1. What is a Home Loan?
A home loan is a loan taken for buying or constructing a home or to make improvements to a residential property. You can get a loan from banks and registered housing finance companies. Your home loan is secured against the property that you buy. This means that in case you are unable to repay the loan, the lending bank will have the right to take possession of your home.
You need to be familiar with two terms relating to home loans:
- Principal amount: This is the total loan amount that the lender gives you
- Interest rate: This is the cost of the loan that you pay to the lender
The amount of the loan, i.e. the principal, which you can avail of, is decided by the lender based on:
- Your income
- Your loan repayment capacity
- The house (property) you wish to purchase
As a borrower, you can choose the type of interest rate that you will pay. You can either pay:
- Fixed rate: Where the interest rate remains fixed during the life of the loan
- Floating rate: Where the interest rate floats or changes depending upon market interest rates
Additionally, you can also choose the loan repayment period that you are comfortable with.
2. Do I need to pay any cash up front, or will the lender loan the entire amount?
Yes, you will need to put in a down payment of up to 15%-20% of the value of the property upfront (figure can vary by lender). Home loan lenders usually do not finance the total cost of the property.
3. What are the choices of repayment period of home loan?
You can choose a repayment period from 12 months - 300 months (1 year - 25 years) for your home loan in India. During this period you will be making a fixed monthly payment to the lender. This payment is called EMI – Equated Monthly Installment. Please note that usually post-dated cheques of the home loan EMI amount are taken upfront, at the time of the loan grant. This EMI is a fixed amount that you pay on a monthly basis and stays constant during the life of the loan (unless you change the tenure, i.e. length of the loan). However, the home loan interest and principal component of the EMI change on a monthly basis.
4. What are the fees associated with home loans –before and after disbursal of home loans?
There are charges and fees to be paid both before the loan is disbursed to you, as well as during the life of the home loan. Before the disbursal:
Most lenders would take a cheque of the home loan processing fee along with the application form. This fee is mostly non-refundable. So be prepared to pay up to Rs 5,000 as processing fee at the beginning of the process.
Legal and Technical Charge
Many lenders recover the costs that they incur for legal and technical verification of the property. These are known as legal and technical charges. Stamp Duty You will have to pay the stamp duty to the Government on yourhome purchase transaction. Many banks also recover the stamp duty paid on the registration of the loan agreement.
Prepayment and Foreclosure Charges
Prepayment Charge is the penalty paid by the borrower for making extra payments beyond the repayment schedule. Usually, this is waived off by most lenders. Foreclosure Charges are applicable when you repay the entire amount of the home loan before the actual tenure. These days banks levy this charge only when you are doing a home loan balance transfer to another home loan lender and not when foreclosing with your own funds.
Duplicate Statement Charges
Every year, the lender sends you a statement detailing the amount of money that you have paid during the year towards your home loan. This amount is broken into interest paid and principal repayments. This is done for your annual tax filing purposes. If you lose this statement, the lender might charge you to issue a duplicate statement.
Delayed Payment and Cheque Bounce charges
Delayed Payment Charges also known as the late payment charges are levied if you make the payment after the due date. You might also be subject to cheque bounce charges in case one of your post-dated cheque bounces because of lack of funds.
5. What are the types of home loan insurance?
There are two types of home insurance that you must get.
Home Loan Insurance
When you take a home loan, you owe the lender money. If you are not able to repay then the lender will take away your home. So, in a situation where you lose your life and no surviving member of the family can repay the loan, your home may be taken away by the lender. You can protect yourself and your family by buying a Home Loan Insurance, also known as Loan Cover Term Insurance. If something happens to you, you can be rest assured that with this insurance your home loan repayment will not be at risk and your home will not be taken away.
Home Insurance Your home is your most valuable asset and the result of your life's hard work and savings. You must protect it against natural disasters such as floods or earthquakes, or against fire. Therefore, it is important to get home insurance for building and contents so that you can at least recover the replacement cost of your home or your belonging in the event that something happens to your house.
6. What are the tax benefits of home loans in India?
You can avail tax benefits for both interest as well as the principal component of your home loan.
Interest paid on the home loan
As per Section 24 of the Income Tax Act, 1961 a deduction up to Rs. 150,000 towards the total interest payable on the home loan towards purchase / construction of house property can be claimed. The interest payable for the pre-acquisition or pre-construction period would be deductible in five equal annual installments starting from the year in which the house has been acquired or constructed. This deduction is allowed only for self-occupied property. The interest towards home loan taken for construction, repairs, renewal or reconstruction of existing house property is also eligible for deduction under Section 24. Principal repayment of the home loan As per Section 80C of the Income Tax Act, 1961 the principal repayment up to Rs. 100,000 on your home loan for purchase or construction of a residential house property will be allowed as a deduction from the gross total income.
Some key points on taxation:
Tax benefit is not available if you do not have possession of the house. Two or more people who have taken a joint home loan in India can both take advantage of the tax benefit in the ratio of the EMI payment that they are making. You can take advantage of both the home loan tax benefits and HRA benefit if you are living in a rented accommodation and not in your own house. This tax benefit is not available for loan against existing property or loan taken to purchase land.
7. I bought a property last month. Can I get a home loan for the same right now?
Most lenders would consider any property bought during the last 3 -6 months as a regular home loan application. You would be eligible for the same rates and income tax benefits as any other home loan . However, if you delay and the property purchase becomes more than 6 months old it will be treated as Loan against Property. The rates for the same are higher and there would be no tax benefits as well.
8. I intend to co-own, the property with my brother, sister, father, mother. Will I be eligible for a loan?
You would not be eligible for a loan as most home loan lenders allow only immediate relatives to co-own a property. This means that a parents-son combination and a husband-wife combination is only allowed. The reason for this restriction is that if some dispute arises between the joint borrowers, their incomes might not be pooled any longer and there might be a problem in repaying the loan to the bank.
9. Can a single woman get a loan ?
Yes, a single woman can get a loan. Till a few years back, banks hesitated to give loans to single women fearing loss of income after marriage. With double income families becoming the norm rather than exception, lenders now are lending to single women as well. Many lenders also have special schemes for women offering them a discount up to 0.25%.
10. Can I get a home loan for an apartment that I want to purchase in New York?
No, currently no home loan lender provides loan for purchasing properties abroad. The primary reason being operational difficulties in property verification, disbursement and different legal structure governing both home loan and repossession terms.
11. Do professionals have special eligibility norms?
Most home loan lenders offer special privileges to self-employed professionals. They recognize the fact that in such cases, income is generally under stated and the earning potential of such individuals is higher than what has been disclosed. Every Housing Institution (HFI) has its own conditions regarding the type of professionals they would cater to. The HFI also decides on the qualifications required for such professionals to qualify for the relaxed norms for loan eligibility calculations.
12. Can I get two home loans against two different properties?
Yes, you can have as many loans against different properties. The only criteria being that you should be able to repay all the EMIs every month.
13. Is there any loan provision for purchase of land?
Yes, loan for land purchase is available as long as it is for residential purposes only. Many mortgage lenders like HDFC and State Bank of India offer this loan. You can get up to 85% of the purchase amount based on your credit profile and paying capacity. You get no tax breaks if you take a loan to buy a plot of land. But, if you take a loan for construction, that means a loan to build a house on that plot of land, then you can get a tax break. In such a case, the tax benefits are available on both portions of the loan the one to purchase the plot and the one taken to construct the house thereon. Please note that the benefits under Section 80C and Section 24 can be availed only when the construction of the house is complete.
14. Can a NRI (Non Resident Indian) avail of a housing loan?
Yes, Non Resident Indians can avail of a NRI housing loan to buy a property in India. However, the loan disbursement process as well as the terms & conditions for a loan taken by a NRI are different than regular home loans granted to Indian residents.
15. What is a “pre-approved property”?
Many large builders get their projects “pre-approved” by specific home loan lenders. The lender examines the legal documents of the title of that project, the stage of construction as well as the builder's track record to complete the project in time. It then declares all properties in the project to be “pre-approved”. You do not need to go for legal and technical checks in case of a “pre-approved” property.
16. What is Pre EMI?
You've chosen a property that's yet under construction. So the lender makes the disbursement in parts based on the progress of the construction of your property. However till the housing loan is fully disbursed you have to pay simple interest at the rate you have agreed upon with the lender. This is known as the Pre EMI. And from the month following in which the full disbursement is made you will start paying your EMI.
17. What is Floor Space Index?
Floor Space Index refers to the ratio of the built up area of a property to the area of the land on which it is built. An FSI of 60% would mean that the total built up area of the building can be equal to only 60% of the area of the land on which it is being built. There are FSI specifications released by the relevant municipal body or development authority for all construction in its area. It is also known as Floor Area Ratio (FAR).
18. What is a fixed rate home loan ? When should one opt for a fixed rate home loan?
A fixed rate home loan is one where the interest rate on home loans charged by the lender is constant over the tenure of the loan. It is advisable to go in for a fixed rate only if you feel that the rate of interest prevailing in the market have touched rock bottom and the rates can only move upwards. Here are the latest offers on a 10 year fixed rate home loan and 20 year fixed rate home loan from the leading banks and housing finance companies in India.
19. What is a floating rate home loan? When should one opt for a floating rate home loan?
A floating rate home loan is one where the home loan interest rate charged by the lender keeps changing with respect to the rates in the market over the tenure of the loan. Typically, the rate charged is on the basis of their cost of funds and the prevailing market rates. These rates change periodically. Accordingly the tenure increases or decreases or alternatively the EMI increases or decreases based on whether the rates move upwards or downwards. Every home loan lender decides whether to change the rate of interest or change the tenure at the time of sanction. It is advisable to go in for the floating rate if you feel that the interest rates have reached its peak and can only go downwards. Here are the latest offers on a 10 year floating rate home loan and 20 year floating rate home loan from the leading banks and housing finance companies in India.
20. Can I convert my loan from fixed rate loan to floating rate loan & vice versa?
Yes, you can convert floating rate home loan into a fixed rate one with no extra charges. However, to convert a fixed rate product to a variable rate product, most banks will charge a small fee. The swap can be done any number of times and at any point of time.
21. Can the Fixed Rate of Interest change during the loan repayment?
The Fixed Rate of Interest ideally remains fixed over the tenure of the loan. This rate does not change after the final disbursement has been made. It is ideally suited for situations where you expect the rates of interest to go up in the future and this fluctuation in the rates does not affect you adversely. In cases where the disbursement is spread out over a period of time and the rates might have changed in the interim. The rate of interest would remain fixed at the final weighted average rate at which the loan was disbursed. Nowadays, many lenders are reserving the option of changing the rate on a fixed rate home loan after 3 or 5 years. So please read the fine print before you sign up for a fixed rate home loan.
22. What happens to processing/administrative fees if I don't avail of the disbursement?
Most lenders do not refund the fees that you pay to them if you cancel the loan after taking the offer letter from them. However, there are few Govt. owned banks which do offer full or partial refund. Almost all the lenders refund the money in case the loan is not sanctioned.
23. What is the difference between monthly rest & annual rest?
In a monthly rest, the interest is calculated on the outstanding principal at the beginning of every month. Once the interest is calculated at the rate applicable to you for the month it is deducted from the EMI received during the month. Annual rest works on the same principal only the interest is calculated on your outstanding principal at the beginning of every year. It is also commonly known as “Yearly Reducing Balance”. Monthly reducing balance is a better option all other things being equal as you get immediate credit for repayment and the interest component keeps reducing almost immediately on a monthly basis.
24. What are the charges other than interest that are levied by home loan lenders?
Almost all lenders charge certain administrative or processing fees apart from interest for providing a home loan in India . You must compare all these charges as well before signing on to a home loan contract.
- Legal fees - payable to the lender or to the legal consultants of the lender
- Technical or Valuation charges - payable to the lender or to his technical consultant.
- Stamp duty on creation of mortgage - some banks charge this fee whilst other banks normally just have a clause that requires this to be paid in the event the state government actually charges this amount. The escape route for non-payment of this duty are progressively being eliminated and the fact that the consumer carries the liability to pay this duty in the future if demanded by the state government along with interest and penalties in the future. So, this should not really be used by a consumer to eliminate a lender just because he is paying this stamp duty to the government.
- Prepayment Charges - This is the biggest charge that most consumers miss taking into account. A loan can be prepaid either in part or in full at any given point of time. You can also prepay a loan even when it is only partly disbursed. However, most banks have an upper limit on the number of times a person can prepay his loan in a year as well as on the minimum amount you can prepay each time. Until recently, banks charged a penalty for part or full prepayment. Increased competition has forced most banks to allow repayment without any charges if it is funded from own sources. In case the borrower, is transferring the loan to another lender he will need to pay the full charges.
25. What are the tax benefits that I can avail of for repaying a home loan?
You will be eligible to claim both the interest and principal components of your repayment during the year.
- Interest can be claimed as a deduction under Section 24. You can claim up to Rs. 150,000 or the actual interest repaid whichever is lower. (You can claim this interest only when you are in possession of the house)
- Principal can be claimed up to the maximum of Rs. 100,000 under Section 80C. This is subject to the maximum level of Rs 100,000 across all 80C investments.
- You will need to show the statement provided by the lender showing the repayment for the year as well as the interest & principal components of the same.
26. Can I take advantage of tax benefits from a home loan as well as claim House Rent Allowance (HRA)?
If you took a home loan and are still living in a rented place, you will be entitled to:
- Tax benefit on principal repayment under Section 80C.
- Tax benefit on interest payment under Section 24.
- HRA benefit.
Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops. If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above. However, in this case, the rent you receive would be considered as your taxable income.
27. I have a home loan in which I am a co-applicant. However, the total EMI amount is paid by me. What is the total income tax exemption that I can avail of ?
Yes, you can claim income tax exemption if you are a co applicant in a housing loans long as you are also the owner or co owner of the property in question. If you are only person repaying the loan, you can claim the entire tax benefit for yourself (provided you are an owner or co-owner). You should enter into a simple agreement with the other borrowers stating that you will be repaying the entire loan. If you are paying part of the EMI, you will get tax benefits in the proportion to your share in the loan.
28. I have two housing loans on two different properties. Can I get tax rebate under sec 80 C of both the loans?
Yes, you can get the 80C benefit on both loans. However, the total amount that you will be entitled to will be a total of Rs 100,000 across both the homes. The interest paid on a home loan is not directly deductible from your salary income for either of your flat loans. Income from house property will be calculated for each flat you own. If either of these calculations shows a loss, this loss can be set off against your income from other heads. As for Section 24 deduction, on yourself occupied house you can take advantage of interest payments up to Rs.1,50,000. For the other property, you can claim actual interest repaid, there is no limit for the same.
29. Is the EMI amount or the tenure of the loan affected if the value of the underlying property falls?
Fluctuating value of the property does not affect your EMI or your home loan liability. If you fail to repay your home loan you will be damaging your credit profile and any chances of getting a loan in the future. In such a case, where you want to dispose of the property because of loss in value – you will be much better off if you prepay your home loan and then sell the property.
30. Is it necessary to get property insurance, while availing a home loan?
Most lenders do not insist on property insurance when disbursing a loan. However, it is strongly advised to buy insurance as your home would be one of your most valuable assets. The home insurance rates are very affordable especially when bought for a long duration say 10 years. It would cost close to Rs. 50 per lakh of property value per year.
31. Can I sell the property, even when the home loan is outstanding?
Yes, you can sell the property with the consent of the lender. This consent letter usually mentions the amount at which the home loan can be considered fully paid off. This amount is inclusive of prepayment charges as applicable and calculated at a future date to give you enough time to find a buyer. Based on this letter, you can negotiate with potential buyers.
If the buyer, wants to take a loan to purchase the property the process is much simpler if he approaches the same lender. Then the lender does not need to release the title papers to another lender before getting the payment.
If the buyer wants to make an outright payment- he can make the payment out to the bank directly based on the consent letter. And the balance amount is paid out to you. The property papers will be released only after the bank has recovered the entire amount including prepayment charges.
32. Can I increase or decrease the amount of the loan even after it has been sanctioned?
Yes, the change in amount can be done at any point before disbursement. Any increase in loan amount will however be subject to the eligibility conditions. The bank might also charge you excess fees on requesting an increase in the loan amount. The bank is not obliged to return excess fees paid in case you are requesting for a reduction in the loan amount.
33. Is it advisable to transfer a home loan from my existing provider?
Please be clear on why you wish to change your loan provider?
- Is it because you want a better interest rate and change in EMI?
- Is it because of service?
- Or, any other reason?
There is usually a pre-payment penalty for the loan, so please understand that you will lose some money when you transfer out of your present lender. Additionally, the new lender might also charge you a loan processing fee. So, you might end up paying two types of fees during this transfer. Ask both the lenders what the fee will be. Make sure that you do the calculations of whether you will really save money with the transfer or not. The last thing you want to do is pay all these hidden charges. Also, practically speaking, you want to make sure that you are not going to add to your headache on the service levels.
34. What are the documents I will be asked to submit if I applied for a housing loan?
These are the documents that all applicants have to submit:
- Allotment letter of the co-operative society/association of apartment owners.
- Copy of approved drawings of proposed construction/purchase/extension.
- Agreement for sale/sale deed/detailed cost estimate from architect/engineer for the property to be purchased/ constructed/ extended/ renovated.
- If you have been in your present employment/business or profession for less than a year, you will need to give a document mentioning details of occupation for the previous 5 years, giving information about the position held, reasons for change and period of employment.
- Any other information regarding your repayment capacity that is necessary.
These are the documents that all applicants have to submit:
- Verification of Employment Form with only Part I filled in
- Latest salary slip/salary certificate showing all deductions
- If your job is transferable, permanent address where correspondence relating to the application can be mailed
- A letter from your employer agreeing to deduct the monthly installment towards repayment of the loan from your taxable salary
- Any other information regarding your repayment capacity that is necessary
If you are self-employed, you will need to submit:
- Balance Sheets and Profit & Loss Accounts of the business/profession
- Copies of Individual Income Tax Returns for the last three years certified by a Chartered Accountant
- A note giving information on the nature of your business/profession, form of organization, clients/suppliers, etc.
5 Vital Tips on Home Loans.
- To increase your loan eligibility,combine your income with that of your spouse, children or parents
- Always negotiate - the first home loan interest rate quoted is never the final rate
- Before paying the loan processing fee request lender for preliminary check on the property
- Buy Loan Protector Life Insurance - ensure your family can use the house if you are not alive
- Immediate disbursement get best rates - talk to home loan providers when you are close to finalizing your property