Home Loan Tips

American author Maya Angelou once said, “The ache for home lives in all of us, the safe place we can go as we are and are not questioned”. Owning a beautiful and comfortable home is the foremost of all human desires. Opting for home loans is a step forward in that direction.

Banks and Housing Finance Companies (HFCs) offer various home loans with tailor made options to suit different payment capabilities. A simple understanding of home loans can help loan seekers in applying for suitable options.

Why Home Loans?

• Because rarely do people have the money to buy their dream home.
• Because one can avail a loan of up to 85-90 percent of the total property cost.
• Because taking a home loan offers tax benefits
• Because one can take loans with tenure ranging from one to 20 years

Types of Home Loans

There are several types of home loans for different needs of prospective loan seeker.

Home Purchase Loans – As the name suggests, these are basic loans used to purchase new property.

Home Improvement Loans – These loans are used to renovate and modify existing properties.

Home Construction Loans – These are given out to construct a new home.

Home Extension Loans – These loans are used to expand or extend parts of an existing home.

Balance Transfer Home Loans – These are usually new loans with lower interest rates, which are used to repay an old loan.

Land Purchase Loans – These are opted to buy fresh land for construction of new homes.

Bridge Home Loans – When people wish to sell their existing home in order to buy a new home, bridge home loans can help to finance the new home until a buyer is found for the existing one.

NRI Home Loans – This increasingly popular home loan aids the NRIs in buying residential properties in India.

Interest Rates – Floating and Fixed

Interest rates play an important role in determining whether it would be prudent to opt for a home loan. Interest on home loans are usually calculated on monthly or yearly reducing balance basis, and they may either be fixed or floating.

When the interest rates charged remain constant throughout the tenure of the loan, it is known as Fixed Interest Rate. It does not depend on the prevailing market rates. Opting for fixed rate protects the loan seeker in case of fluctuating interest rates in the market.

On the other hand, Floating Interest Rates is dependent on the market rate. It is directly linked with the bank lending rate and the amount of interest payable will rise and fall in accordance with the prevailing market rates.

Interest rates given by major banks and financial institions fall in the range of 10.00% to 13.50%. Public sector banks like State Bank of India and Canara Bank offer fixed interest rates in the range of 10.00% to 12.50% and floating rates between 10.00% to 11.25%. Housing Finance Companies (HFCs) like LIC Housing Finance, HUDCO and Canfin Homes Ltd. offer fixed rates between 10.00% to 12.00% and floating rates between 10.00% to 12.75%. Other financial institutions like Kotak Mahindra Bank, ICICI, HDFC, HSBC Bank etc. also provide competitive lending rates.

These loans are usually given out for a maximum tenure of 20 years. A charge of 0.50% to 1% of the total loan amount is levied as processing charges.

Usually, the banks and financial institutions would require the loan seeker to fund around 10-20% of the total loan amount as down payment, which has to be deposited before home loan is disbursed. Banks can refuse home loan in the absence of non-compliance of the same.

Calculating the loan amount

Factors like age, repayment capacity, education, stability and job security, assets, savings, liabilities etc. are taken into account while sanctioning a loan. If a well-earning couple applies for the loan together, their chances of getting a loan for a big amount are substantially increased.

Repayment and Pre-payment of Loans

Home loans are usually paid by Equated Monthly Installments or EMIs. The amount of EMI is determined on the basis of the amount of loan granted, interest rate and tenure of loan. Apart from these, most financial institutions allow foreclosure of loans (prepayment), with nominal (2-3% of the outstanding amount) or no charges.

Tax Benefits in a nutshell

The tax benefits that come with taking a home loan cannot be emphasized enough. Section 80C of the Income Tax act provides for a maximum deduction of Rs 1Lakh in respect of repayment of the principal amount of the loan taken. Apart from this, under section 24, interest repayments of up to Rs. 1.5 Lakhs per year are exempted from tax.

Processing the Home Loan

When a loan seeker approaches banks or HFCs for a loan, their application goes through two important processes –

• Firstly, working out loan eligibility based on financial standing and documents submitted to prove the same.
• Secondly, determining the credit risk and sanctioning a home loan accordingly.

Loans will only be granted once the documents are verified and relevant no objection certificates are duly obtained. In case documents are not in order, it will only lead to unnecessary delays or denial.