Buying a home is the most significant financial decision for many individuals and certainly involves much financial planning. Availability of Home loan makes it easy.
A house loan or home loan is a form of secured loan borrowed to purchase a residential house/flat or a plot of land for construction of a residential house, or renovation, extension and repairs to your existing residential house. It has a fixed tenure and is repaid by Equated Monthly Instalments (EMI) over the sanctioned tenure.
A home loan can only be availed by an individual. Non-individuals buying property is treated under LAP product.
Individual deriving income from any lawful business activity, which may be in the following forms are eligible for HL:
The age group for availing credit facility is in the range of 21-65 years. The maximum age of 65 should be at the time of maturity of the loan. Lenders do insist on taking insurance cover in the form of loan shield, and the premium starts increasing with an increase in age. Therefore, the younger generation enjoys a better price as well as terms and conditions while availing a loan as compared to the older generation.
The risk associated with higher age factor can be mitigated by adding one or more younger generation individuals as co-borrower or guarantor to the loan structure.
Turnaround time, in short TAT, is the time required for the lender to process the loan application. TAT starts from the login of the file and ends with loan disbursement.
Home Loan processing involves scrutiny of KYC, Financial documents and copies of co-lateral papers. Financial appraisal, scrutiny of title flow of the collateral and valuation happens simultaneously.
Sanction or Rejection of the proposal is decided in a week, which includes a valuation and legal scrutiny. One must keep in mind, providing a full set of documents and information in one go, helps the lender to decide faster.
Few builders approach lenders to evaluate the project and provide either a pre-approved home loan or pre-approval for the project. In such cases, crucial time is saved as legal scrutiny, and property valuation is not required, and the loan application is decided in 3 to 4 working days.
On acceptance of the Sanction and signing of the loan agreement, the amount is disbursed to the borrower. The total time taken from signing the application form to releasing the fund can be completed in 2 weeks.
If the process involves the takeover of loan from another lender, additional time is elapsed in getting the co-lateral papers from the existing lender and creating mortgage in favour of the new lender. This process itself takes about 2 to 3 weeks, depending on the lender’s policy and place of document storage.
Rate of Interest is positively correlated with the risk involved in the lending. The other guiding factors which govern the rate of interest are Credit Score, Loan amount, Tenure, Risk Profile, scheme etc. Home Loan attracts ROI of 8% to 11.5% depending upon whether it is site purchase or independent house purchase or apartment purchase or composite loan.
Home Loan is available under Fixed, Floating or Hybrid Rate of Interest and is linked to the Reference Rate. Reference Rate is dependent on the risk profile of the lender and Rate of Interest is decided based on the Spread the lender wants to keep over and above the reference rate.
Loan Tenure is dependent on Risk Profile, Credit Score and scheme under which the loan is being sanctioned.
The general repayment tenure of Home Loan starts from 5 years, and maximum tenure could be 30 years. Most borrowers prefer 20 years tenure for repayment.
The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 20-30-year loan. However, it is advisable to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high.
The eligibility of an HL depends upon various factors, including the following important ones:
As the name suggests, a home is borrowed to buy or construct a residential house. The lender disburses the loan directly to the seller of the property in case the borrower is acquiring the property, or disburse to the borrower account on submission of proforma invoice, bills or engineer’s certificate. Hence, the use of the home loan is specific, and the borrower cannot use the fund otherwise stipulated.
Considering the substantial amount and the long tenure involved, a home loan is certainly a liability. It also offers certain benefits:
Financial Investment: Buying a home is one of the biggest financial investments one may make in the lifetime. The sum that sinks into the home does make it the largest component of an investment portfolio.
Capital Appreciation: Property offers a safe investment option with noticeable appreciate over the years. This can shield one from inflation in the long run.
Low-Interest rate: Interest on a home loan is lowest among any other loans and coupled with various benefits one can avail on the Income-tax deduction, it is certainly one of the preferred lending product the banking industry offers.
Tax Benefits in Interest Payment: As per Section 24(b) of the Income Tax Act, 1961 a deduction up to Rs. 2 Lakh towards the total interest payable on the home loan towards purchase/construction of house property can be claimed while computing the income from house property. Further, Principal payment also qualifies to be deductible under sec 80C up to Rs 1.50 lakhs. If the property is let out, entire interest can be claimed as a deduction.
Tax Benefits in Principal Payment: As per Sections 80C of the Income Tax Act, 1961 the principal repayment up to Rs. 1 Lakh on home loan will be allowed as a deduction from the total gross income.
Buying a property on Home Loan is a major financial decision and one need to know the impact of such a financial decision. 80% of the property purchases in India are done through Home Loans, and it is now a norm to have Home Loan as a tax planning tool. Still, this product has a few disadvantages:
High-Interest outgo: Though the rate of interest on HL is low, the long term in nature makes the total interest outgo offset the appreciation in the property value over the years.
Loss of HRA exemption: A salaried borrower needs to forego HRA exemption once he avails Home Loan. On a self-occupied property, maximum interest claimed as an exemption under sec 24 is Rs. 2 Lakh, that is monthly Rs. 16,667/-. In a higher salary band, the HRA component of the salary is much higher, which becomes taxable. Further, the allowed deduction of Rs. 1.50 Lakh under sec 80C is mostly not used, as the borrower’s saving in PF, Insurance, school fees have left little room for home loan principal.
Long Term Commitment: Though the average sanctioned term of home loan is 18 years; the average duration of home loan is 8 years. Average salary increment is 7% which may be just equal to inflation. If any unplanned expenditure comes up during this period, the borrower faces a challenge in making the Home Loan repayment. Unless some years the salary has a sharp jump, Home Loan could be a real burden.
Adverse Interest Rate Movement: Being home is a long-term loan; it subject to volatility in interest rate movement. On the increase in interest rate, lenders increase the tenure keeping the EMI unchanged; thus, interest component increases in EMI. This further pushes the overall interest payment to the north.
The charges for availing loan may include initial Login fee, Processing fees, documentation charges, stamping, mortgage, affidavit and Notary fees etc.
Certain charges like Documentation Fee, Legal & valuation fees, affidavit and Notary fees are absolute figures, whereas Processing fee, stamping and mortgage fees are a percentage of the loan amount.
Documentation, affidavit and notary fees put together ranges from Rs. 5,000 to Rs. 25,000 depending on the terms of lenders.
The processing fee ranges between 0.20% to 1.00% of the loan amount. Few of the lender on good gesture waive processing fees. Stamp duty and mortgage charges are at actual, which is a fee charged by the State Govt on the lending and mortgaging the assets.
All these charges are borne by the borrower. The borrower either pays upfront or the same is deducted from the loan amount.
The repayment of the loan should be made according to the repayment schedule of the lender through banking mode.
A lender and borrower can agree on the repayment mode according to convenience. Repayment of EMI can be made through NACH, ECS or SI. The lender set the repayment mode for each loan account to ensure automatic repayment on a specified date. If payment is not cleared through the set process, it is termed as default in payment.
The lender generally collects updated PDCs for security purpose and may present whenever EMI get bounced or to take legal steps to recover the outstanding loan.
HL is based on property value and income eligibility. Generally, the lender provides a maximum of up to 85% of loan against the value of the property. Therefore, if you want a home loan for buying a property of Rs. 50 Lakhs, the maximum amount you can get is 85% of that, i.e., Rs. 42.50 Lakhs. The total financed amount also includes registration, transfer and stamp duty charges. There is no upper limit of the loan amount one can avail. However, to be eligible under Pradhan Mantri Awas Yojana, the home loan is to be restricted under Rs. 18 Lakhs.
Buying home is the single largest financial decision for many individual and home has an emotional factor to the Indian. These two aspects and the appreciation in the value of the property has redefined the risk-taking ability of lenders. Lenders has evolved in designing various unique schemes suitable to the requirement of different category of borrowers. A borrower should apply under the most suitable scheme to be most benefited. Aagey.com’s proprietary algorithm analyses 1,000+ schemes offered by 75+ lenders to bring the best fitment possible. Few of the schemes are:
Top up is the loan facility given by the lender based on servicing of an existing loan.
In case of HL, if the borrower has paid 18 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called Top Up and is subject to verification of income documents, re-valuation of the co-lateral and other eligibility criteria laid down. This additional loan could be given as Home Improvement loan for additional work to be undertaken to the existing home or offered as LAP. This is offered as a fresh loan which would run parallel to the existing loan.
Foreclosure or Pre-payment is the process when one repays the loan before the loan tenure ends. Generally, foreclosure of loan comes with penal charges depending upon the number of EMIs paid. Shorter the EMI servicing period, higher the penal charges. However, in pursuant to RBI guidelines, foreclosure charges/pre-payment penalties on any floating rate term loans sanctioned for purposes other than business to individual borrowers are waived off. Home Loan is invariable sanctioned to Individual, for non-business purpose and is floating in nature, does not attract foreclosure charges/pre-payment penalties on closure, irrespective of the fact the loan is closed from own fund or borrowed fund. Minimum EMI servicing period to be eligible for foreclosure is 6M to 12M depending upon the policies of each lender.
Home Loan is called as “No Cash out Loans”, that means the lender does not disburse any fund to the borrower, rather the disbursement amount gets credited to the seller account directly. If the borrower wishes to close existing loans, he has to do so from his own fund. Closing of existing loans has two benefits – reducing running EMIs increases eligibility under Home Loan and diverting disposable income towards clearing Home Loan EMIs to repay faster. Since Home Loan are offered at a very low rate of interest among all the loan products, it is advisable to close high-cost loans before taking Home Loan.
While the borrower has a lump sum idle money but is not enough to close the entire principal outstanding loan amount, part payment is an option, where a part of the loan is repaid. Such bulk payment brings down the EMIs and the total interest paid and to be paid. This is easy, but an effective way to save on the interest outgo during the tenure of the loan.
Lenders allow part-payment up to 20 to 30% of the loan amount twice in a year. Part-payment option exercised regularly will go towards bringing down EMI amounts, the total interest paid and repaying the entire loan faster.
If the borrower is facing a temporary liquidity crunch, may apply to the lender for extending loan tenure so that EMI burden can come down. However, tenure extension may amount to “Debt Restructuring” as per RBI guideline.
Upon borrowing, the borrower creates the mortgage in favour of the lender and hand over the original documents to the lender. The lender has the responsibility of safekeeping the securities, documents, title deeds till the loan is fully repaid.The borrower has always had a concern – how quickly one can get back once the loan is repaid and how safe the documents are with the lender.
The Banking Codes & Standards Board of India (BCSBI) constituted by the RBI has recommended banks to put in place mechanisms to ensure that securities and title deeds of borrowers are properly preserved. Also, banks are to return all securities, documents, title deeds within 15 days of the payment of all dues. Banks and NBFCs store documents in strong rooms and non-basement storage places that could help against floods and fire.
Nevertheless, on the safer side, we recommend all borrowers to keep a set of photocopies of all the documents submitted to the bank and a letter from the lender listing out the documents in their custody.
Another aspect of document safety is the copies of documents submitted may get misused by fraudsters. To protect from any fraudulent activity, it is advisable to scribe “Submitted to XYZ Bank for Loan Application” on each and every photocopy of the document submitted.
A Home loan can be for the purchase of a completely constructed house or apartment; purchase of land now and construction later; or composite.
Purchase of land and construction later and are in the range of 10 to 11%, whereas composite loans are at 1% spread on the reference rate. Buying a completed house or flat is possible at the best rate, which ranges from as low 8.25% to 9.50%.
