Professional Knowledge: Housing Finance and Banking Operations
Professional Knowledge: Housing Finance and Banking Operations
This section tests the housing-loan lifecycle and the operational mechanics behind it: eligibility, property valuation, LTV, disbursement, EMI, amortisation, repayment modes and funding.
Core rules
- LTV = loan amount ÷ property value. A higher LTV means lower borrower equity and higher credit risk. Stamp duty, registration and certain charges are usually excluded from the property value for LTV.
- EMI = P × i × (1 + i)^n / [(1 + i)^n − 1], where i is the monthly rate and n the number of months.
- In early years, interest dominates the EMI; principal repayment rises over time in an amortising loan.
- Pre-EMI interest is charged on disbursed amounts before full disbursement/EMI start; it is not principal repayment.
- HFCs fund loans through equity, borrowings, refinance, bonds and securitisation. NHB refinance is a wholesale funding source, not a retail deposit.
- CERSAI registration of security interests supports secured lending and reduces search risk.
Worked example
A property is valued at ₹60 lakh and the borrower seeks ₹48 lakh. LTV = 48/60 = 80%. If the applicable ceiling for that loan bracket is 80%, the loan is at the limit; any processing fee or insurance cannot be added to the property value to make the LTV look lower. If the borrower needs ₹51 lakh, LTV becomes 85%, so the lender must either reduce the loan or treat it as an exception if permitted.
Traps
- Calculating LTV on the loan-plus-fees amount.
- Confusing pre-EMI interest with principal.
- Assuming a fixed-rate loan changes when the repo changes.
- Ignoring that securitisation transfers pooled loan risk to investors.