Category Archives: Home Loan

An Ultimate Guide for the First-time Home Loan Borrowers

Buying a house is a significant investment and a major milestone that provides us with a place to call our own. In the long run, property prices generally appreciate, which can increase our wealth over time. However, since owning a house is a big investment, many of us explore borrowing options to make a home purchase. A home loan is an ideal financial solution that can help you achieve your dream of owning a home with manageable monthly payments and a choice of repayment terms that suit your needs.

Nevertheless, for first-time home loan borrowers, certain aspects, such as interest rates, processing fees, down payments, loan agreements, etc., may be bewildering, which can make getting your first home loan to seem like a daunting task. This article serves as an ultimate guide for first-time home loan borrowers to help streamline the home loan process and ensure a smooth borrowing experience.

What Are the Types of Home Loans?

First of all, understand that there are several types of home loans that cater to specific purposes. Here are some of the commonly seen home loans in India:

1. Regular Home Loans:

This is the most common type of home loan in India, where an individual avails of a home loan to buy a newly constructed or pre-built property. While almost all the banks and housing finance companies in India offer this type of loan, the interest rates and loan terms may vary from lender to lender.

2. Land/Plot Purchase Loans:

As the name suggests, this loan is availed to purchase land or a plot where the borrower intends to construct a home. Lenders typically provide up to 85%-90% of the land’s cost, while the remaining 15% needs to be arranged by the applicant.

3. Home Construction Loans:

Banks and HFCs offer these loans to individuals who plan to construct a house on their own land. The application and approval process for a Home Construction Loan can be complicated to understand for a layman.

4. Home Renovation Loans:

These loans are ideal for individuals who cannot gather sufficient funds to renovate their existing homes. The maximum amount that one can borrow for a home renovation depends on several factors, including the applicant’s repayment capacity and debt-to-income ratio.

What Are the Eligibility Criteria for a Home Loan?

Before applying for a loan, it is crucial to have a thorough understanding of the loan basics and eligibility criteria to avoid any surprises. It is advisable to equip yourself with knowledge of banking procedures to prevent any discrepancies from arising at the last minute.

Each bank and NBFC has its own eligibility criteria for home loans. Here are the primary requirements that typically remain constant with all the lenders:

Age – The applicant must be between 21 and 60-65 years old.

Employment Status – The applicant must be either a salaried or self-employed individual with a stable income.

Minimum Income Requirement – The applicant must earn more than the minimum income set by the bank. For example, HDFC Ltd. has minimum salary criteria of Rs 10,000 per month and minimum business income criteria of Rs 2 lakhs per annum.

While these factors make you eligible for a loan, there are many other additional aspects that decide the final application approval, such as the applicant’s repayment capacity, debt-to-income ratio, down payment, present and future income, credit history, credit score, etc.

You Can Enhance Your Home Loan Eligibility By:

• -Including a family member who earns as a co-applicant
• -Making a larger down payment
• -Opting for a structured repayment plan
• -Having a steady income and regular savings
• -Providing information on your additional income sources that are regular, e.g. such as income in the form of rent
• -Fixing any mistakes in your credit score
• -Paying off your ongoing loans and short-term debts

What Are the Documents Required for a Home Loan?

Personal Documents:

• -Application form
• -Passport size photographs
• -Photo ID proof, such as PAN Card, AADHAR Card, Passport, etc.
• -Current residential proof, such as AADHAR Card, Passport, Driving License, Voter ID, etc.
• -A cheque for the processing fee

Income Documents:

For Salaried Individuals:

• -Last three months’ salary slips
• -Form 16
• -Bank statement for the last 6 months

For Business Persons:

• -Proof of business existence
• -Educational certificates
• -Bank statement for last 6 months (both; business account and personal account)

For Professionals – Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements

For Business Owners – Business profile, Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements

What Are the Types of Home Loan Interest Rates in India?

The home loan interest rates are based on the Marginal Cost of Lending Rates (MCLR) and the bank’s base rate. While the MCLR is decided by the RBI, the banks set a base rate based on their cost of lending. The banks can quote a home loan interest rate above the base rate considering the borrower’s risk factor. If the RBI makes significant changes to the Repo Rate, banks and financial institutions adjust their base rate accordingly.

There are primarily two types of interest rates available for home loans in India: Fixed Interest Rates and Floating Interest Rates.

Floating Interest Rate: A Floating Interest Rate, also known as a variable interest rate, is linked to the current lending rates and hence, can fluctuate during the loan period. Consequently, your EMIs will change accordingly. Since home loan interest rates have been increasing for a long time, they are expected to stop rising soon. Hence, it makes sense to choose a floating interest rate.

Fixed Interest Rate: A Fixed Interest Rate home loan has a consistent interest rate throughout the loan tenure, which means that your EMIs remain the same. Opting for a fixed interest rate loan is advisable when the interest rate is low, and an upward trend is expected in the future.

What Are the Things to Consider When Applying for a Home Loan for the First Time?

1. Interest Rate:

The home loan interest rate plays a significant role when it comes to determining whether or not to take out a loan and which lender to select. We all are aware that you should conduct thorough research before settling on a lender. In addition, as discussed earlier, you should have knowledge about the various interest rates charged by banks and HFCs.

2. Loan Amount:

Your home loan amount has an impact on various factors, especially the rate of interest. The interest rate typically differs for the loan amount up to 30 lakhs, between 30 and 75 lakhs, or over 75 lakhs. Since a home loan is a long-term financial obligation, it is advisable to choose a loan amount that you can comfortably repay over an extended period.

3. Loan Tenure:

Home loans can typically be availed for a longer duration of up to 30 years, depending on the applicant’s eligibility. Opting for a longer loan tenure can lead to smaller monthly repayments but will result in higher overall interest payments. Alternatively, selecting a shorter loan tenure may result in larger EMIs, which can create a financial burden. It makes sense to choose the appropriate loan tenure to facilitate easier monthly repayments and avoid spending huge sums on interest payments. If the property is still under construction, the loan will be disbursed in stages based on the developer’s instalment schedule. During this time, only the interest amount, known as pre-EMI interest, needs to be paid. However, if you wish to begin repaying the principal amount, you may choose to pay the EMIs.

4. Down Payment:

Let’s say you have applied for a home loan worth Rs 70 lakhs, but the bank only approves Rs 50 lakhs due to your eligibility. In this case, you will be required to pay Rs 20 lakhs on your own. This payment made by you is referred to as a down payment. It is advisable to make the highest possible down payment that is feasible for your budget, as it will reduce the loan amount. A lower loan amount means lower interest payments. While some banks may offer 100% of the property value as a loan based on your eligibility, it is recommended to make a down payment of at least 20% to avoid excessive interest charges and ensure manageable repayment.

5. Processing Fees And Other Charges:

When you apply for a loan, the lender will charge you a processing fee for handling your application. Generally, for a home loan, the processing fee falls between 0.5% to 1% of the loan amount. However, certain lenders offer a flat processing fee regardless of the loan amount. As home loans typically involve large sums of money, even slight variations in the percentage charged for the processing fee can lead to a significant difference in the total fee amount.

For many people, buying a home is a significant financial commitment, and as a result, they are emotionally invested in owning a debt-free property. Individuals often prefer to repay their home loans as soon as possible to reduce the debt burden. This can be achieved through either part-payments, where a lumpsum payment is made towards the principal amount, or foreclosure, where the entire loan amount is repaid before the end of the loan tenure. By making part payments whenever feasible, you can significantly reduce the interest payments and become debt-free sooner. Most banks and housing finance companies do not charge pre-payment or foreclosure fees after a specific period or once a certain percentage of the loan is repaid. However, some lenders do charge a certain amount for pre-payments and have restrictions on the number of pre-payments allowed and the amount that can be prepaid. Therefore, it is essential to understand the pre-payment charges before taking out a loan and select a lender that offers pre-payments with little to no charges.

6. Home Loan Insurance:

Home Loan Insurance Plan or Home Loan Protection Plan offers financial protection against an unpaid home loan amount to your family in the event of your untimely demise. The insurer repays the outstanding loan amount for which the insurance policy was purchased. This ensures that your family is not left with the financial burden of unpaid dues. Many banks and HFCs require borrowers to purchase a Home Loan Insurance Policy to avoid any defaults that may arise in case of an unfortunate event.

To conclude:

Purchasing a house is a significant financial and emotional decision. Hence, before taking a home loan, it is crucial to understand all the aspects of it and take into account the important factors mentioned above so that you select the appropriate loan type and the amount that will not cause financial strain in the future. Additionally, it is advisable to conduct comprehensive research online to find the best deals on interest rates and fees. However, it is also recommended to consult with your primary banker as they may offer the best deals and services. This will help you make an informed decision and ensure that your first house purchase is a positive and financially sound experience.

Source: Personalfn

What is Home Loan Insurance? Why is it Important?

Life is not certain and also doesn’t come with any guarantee cards. Instances like partial or complete disability, or death of the sole bread earner can result in huge financial trouble for the family. And, if there is a home loan repayment running, the situation can get really bad.

Therefore, to avoid such a situation, to protect your near and dear ones from financial trouble due to home loan repayments in the event of the unfortunate demise of the primary borrower, it is advised to take insurance for a home loan. It’s very important for maintaining the financial stability of your family.

Let’s have a detailed view of the topic.

What is Home Loan Insurance?

Home loan insurance is a type of life insurance cover, where in the event of the death of the borrower, the home loan insurer will settle the entire outstanding home loan amount with the lender. And the borrower’s family gets complete ownership of the house property.

How Do I Avail Home Loan Insurance?

A home loan insurance policy is taken while procuring the home loan. Usually, the home loan insurance cover comes bundled with the home loan package, where the premium amount is deducted from the total home loan amount or the lender may ask you to pay the premium.

As home loan insurance cover is not mandatory, meaning, neither RBI nor IRDAI has any rules that force the borrower to buy the home loan cover. You can buy the home loan insurance cover from your preferred insurer.

However, it is better to buy one from your lender, if there is no marginal difference in premium rates to reduce the complexities in the home loan approval process.

How Does Home Loan Insurance Work?

Home loan insurance plans are a type of term plan, where the borrower is covered under this insurance plan until the repayment is complete. Once the outstanding home loan is repaid entirely, the home loan insurance tenure expires.

If the borrower dies during the repayment tenure, and a large part of the home loan amount is still needed to be repaid, the family can claim the home loan insurance cover to settle the entire outstanding home loan amount. This ensures the family will not have to repay the home loan and gets full ownership of the house property.

In absence of home loan insurance cover, the lender will seize the house to recover the losses, even in the case of unfortunate events. Please note that the insurance does not provide cover against situations such as job loss or disability due to accidents.

Lenders such as Grihashakti offer customers plans from top insurance providers which can go above and beyond basic home loan insurance coverage. We allow our customers also to purchase useful policies such as health insurance, accidental health cover, and more.

How Home Loan Insurance Premium is Paid?

Most home loan insurance has a one-time lump sum premium payment option, which is either deducted from the approved home loan amount or the lender asks to pay the additional premium amount.

For example, if the home loan amount is Rs 50 lakh for 15 years tenure, and the premium amount is Rs 1 lakh, the borrower has the option to take either Rs 51 lakh as a home loan or deduct the premium amount from the home loan amount.

However, it is cost-effective to pay a home loan insurance premium annually, because most borrowers prepay the outstanding sum before the tenure ends. While in a one-time premium payment option, the premium is calculated for the entire pre-determined repayment tenure.

Importance of Home Loan Insurance for Borrowers and Lender

The utility of a home loan insurance scheme is unmatched and provides all-around protection to borrowers. Some of the home loan insurance benefits include:

• Protect family: It protects the family from financial uncertainty, in case, if there is a sudden death of the borrower during the repayment tenure. The home loan insurance policy settles the outstanding home loan amount with the lender and the ownership of the property is transferred to the borrower’s family.

• Protect Assets and other collaterals: It protects your assets and other collateral, as the lender will not seize the property to recover the dues of the outstanding loan amount.

• Tax benefits: Since a home loan insurance plan falls under the category of term plan insurance, the borrower can claim a tax deduction under Sec 800 of the Income Tax Act for the premium paid.

• Protects lenders from financial loss. For lenders too. home loan insurance helps them to prevent loan accounts from going bad and go through the time-consuming process of seizing the property to recover dues.

A home loan insurance cover is a win-win financial solution for both parties, as it saves from irreparable financial damage while protecting the property.

Wrap Up

Buying your dream home using a home loan is a big financial decision, as the repayment tenure lasts up to several years and EMIs form a significant part of your income.

Having insurance against home loans helps to protect your family against any uncertainty and the burden of home loan repayments is taken care of and they don’t have to abandon the house property due to non-payment.

Source: Fullerton

How would taking a home loan help you save taxes?

• For someone servicing a home loan it might be one of the best tax-saving tools in their kitty, especially if they have exhausted all other tax saving avenues. Besides the tax saving, your home loan also helps you create an appreciating asset at the lowest interest rate. While many are aware about low interest rate and tax saving prospects of the home loan, very few are aware about what should be the optimum loan amount and tenure that gives them the best of both worlds at the lowest cost and fastest repayment. There are many limitations of this tax saving avenue, and it delivers the best saving only when you use it smartly. Here is a look at how to optimise your tax saving using your home loan.
•  
•  

Why annual interest outgo of your home loan is most critical

 

You can save income tax on the home loan principal repayment amount up to Rs 1.5 lakh each year under section 80C of the Income-tax Act, 1961. However, this is a crowded avenue which has many other alternatives such as deductions available on EPF and PPF contributions, investments in ELSS, ULIPs, tax benefits on payment of school fee, life insurance premiums, and many more, due to which there is hardly any scope left for one to claim deduction on the home loan principal amount.

 

On the other hand, the tax saving that is offered on home loan interest payment under section 24b does not have any replacement and you can use this tax saving only when you are paying interest on a home loan. So, the annual interest outgo becomes a deciding factor as to how much tax you can save through your home loan. If you fall in the 30% income tax bracket you can save Rs 60,000 each year if your annual interest outgo is Rs 2 lakh or above. The lesser interest outgo you have, the lesser would be your tax saving.

 

“The deduction to claim interest paid is available for up to Rs 2 lakh within the overall limit of Section 24b in a financial year. In case of Let out property, there is no limit on the maximum interest that can be claimed. However, the loss that will be adjusted against other income heads such as salary etc. cannot exceed Rs 2 lakh in a financial year. The remaining loss under the head ‘Income from house property’ can be carried forward for 8 successive years to be adjusted against the income from house property only,” says Rishi Mehra, CEO Wishfin.com, an online financial market place.

 

 

Loan amount and tenure that delivers biggest tax saving

If you were to just look at tax saving, you need to go for a higher loan amount and the longest tenure to give you the maximum possible tax saving. For instance, if you take a Rs 30 lakh home loan for 15 years at 7% per annum interest rate, the total tax that you can save in 15 years is Rs 5.54 lakh, if you fall in 30% income tax bracket. On the other hand, if you have a home loan of Rs 50 lakh with a tenure of 30 years, the tax saving amounts to Rs 13.93 lakh in a similar situation.

 

However, the longer tenure will also mean that your total interest outgo is much higher. Instead of paying a total interest of Rs 18.53 lakh on a Rs 30 lakh home loan, you would end up paying a total interest of Rs 52.59 lakh on a Rs 50 lakh loan. As a result, your interest liability rises much more than the increase in the tax saving. The best way to strike a balance and find an optimum amount is by comparing the net interest rate after considering the tax saving benefits. Net interest rate is the effective rate of your home loan with which you would pay the same amount of interest that you would get by deducting the tax saving from the original interest charged by the lender. At the current prevailing rate of interest a home loan which is close to Rs 30 lakh with 15 years tenure can give one of the lowest net interest rates.

 

 

 

Why this is so?

Excess interest payment in higher loan amount

It is a myth that if you take home loan of a higher amount you would save more tax. The interest portion in a home loan monthly installment comes down each month as principal repayment increases correspondingly. So, the annual interest payment remains higher in the initial years while it comes down sharply in the second half of the tenure towards the end. However, the maximum tax saving that you can do on account of interest payment under section 24b is limited to Rs 2 lakh.

 

So, any amount of interest that you pay over and above Rs 2 lakh annually does not help you in saving taxes. During the first half of repayment if there are many years in which you are paying interest above Rs 2 lakh in a year, then it remains unproductive and will not help in saving taxes.

High loan amount with longer tenure comes with the dual disadvantage of higher interest outgo without any tax saving and longer period of debt outstanding. To optimise the best mix of lower interest outgo and higher income tax saving you can use partial prepayments to bring down your loan outstanding to a level where the annual interest is close to the Rs 2 lakh annual limit. This is the optimum level which will help you capture the best interest saving and keep your interest outgo at a level where it enjoys income tax deduction on the entire amount.

 

Not many want long tenure just for tax saving

Only a few are comfortable with a debt outstanding for longer periods just for the sake of saving taxes. Borrowers often looks for ways as how to use their home loan in a way that it offers a combination of best tax saving and timely payment of debt.

 

In this scenario keeping the tenure short will help you keep the interest cost lower and pay off your loan quickly. However, once your annual interest outgo comes significantly below Rs 2 lakh you will have unused tax savings. In such a situation, if you have the requirement to upgrade your house to a bigger one or plan to go for a second house then you can utilise the tax saving avenue offered on home loans again. This will ensure that you always keep the debt at lower levels and utilise the tax saving for longer periods at an optimum level.

 

 

Boost your tax saving with a joint home loan

If both spouses are paying a high amount of income tax, then they can take a higher home loan and enjoy the principal and interest deduction on the home loan separately. As a result, the couple can get a total deduction of Rs 3 lakh under section 80C (Rs 1.5 lakh plus Rs 1.5 lakh) on the principal repayment and Rs 4 lakh (Rs 2 lakh plus Rs 2 lakh) towards interest payment under section 24b. This means a bigger home loan of Rs 60 lakh with shorter tenure of 15 years could give them the optimum mix of greater tax saving and faster repayment of the loan. “All the applicants should also be co-owners of the property in order to claim this deduction,” says Mehra.

 

 

Extra deduction on buying an affordable house

 

If you have bought the house under the affordable housing category then an additional deduction of Rs 1.5 lakh is available under section 80 EEA. “The timeline to avail this additional deduction has been extended to 31st March 2022. So, all home loan related deductions put together can help you help you get a maximum deduction of Rs 5 lakh (Rs 2 lakh u/s 24, Rs 1.5 lakh u/s 80C and Rs 1.5 lakh u./s 80EEA) if it meets the specified conditions,” says Mehra.

  

Source: Economic Times

6 things to note before applying for a Home Loan