Home loan interest has come down to below 10% after RBI’s 3 repo cuts of 25bps, which may prompt many to invest in real estate. But before opting for loan you should know all the details related to home loan so that you can take the informed decision. The article is not meant to recommend real estate buying but to know the various aspects of home loan.
Buying an own home is the top most priority of every Indian. This is one of the most common goal and seven out of ten clients come to us for financial planning have a goal of buying first home, or buying a bigger home or buying a home for investment. The trend is very natural as the home loans are available very easily. The rate of interest is also competitive compared to other loans available in the market and tax benefits are also available for the payment of principal amount as well as for interest payment. This tax benefits reduces the cost of borrowing. People also let out the additional home purchased for investment and also earn rental income on let out property. Thus, part of EMI also comes from income generated from the investment. These all makes decision making process easy for investor.
Home loan is available for purchase of residential property both new and resale, construction of home and also composite loan for purchase of land and construction of home. The maximum amount of loan available is approx. 80% of the agreement or registration value whichever is higher. The registration value of the property is the value as per the stamp duty ready reckoner for the purpose of payment of stamp duty. Stamp duty and registration charges are no longer financed and are not added while calculating the total cost of home. Before finalising the loan disbursement, lender also takes into account EMI for the existing loans and credit card dues if any. The title of the property should be free from all encumbrances and also you should have all chain of documents in case of resale flat.
Eligibility criteria are decided on the basis of income of borrower and age of borrower. The age of the property is also considered while approving the home loan. Normally lender will prefer EMI is complete in working span of borrower. The retirement age for this is taken at age 58 to 60 in case of salaried and up to age 65 in case of businessman or professional. Normally lender will assume around 40 to 45% of your income is available to service all the loans. You can also include earning spouse, parents, children and brothers (in few cases) to increase your eligibility. It is mandatory for co-owner of the property to be the co-borrower but co-borrower need not be co-owner.
Home loan is available from both PSU and private banks and also from housing finance companies like HDFC and LIC housing finance etc. Banks are governed by RBI whereas housing finance companies are governed by National Housing Bank. Banks follow base rate system whereas NHB follow Prime Lending Rate system. Interest rate calculation in Bank is base rate plus spread and in case of NHB it is prime lending rate minus spread. It is advisable to take home loan for a term of 20 years or more so that you get maximum loan and also EMI comes within repayment capacity.
Cibil report nowadays has become one of the important sources for the lender to assess the credit history of the borrower. CIBIL is the repository of information which has been pooled in by all banks and lending institutions operating in India. It is important to check Cibil score before applying for any loan because higher score will give you ability to negotiate for the better deal in respect to interest rate and other charges. The CIBIL score of 700 and above out of 900 is considered to be good for getting any loan.
Different types of home loan:
1) Fixed Interest Rate: The rate of interest remains the fixed during entire tenure of loan. Very few banks offer this type of home loans and right now nobody buys fixed rate loans.
2) Floating Interest Rate: The rate of interest changes with change in repo rate declared by the RBI in its monitory policy from time to time. The rate also changes with the change in base rate or prime lending rate of borrower.
3) Dual Interest Rate: The rate of interest is fixed for initial period of 1 to 5 years and then it gets transferred to floating rate automatically.
4) Home Saver or Offset Loans: This is really a good option for those who have large inflows in the saving bank account and is not used immediately. In this borrower has to open a current account with the bank. Borrower can deposit and withdraw from this account just like any normal current account. The beauty is interest is charged on the aggregate principal amount after taking into account the balance in the home loan linked current account. The rate of interest is higher by 0.25% to 0.50% in these loans compared to regular floating rate home loans but itâ€™s worth considering.
Charges and penalty:
Borrower has to bear some charges such as processing fees, legal fees and stamp duty for creation of mortgage. There is also prepayment penalty in both fixed and dual rate (till the initial period of fixed rate) home loans. As per guidelines by both the governing bodies there are no pre payment charges in case of floating rate of interest loans. Therefore it is advisable to take floating rate loan or offset loans as you can prepay your home loan in between or else you can also balance transfer the existing home loan to other lender who offers competitive deal. Transferring of existing outstanding home loan to from one lender to other lender is known as balance transfer. So if your lender is charging higher rate of interest compared to competitive rate of interest available in the market, then you can opt for balance transfer option and reduce your EMI for the balance tenure.
1) Deduction u/s 80C:
Stamp duty paid, registration charges and Principal amount repayment up to a maximum limit of Rs. 1.50 lakhs in aggregate with other items of investments such as EPF, PPF, Insurance Premium, ELSS Scheme of mutual fund etc. is available as deduction u/s 80-C.
2) Deduction u/s 24B:
Interest on home loan up to Rs. 2 lakhs is tax deductible if the property is self-occupied. If the property is jointly owned, both the owners can claim the benefit separately depending on their share in property. You should be careful when you opt to buy under construction property. Most of the people are ignorant about the tax benefit in under construction property. If construction is not completed within 3 years from the date of purchase the deduction u/s 24 on interest payment is not Rs. 2 lakhs but it is restricted to Rs. 30,000 p.a.
If the property is let out the full interest amount is eligible for deduction. Both owner and co-owner can claim the tax benefit in the ratio of their respective share in the home loan. The co-borrower who is not co-owner is not eligible to claim the tax benefits.
We hope this will help you understand different aspects of home loan and also take informed decision.