It is every person’s dream to own a house. A home is a place where we feel safe and we have infinite memories in it. Are you facing a tough time buying your own home? So turn your dream home into reality with Home Loan.
Buying a home is one of the biggest dreams for most people and an exceptional case. Fulfilling such a dream requires a lot of effort on the part of the buyers and can work best through home loans to accommodate the home in their budget. So let us see, what are home loans?
What are Home Loans?
A home loan can be opted for buying a new house/flat or a plot of land where you build the house, and even for renovation, extension and repair of an existing home. He is called Home Lok.
You generally take a home loan to either buy a house/flat or plot of land for the construction of a house, or for renovation, extension and repair of your existing home.
Home loans provide you with financing to help you buy your dream home comfortably. Lenders cover up to 75-90% of the cost of the house and you will have to make an upfront payment (down payment) of the remaining amount.
Meaning of home loan
Home loan is a secured loan which is obtained by giving a property as collateral to buy it. Home loans offer high-value funding at affordable interest rates and for a long tenure. They are repaid through EMI. After repayment, the title to the property is transferred back to the borrower.
If the borrower cannot pay the outstanding amount, the lender has legal rights to recover the outstanding loan amount by sale of the asset.
Types of Home Loans in India
- Home Loans: This is the most common type of home loan taken for buying a home. There are many housing finance companies, public banks and private banks that offer home loans where you borrow money to buy a home of your choice and repay the loan in monthly installments. You can get up to 80%-90% of the market value of the house as financing. The lender will mortgage the home until you repay the loan in full.
- Home Construction Loan: This is the right home loan type if you already have a plot of land and you need financing to build a house on that land.
- Home Extension Loan: Let’s say you already have a house and you want to extend the house with another room or any other floor to accommodate the growing family. Home extension loan provides financing for this purpose.
- Home Improvement Loan: A home improvement loan provides financing for home renovation or repair if there is a defect in the existing system, such as painting the interior or exterior of the home, plumbing, upgrading the electrical system Doing, waterproofing the roof, and more.
- Home Loan Balance Transfer: The existing home loan interest rate may be exorbitant, or you may not be happy with the service of your current lender; You can transfer the home loan outstanding amount to another lender who offers lower interest rate and better service. On transfer, you can also check the top-up loan possibilities on your existing loan.
- Composite Home Loan: This type of home loan provides financing for construction and purchase of a plot of land where you want to build a house, both within a single loan.
Advantages of Taking a Home Loan
- Tax Benefits: The most important benefit of a home loan is the income tax deduction that you can claim on interest and repayment of principal. You can claim up to Rs 1.5 lakh on principal payment under section 80C, up to Rs 2 lakh on interest payment under section 24B, up to Rs 2 lakh on interest repayment in special circumstances under section 80EE and 80EEA and up to Rs 2 lakh on interest payment under section 80C. Up to Rs.1.5 lakh on stamp duty expenses under
- Low Interest Rate: The home loan interest rate is very low as compared to any other loan type available. If you face a cash crunch, you can get a top-up on an existing home loan at a lower interest rate than a personal loan to solve this problem.
- Due Diligence Check of Property: When you go through a bank to buy a house, the bank will do a thorough check of the property from the legal point of view as well as check whether all the documents submitted are valid or not. This due diligence check from the bank will reduce the risk of fraud on your part. If the bank approves the property, it means that you and your home are safe.
- Long Repayment Tenure: Unlike any other loan, home loan has a longer repayment tenure, i.e. 25-30 years. This is one of the key reasons for taking a substantial loan amount, which will be required to be borrowed to buy the house. Spreading the loan amount and the applicable interest over a longer period will reduce the monthly EMI thereby reducing the burden of the borrower.
- No prepayment penalty: When you take a floating-rate home loan, you can prepay whenever you have a lump sum amount without any prepayment penalty. This will help you to close the home loan much before the stipulated loan tenure.
- Balance transfer facility: You can transfer a home loan from one lender to another for a variety of reasons, such as interest rate, service charges, customer service experience, and others.
Home Loan Interest Rates
Average home loan interest rates in India range from 6.5% to 12.00% as of March 2021. Rates generally vary from lender to lender, repo rate set by RBI, inflation, economic activities and many other factors.
Some banks also offer special privileges to women, bank employees and senior citizens by providing a discount of 0.05% on the home loan interest rate.
Also, the home loan interest rate can be either fixed or floating in nature. The fixed-rate home loan remains the same for a period specified by the bank. This type of home loan is safe from market volatility.
In the case of a floating-rate home loan, the applicable interest rate varies depending on the market volatility. This may or may not be beneficial to the borrower.
Eligibility for home loans
Banks have a list of eligibility criteria for home loans. Banks first look at one’s credit history to understand their repayment habits. Generally, a credit score of 750 and above is preferred.
Some other important factors to keep in mind are as follows:
- type of employment
- minimum annual salary
- security of bail
- Margin Requirements
- Assets, Liabilities, Stability and Continuity of Business
- Residence Status (Resident Indian/Non-Resident Indian)
Documents Required for Home Loans
The following documents are required along with your duly filled loan application.
|cultivator||salaried customer||Businessmen/Non-salaried Professionals|
|Application form with photo||Application form with photo||Application form with photo|
|Identity and Residence Proof||Identity and Residence Proof||Identity and Residence Proof|
|Bank statement of last 6 months||Bank statement of last 6 months||Bank statement of last 6 months|
|processing fee check||processing fee check||processing fee check|
|Copies of agricultural land title documents showing land holdings||latest salary slip||Educational Qualification Certificate and Proof of Profession|
|Copies of title documents of agricultural land showing the crops being cultivated||Form 16||Business Profile and Income Tax Return of last 3 years (Own and Business)|
How much home loan am I eligible for?
Before starting the home loan process, determine your overall eligibility, which will primarily depend on your repayment capacity. Your repayment capacity is based on your monthly disposable/surplus income, which, in turn, is based on factors such as total monthly income/surplus less monthly expenses, and other factors such as spouse’s income, assets, liabilities, stability of income, etc.
The bank has to ensure that you are able to repay the loan on time. The higher the monthly disposable income, the higher the loan amount you will be eligible for. Typically, a bank assumes that about 50% of your monthly disposable/surplus income should be available for repayment. The tenure and interest rate will also determine the loan amount. Also, banks generally fix an upper age limit for home loan applicants, which can affect one’s eligibility.
What is the maximum amount I can borrow?
Most lenders require 10-20% of the purchase price of the home from you as a down payment. It is also called ‘your own contribution’ by some lenders. The rest, which is 80-90% of the value of the property, is financed by the lender. The total funded amount also includes registration, transfer and stamp duty charges.
Even if the lender calculates a higher eligible amount, it is not necessary to borrow that amount. Even less amount can be borrowed. One should try to arrange the maximum down payment amount and lower home loan so that the interest cost can be kept to a minimum.
Is a co-applicant required for home loan?
If one is a co-owner of the property concerned, it is necessary that he/she is also a co-applicant for the home loan. If you are the sole proprietor of the property, any member of your immediate family can be your co-applicant if you wish to add.
What is loan sanctioning and disbursement?
Based on the documentary evidence, the bank decides whether the loan can be sanctioned or not. It depends on the quantum of loan to be sanctioned. The bank will give you a sanction letter stating the loan amount, tenure and interest rate along with other terms and conditions of the home loan. The stated conditions shall be valid till the date mentioned in that letter.
When the loan is actually handed over to you, it is loan disbursement. This is when the bank is conducting technical, legal and valuation exercises. One can opt for a lower loan amount during disbursement, which is mentioned in the sanction letter.
In the disbursement stage, you have to submit allotment letter, photocopy of title deed, encumbrance certificate and sale agreement papers. The rate of interest will be applicable on the date of disbursement and not as per the sanction letter. In this case a new sanction letter is prepared.
How will disbursement happen?
Loans can be disbursed in full or in installments, which usually do not exceed three in number. In case of an under-construction property, disbursement happens in installments based on the progress of construction, as assessed by the lender and not necessarily as per the agreement of the developer. Make sure to enter into an agreement with the developer wherein the payments are related to construction work and not pre-determined on time-based. In case of fully constructed asset, disbursement is done in full.
What are interest rate options?
Home loan rates can be either fixed or flexible. In the former, the interest rate is fixed for the entire tenure of the loan, whereas in the latter, the rate is not fixed.
What is External Benchmark-Based Lending?
With effect from 1 October 2019, RBI has made it mandatory for banks to link all retail floating rate loans to an external benchmark. Option given by RBI to banks for an external benchmark repo rate, Government of India’s 3-month Treasury Bill yield published by Financial Benchmark India Pvt (FBIL), Government of India 6-month Treasury Bill yield published by FBIL and any other benchmark market interest rate published by FBIL.
Banks are free to fix rates on external benchmarks. However, they can change the credit risk premium only if there is a substantial change in the borrower’s credit assessment, as agreed in the loan contract. Other components of the spread, including operating costs, can be changed once in three years.
Banks are required to reset the interest rate under the external benchmark at least once in three months. A bank cannot adopt multiple benchmarks within a loan category. Banks cannot lend below the benchmark rate for a particular maturity for all loans linked to that benchmark.
Existing borrowers whose floating rate loans are linked to MCLR/Base Rate/BPLR and who are eligible to prepay floating rate loans without any prepayment charges, can switchover to an external benchmark without any charges/fees except due administrative are eligible for. / legal costs. The closing rate charged to this category of borrowers post switchover to the external benchmark will be the same as the rate charged for fresh loans of the same category, type, tenure and amount at the time of origination of the loan. Even other existing borrowers have the option to switch to an external benchmark arrangement on mutually acceptable terms.
While there are various benchmark rates suggested by RBI, most of the banks have chosen the repo rate as their external benchmark. Since the introduction of the external benchmark rate in October 2019, the repo rate has declined by 1.15%, as a result of which all borrowers whose loans are linked to it have benefited from lower loan interest rates.
What is Base Rate and what should you do if your home loan is linked to it?
All loans and credit limits sanctioned after 1 July 2010 (but before 1 April 2016) are valued at Base Rate. There can be only one base rate for each bank. Under this, banks have the freedom to calculate the cost of funds on the basis of average cost of funds or marginal cost of funds.
After MCLR, existing loans linked to the base rate can continue till repayment or renewal, as the case may be. Existing borrowers will also have the option to switch to MCLR-linked loans on mutually acceptable terms.
What are the costs involved in taking a home loan?
When you take a home loan, you don’t just pay the EMI of the loan. There are many other charges, though not all apply to every case. There may be a processing fee of around 0.5-1% of the loan amount. Sometimes lenders waive it. For some high-value properties, two appraisals are done, and the lesser of the two is considered for loan approval. Lenders call this a technical appraisal fee. Most lenders engage firms to examine the legal documents of borrowers. Banks usually include this cost in the processing fee, but some public sector lenders charge it separately.
How does my outstanding loan change?
EMIs to be paid every month have a major component apart from paying interest. Ideally, when one is paying the principal every month, the outstanding loan should also decrease every month and he only pays interest on the reduced loan. Most of the banks follow a monthly reducing basis approach.
Can you close your loan prematurely?
One can close the loan before its original tenure. If you are on a floating interest rate, no charges will be applicable. If you are on a fixed rate, fees may apply.
What is part prepayment of home loan? Does it help with prep?
Partial prepayment refers to any payment made by the borrower other than the regular EMI. This directly reduces the outstanding principal and interest is calculated on the reduced principal. Prepayment helps in reducing the overall interest expense as the tenure of the loan gets reduced. The higher the prepayment amount and longer the tenure, higher will be your savings.
What documents should I get from the bank every year against the EMI I pay?
Every home loan lender requires you to submit a statement at the beginning of the year showing the total interest and principal to be paid during the year. This statement helps you to declare data to your account section as a declaration of investment proof for tax deduction. At the end of the year, the lender has to again send a statement containing the actual amount of interest and the principal repaid which will help you avail tax benefits.
Should insurance be taken to cover home loan liability?
It is always better to cover your home loan liability and not let it burden your family in your absence. You can buy a pure term insurance plan or a mortgage insurance plan for an amount equal to the loan amount for a specific period. Single premium or regular premium is allowed to be paid for purchasing any such plan. However, it is not mandatory to buy such an insurance plan while taking a home loan from the lender.
What are the tax benefits on home loan?
Out of the total annual EMI, the principal component gets tax benefit under Section 80C of the Income Tax Act. Even the partial prepayment amount is eligible for this, but within the aggregate limit of Rs 1.5 lakh under section 80C.
In addition, up to Rs 2 lakh can be deducted in a year on the interest paid. In addition, first-time home buyers can avail an additional deduction of Rs 1.5 lakh under section 80EEA for buying a house under the affordable housing segment up to Rs 45 lakh on home loans sanctioned till March 31, 2022.