Home loan is a certain amount of money advanced to a person by a bank or money lending firm to assist them in buying a house or a flat. It is also availed to construct, repair or renovate a residential property. Lenders offer the loan amount on a fixed or floating interest rate, which has to be paid by the borrower along with the principal amount on a monthly basis. Home loan is one of the most popular and the largest selling products offered by banks and NBFCs.
About Home Loan:
Home loan is one of the most vital financial decisions of your life. In India, you can avail home loans mainly from two types of lenders: the housing finance companies and commercial banks such as Aditya Birla Finance, PNB Housing and Finance, HDFC, ICICI, Axis Bank, Kotak Bank and many more. However, most of the lenders sponsor 90% of the property value as a home loan. The remaining 10% needs to be capitalized as a down-payment from your side.
Types of Home Loans:
- Home/Land Purchase Loan: This is the most popular kind of loan where as the name suggests the bank or NBFC offer loan to the borrower to purchase a home.
- NRI Home Loan: This home loan is particularly designed for Non-Resident Indians who want to invest or buy a property in India. The interest rates differ from that of a home loan.
- Pradhan Mantri Awas Yojana: As the name suggests, it is a government scheme where almost all the banks offer loan under the coalition of this scheme. With the announcement of Credit Linked Subsidy Scheme (CLSS) in June 2015, it gives a rightful chance to every Indian to fulfil his/her dream of buying a house.
- Home Conversion Loan: Every day is different and so when a person wants to move from an old house to a new home, the home conversion loan helps him/her to transfer the current loan from their old home to a new house they purchased.
Determination of a home loan eligibility criteria is based on many of the following criteria’s
- Your Current Income
- Age Criteria (minimum 21 and maximum depending 60-65)
- Past Credit History
- Nature and continuity of your employment
- Current valid obligations such as existing EMIs and Credit cards.
Documentation required to avail a Home Loan:
A generic list of documents required which are submitted during an application and which are filed based on eligibility criteria are listed below:
|Salaried Customers||Self Employed Professionals||Self Employed Businessman|
|Application form with photograph||Application form with photograph||Application form with photograph|
|Identity and Residence Proof||Identity and Residence Proof||Identity and Residence Proof|
|Latest Salary-slip||Education Qualifications Certificate and Proof of business existence||Education Qualifications Certificate and Proof of business existence|
|Form 16||Last 3 years Income Tax returns (self and business)||Business profile|
|Last 3 years Profit /Loss and Balance Sheet||Last 3 years Income Tax returns (self and business)|
|Last 3 years Profit /Loss and Balance Sheet|
|Last 6 months bank statements||Last 6 months bank statements||Last 6 months bank statements (self and business)|
|Processing fee cheque||Processing fee cheque||Processing fee cheque|
Home Loan Interest Rates:
Interest rates regarding home loans are mainly classified as Fixed rate and floating rate of interest in India.
Home Loan - Fixed Interest Rate:
Fixed interest Rates are those rates which do not change with the fluctuations of the market and so the repayment of the instalments is fixed and equal for the entire amount of time. The fixed rate of interest does not remain constant for the entire tenure as most of the lenders have a reset clause after 3-5 years. The borrower must opt for fixed interest rates only if he thinks it is the lowest in the market at that time.
Home Loan Floating Interest Rates:
Floating rates of interest means that the interest rate will vary in accordance with the market conditions as the interest rates are tied up to a base chare rate with an additional floating element and thereof the rates vary. Therefore, with changing base rate, the floating interest rate also varies.
The changes in interest rates depends on the base rate of the bank. Hence, when the interest rate changes the customer can change his EMI or tenure. Hence, if the bank increases or decreases their bank rates, the customer can choose to either increase or decrease his EMI or increase or decrease his tenure whichever is more convenient.
Any salaried individuals, self-employed person or businessmen who overcome the eligibility criterion set out by the lending institutions can avail the benefits of home loan.
Banks will ask you to pay late payments penalty, you will be put on a high-risk loan borrower category and your CIBIL score will get affected.
The property deed of the house for which loan is being taken should be provided as security against loan. If the house is under construction and you are not able to provide the required documents, then any collateral as security such as bank deposits, government bonds, deeds of other immovable property you own would need to be provided.
Any immediate members of your family say your spouse/children/parents are allowed to act as your co-applicants in case of home loan.
Post dated Cheques : In case you don’t have an account with the specific bank, then you can draw a cheque to pay the EMI’s at the end of the month.
As home loans are related to long term loans their tenure ranges from a minimum of 15 years to the maximum of 30 years. It totally depends on your loan amount along with some other factors. Usually, the maximum tenure for salaried individuals is 25 years and for self-employed individuals, it is 20 years.
With prepayment, you will able to reduce the EMI, which in turn will result in the reduction of the principal loan amount. Low principal amount leads to lower interest. Thus, you will be able to save lots of money with lower interest payments.
Almost all banks do not charge any penalty on pre-payment of home loans.
The maximum amount of home loan disbursed depends on two factors:
- Your credit score
- Your potential to repay the loan
Banks usually take into account 40 to 60% of your net annual salary for EMI and the market value of the property as a factor to decide on the maximum loan amount to be disbursed.
Fixed interest rate means the EMI’s are fixed for the home loan over the entire period of repayment of the loan. While in floating, the rate of interest on the loan borrowed fluctuates with the market conditions. Research thoroughly and do your inquiries before taking the loan as each one of them has their own benefits and drawbacks.
Not many banks allow you to trade from floating to fixed interest rates. However, some banks can permit you to switch with a small penalty charge. Make an enquiry to your lenders about the requirements and the procedure.
Reserve Bank of India has introduced a new set of guidelines for banks called MCLR (Marginal Cost of Lending Rate) wherein banks are allowed to set their own convention of lending rates and give loans to the borrowers as per their creditworthiness. If you have taken a loan on the basis of base rate then it would be tangible for you to transfer to MCLR lending rates, as you can a save large portion of money with the drop of interest rate in the future.
If all valid documents are submitted then the loan will be disbursed in 14-days.
Once the loan is sanctioned, banks will then dispense loan in 3 to 4 instalments based on the sale deed and builders demand notes of payments.
You can sell your property after 7 to 10 years depending on the terms and conditions declared by the lender in the loan agreement.
Doing so will not have any effect on your CIBIL score, but it will definitely increase your eligibility for a home loan.
You can get two benefits:
1. Tax benefits on interest – You can claim a benefit of maximum 2 lakhs on the interest amount paid on a home loan as stated in the section 24 of the income tax act.
2. Tax benefits on principal loan amount – You can also get a tax benefit of 1.5 lakhs on the repayment of principal home loan amount as per the section 80C of the income tax act.
Banks are very selective when it comes to credit score. A low credit score will make it difficult for you get a home loan. However, many NBFC’s can compensate your low credit score with higher interest rates for availing a home loan.
Some of the stellar housing financial institutions in India are: IDFC Bank, ICICI Bank, Axis Bank, HDFC Bank, Kotak Bank, PNB, Yes Bank, Standard Chartered Bank, Deutsche Bank, Aditya Birla Finance, RBL, Indusind Bank, India Infoline, TATA Capital, Shriram Finance, L&T, Money Matters Finance Ltd to name a few and others.