All About Home Loan

A home loan is money borrowed from a money lending institute or a bank for the purpose of securing a property. You can take a home loan on any property and not just on home. This property could be personal or commercial. The loan is given out at a specific interest rate which you have to return on an EMI (Equated Monthly Installment) basis. Here the property that you purchase is used in the form of a bank’s security which the bank can auction in the instance of a non-payment. The money lending body keeps most of the important property-related documents with itself.

Types of Home Loan

Home loans are given out for many different purposes. The types of home loans are listed under.

1. Home Purchase Loan: You take this loan when you want to buy a home (new or pre-owned).
2. Joint Home Loan: You can take this loan to purchase a property along with a close family member such as a parent or a spouse.
3. Land Purchase Loan: You can take this loan when you want to buy a land to construct a property on it.
4.  Home Construction Loan: You can avail this loan when you want to construct a new property.
5. Home Extension Loan: You can take this loan when you want to add certain room or space to your previously existing property. With the help of this loan you can plan a new floor to the house, or add another kitchen, bathroom, garage, or a bedroom.
6. Home Improvement Loan: You can use this loan to renovate or make repairs to your home.
7. Home Loan Balance Transfer: Home loan balance transfer allows you to transfer the balance loan amount from the current bank to a new bank that offers you superior facilities and a lower rate of interest.
8. Top Up Home Loan: This allows you to borrow added amount above the existing loan value.

Benefits of Availing Home Loan

Home loan is very helpful when it comes to buying a desired property which you lack the means or money to buy. However, if you do have the requisite amount to purchase a property, still availing home loans provides you with a number of benefits. You get the advantage of tax saving and can save up your money to ensure sufficient liquidity and allow your funds to grow.

• Home loans are given out at cheap rates of interest. You do not have to pay any prepayment penalty which are applicable in other types of loans, while you get to enjoy floating interest rates.
• Income Tax Act Sections 24, 80C and 80EEA provide one of the greatest tax deductions on home loans. Hence, if you belong to under the 30% tax bracket, then you can get a tax deduction of up to Rs. 5 lakhs and lower your tax liability by Rs. 1.5 lakhs.
•  After saving on taxes, you can use the remaining money to invest in various money earning schemes.
• In the event of a liquidity crunch, other loans like personal loans act as an expensive alternative to home loans. So, by applying for a home loan, you are saving some liquid cash for emergencies.
• Home loans are given out after strict checking by the banks. So, when a bank finances a property, then your risk is greatly reduced.

Documents Required

1. Identity Proof (PAN card + driving license/ aadhar card/ voter id card/ another identifying document)
2. Address Proof (latest utility bill/ valid passport/ aadhar card/ voter card/ another identifying document)
3. Income Proof (latest Form 16/ ITR + bank statement for the past 6-months of the salaried account + salary slip of last 2-months); incase of a businessman (profit-loss statement for the last six months)
4. Property-related Papers (entire copy of property-related chain documents + ‘Agreement to Sell copy’ + copy of Buyer Agreement/ Allotment Letter + copy of Payment’s Receipt as made to the developer)
5. Papers of any other existing loans + bank statement for last six-months for proof of repayment

How Much Home Loan Can I Get? 

If you are deciding to get a home loan from any bank or any other lending body, then you can make use of a home loan eligibility calculator to know about the loan value as per your eligibility. This Home Loan calculator takes into account certain constituents such as your monthly earning, the loan duration, and existing fiscal obligations to inform you about the highest loan value that you can get.

If your earning is high, then you would be eligible for a greater loan value. Still, factors like current loans could decrease real loan-to-value. So, if you want to apply for a greater loan amount, then it is advisable to pay-off all credit card dues and forecloses any pre-existing loans. Moreover, a high CIBIL score of 750 and above increases your chances to avail of a greater amount.

Interest Rates

Home loans benefit from one of the lowest interest rates available in the market. The interest rates keep changing according to the market conditions. However, you can get home loans as less as 7% interest rates.

Can I Co-apply For a Home Loan with a Family Member?

Yes, you can easily co-apply for a home loan along with a family member. In fact, in India it is not compulsory to have a co-applicant when applying for a home loan, still many loaning bodies prefer to have co-applicants so that there is a loan repayment guarantee. Having a co-applicant also rises your chances to get the home loan.

There are a few constraints on who could be a co-applicant for a home loan. For example, a minor, a friend, a brother-sister pair, or a sister-sister pair could not act as a co-applicant. You could only have your spouse as a co-applicant. Two brothers can also act as co-applicants. All sons could co-apply for loan along with their parents, but only unmarried daughter can apply for such a loan with her parent.

Can I Prepay the Home Loan?

Yes, you can prepay the home loan. You could take the help of a home loan prepayment calculator to know the prepayment charges. The prepayment charge is generally 2 to 4% and is dependent on the rules and regulations of a lending body.

What is a Moratorium Period?

A moratorium period is a particular duration after you receive the home loan when you don’t have to repay any value on it. It is like a waiting period before you actually start to repay your EMIs. Generally, you start paying an EMI as soon as you get a loan sanctioned, but in the moratorium period, you get a break from this EMI. However, you must remember, that even if you are exempted to pay during this period, still there would be no exemption on the interest rate which would continue to build up. The interest rate during this period would be calculated on a simple interest basis and applicable only on the offered amount and not the entire loan value. You can use the moratorium period to plan your finances before you are hit by the EMIs.

What is an Amortization Schedule?

Amortization schedule is the repayment schedule on your bank loan. You must know about the amortization schedule at the time when you apply for a home loan. A home loan amortization calculator would help you in this task. Your lender would also supply you with detailed amortization schedule. The schedule generally comprises of an installment number, due date, opening principle, installment amount, principle component of installment, interest component of installment, closing principle, and interest rate per annum.

What if I Fail to Repay?

If you fail to pay your EMI for a particular month, then there would be a negative effect on your CIBIL score and you may have trouble applying for any future loans. The NBFC body or the bank also charges a penalty of 1 to 2% if the EMI remains unpaid for more than 30 days. However, if you are not able to pay your EMIs for a longer term then the bank has the right to auction your property and get back the lent amount. Still, you have the chance to pay your dues before the auction date or, alternately have the right to appeal to the Debt Recovery Tribunal to put a hold on the auction.  

Tax Benefits

Home loans have some attractive tax benefits.

• Under Section 80C, once your property has been constructed, you can enjoy an annual tax benefit on principal repayment of your loan amount up to Rs. 1.5 lakhs. This is inclusive of amounts paid on stamp duty and registration charges.

• Under Section 24, you can get annual tax benefits on interest repaid. Here, you get a maximum deduction of Rs. 2 lakhs. Moreover, if the property remains unconstructed for more than three-years from the end of financial year in which the loan was granted, then just Rs. 30,000 could be claimed as the deduction. If you repay the loan before the property is fully constructed, then the total eligible deductible amount would be claimed in five equivalent instalments for the next five financial years.

• Under Section 80EE, a first-time buyer can enjoy a tax benefit of up to Rs. 50,000.

Can I Make Balance Transfer?

A home loan balance transfer is a popular option by which buyers reduce their EMIs. However, the balance transfer would only be fruitful in the early years of the loan duration because the lenders tend to retrieve most of their interest rates in the beginning of the period. Moreover, you have to pay certain charges to initiate this balance transfer.