring down your overall liability. One point you may want to keep in mind is that as per the Income-tax Act, 1961, in addition to providing tax exemption on the principal amount of up to Rs1 lakh a year, in the case of a self-occupied property, there is a cap of up to Rs1.5 lakh a year on the interest component you can claim as tax benefits; there is no such upper limit on the rented property, except for adjusting for rental income, etc. Hence, you may want to take a decision based on the tax efficiency of the loan—you must consult a tax expert.
Renu Sud Karnad is joint managing director, HDFC.
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