What is Home Loan
Home loan is a secure source of finance to ensure that you can actually accomplish your dream of having your very own home which eventually acts as a security for you as well. Home loans are offered against security of a property (commercial/residential). The borrower generally approaches a bank or a financial institution, which sanctions the loan against mortgage of the property that is intended to be bought by the applicant. An arrangement of conditional ownership is entered into, whereby, in the unfortunate event of the borrower defaulting in his/her instalment payments, the bank/financial institution can retrieve the lent money by selling the property against which the home loan had been sanctioned. In most cases the mortgage continues till the last instalment of the loan has been paid.
Types of Home Loan
There is a wide variety of home loans on offer.
- Home Purchase Loan: for buying of a property.
- Home Improvement Loan: for carrying out renovation and repair work of an existing home/apartment.
- Home Construction Loan: for building of a new house
- Home Extension Loan: for expanding the current area. i.e. constructing an extra room.
- Land Purchase Loan: for the acquisition of land to construct a home, or even for investment purpose.
- Loan for the self-employed: for utilisation by small retailers, self-employed individuals, doctors etc. This is a custom made type of loan.
- Plot loan: for purchasing non-agricultural plots (applicable all over India)
- Home Loan Transfer: for transfer of loans from other institutions or Banks
- Home Conversion Loan: for financing a new home which the owner wants to shift to from a home that is already being financed by an existing home loan. This new loan pays back the existing loan and provides the extra money required for the new establishment.
- Bridge Loan: for sustaining the borrower through the interim period, when he wants to sell an existing some and buy a new one. It is a short term loan that sees the individual through till he/she has found a buyer for the old establishment.
Some banks provide specially designed home loans for the rural segment of the population including agriculturalists, horticulturalists, dairy farmers etc. The loan is provided for construction of houses on residential plots, purchase of new houses, and also for extending and renovating an existing house. These loans are provided after gauging the applicant’s financial status and if found satisfactory, loan is granted without the mortgage of agricultural land.
Why is it more convenient to take a Home Loan?
Before taking the plunge to buy a property it is always wise to weigh the options of using up your savings or to avail of a home loan. Generally, it the advantage of the latter that outweighs the former on the basis of the following points:
- Bank inspection
- Credit history
- Tax Benefits: Interest paid
- Tax Benefits: Principal Repayment
The interest payable for the pre-acquisition or pre-construction period is liable to be deducted in five equal annual instalments commencing from the year in which the house has been acquired or constructed.
In case the spouse is a co-applicant, the joint loan holders** are separately eligible to enjoy the benefits during tax computation.
** A co-applicant is/are the co-owners of the property which is being offered as collateral security to the loan. However all co-applicants need not be co-owners. Co-applicants to the loan are generally husband/wife, father/son, etc.
What are the elegibility Criteria for Taking a Home Loan?
To qualify for a home loan some basic criteria need to be fulfilled. (The following list is not exhaustive; please check with the bank that you are dealing with)
The applicant must be-
- An Indian resident or an NRI
- Of minimum 21years of age at the commencement of loan
- Below 65 years of age when the loan matures
- Either salaried, professional or self employed
Other factors that influence the eligibility are the applicant’s monthly income (which in turn determines his/her ability to make a down payment), existing loans and the cost of the property that has been chosen.
Loan amounts may be sanctioned after or prior to purchase of a property.
Documents Required (at a glance)
(The following list is not exhaustive; please check with the bank that you are dealing with).
- Proof of identity
- Proof of address
- Proof of income (IT return, usually for last 3 years and salary slips as required)
- Bank statement of salary account (generally last 6 months) along with verification of signature
- Passport size photographs
- Additionally for NRI applicants there must be a valid visa stamping, work permit, duly attested letter by last employer and a copy of CDC (for those employed in merchant navy only)
These must accompany the completed loan application form.
Points to Consider before Taking a Home Loan
There are some points to ponder on before zeroing in on a particular loan.
- Eligibility criteria
- Type of Loan
- Offer document
- Rate negotiation
- Choosing the Bank
- Loan tenure
- Fees and Penalties
* EMI (Equated Monthly Instalment) is the amount payable to the lending institution every month, till the loan is paid back in full. It consists of a portion of the interest as well as the principal.
Interest rate is dependent on the market conditions and hence is dynamic in nature. It is calculated either on annual, monthly or daily reducing basis.
- Annual reducing system is where the principal, on which the interest is paid, reduces at the end of the year.
- Monthly reducing system is where the principal reduces every month as the EMI is paid on it. EMI here is effectively less than the annual reducing system.
- Daily reducing systemis where the principal reduces from the day the EMI payment is made. EMI in this system is less than the monthly system.
Deduction that Can be Claimed
- Deduction on Interest
- Deduction on Principal payment
- Deduction on Stamp Duty and Registration Charges
- Deduction under section 80EE
One repayment option is by giving a number of post-dated cheques for credit into your loan account with the lender.
Repayment may also be done though issuance of an adequate mandate to your Banker instructing them to debit the EMI amount on a specified date and credit it to the loan account of your lending bank. This saves you the trouble of keeping track of a bundle of PDCs over a considerable period of time.
Some banks are now providing the option of smart loans, whereby the borrower can prepay the loan amount partially if he/she has surplus fund. Under such circumstances, the borrower has the option of reducing the interest burden or increasing the EMI to reduce the tenure of the loan. Banks such as HSBC, SBI, and Standard Chartered have already introduced this scheme.