Frequently asked questions
Home Loan Features & Benifits
Features and benefits of home loans vary for different lenders and loan schemes. Some of the common ones are listed below:
Lower Interest Rates: A home loan is a long-term commitment, thus, interest rates play an important role in deciding not only the loan amount, but also the tenure of repayment. Banks and financial institutions offer reasonable and attractive interest rates to make home loans more affordable than personal loans.
Flexible Loan Tenure: Home loan repayment period is usually of up to 30 years, though this depends on the lender, the chosen loan scheme and repayment capacity. Since the tenure is too long, lenders provide their borrowers with the option to prepay or foreclose their outstanding amount whenever they are in a condition to do so. Borrowers can also choose their loan tenure, if they are able to convince the lenders of timely loan repayments.
Tax Benefit for Interest Amount: A home loan EMI (Equated Monthly Instalments) has two components – interest amount and principal amount. The interest paid for the year can be claimed as deduction up to a maximum of Rs. 2 lakh under Section 24 of the Income Tax Act, 1961.
Tax Deduction on Principal Repayment: The principal component of a home loan EMI paid for the year is allowed a tax deduction under Section 80C of the Income Tax Act, 1961. The maximum amount that can be claimed is up to Rs. 1.5 lakh. But to claim this deduction, the purchased property should not be sold within 5 years of possession.
Additional Tax Deduction on Home Loan: Home loan borrowers get additional tax deduction of up to Rs. 50,000 and Rs. 1.5 lakh under Section 80EE and Section 80EEA, respectively. To claim the tax benefit under Section 80EE, the home loan amount should be Rs. 35 lakh or less, the value of the property should not exceed Rs. 50 lakh and borrowers should not own any other house on the date of the sanction of loan. To claim tax benefit under Section 80EEA, the stamp value of the property should not exceed Rs. 45 lakh and the borrower should not own any other house on the date of sanction of loan.
Easy Balance Transfer Facility: Home loan balance transfer is a facility in which the outstanding loan amount with one lender can be transferred to another lender, which offers a lower interest rate or better loan terms. The new lender pays off the entire outstanding loan amount to the previous lender. After this, the borrower pays the EMIs at the new rate to the new lender.
Top-up Loan Facility: There may come a time when you would need money over and above your existing home loan. For such situations, lenders offer a top-up loan facility. It is an additional amount that you can avail over and above your existing home loan. The facility is not offered to all the borrowers as various factors like borrower’s repayment capacity and past credit records are taken into consideration before doling out this benefit.
Types of Home Loan
Banks and Housing Finance Companies (HFCs) offer home loans for different purposes. So before applying for any type of home loan, assess your requirements in order to get a suitable home loan scheme. Some of the types of home loans available are as follows:
Home Purchase Loan is the most common type of home loan availed usually to buy ready-to-move-in properties, under construction properties and pre-owned homes/resale properties. As per RBI guidelines, lenders can offer loan-to-value (LTV) ratio of up to 75-90% of the property value.
Composite Loan is a perfect financing solution for individuals who want to buy a plot of land either for investment or for building a house. In this type of home loan, the first disbursement is made towards the purchase of plot. The subsequent payments depend on the stages of construction of the house.
Home Construction Loan is available for individuals who want funds for the construction of a house. The loan is granted only if you own a plot of land and plan to construct a house on it. Just as in composite loan, here too the disbursement depends on the stages of construction of the house.
Home Improvement Loan can be availed to fund home renovation and home repairing expenses of the existing house. The interest rate for this loan is same as that for a regular home loan. However, its loan tenure is shorter than the regular home loan.
Home Extension Loan is for those who require funds to add more space to their abode. Under this loan type, financial institutions usually lend 75-90% of the construction estimate, depending on the loan amount and LTV ratio.
Bridge Loan is a short-term home loan and is suitable for individuals who wish to buy a new house with the sale proceeds of the existing home. The loan helps in covering the gap between the purchase of a new house and the sale of an existing house.
Interest Saver Loan is similar to home loan overdraft facility. In this, the borrowers’ home loan account is linked to their bank account. Any amount deposited in the bank account over and above the EMI amount is used as prepayment towards the loan, thus, saving on the interest amount.
Step Up Loan is a type of home loan in which borrowers pay lower EMIs during the initial years of the loan tenure. However, there is a provision of increasing the EMI amount over time. This makes the loan affordable for young professionals who just start their career.
Types of Home Loan Interest Rates
Home loans are sanctioned either at fixed interest rates or floating interest rates.
What is Fixed Rate Home Loan?
In case of fixed rate home loans, the rate of interest applicable at the time of loan disbursal remains constant during the loan period. And because of the unchanged interest rate, the loan EMIs also remain constant. A disadvantage with fixed rate home loan is that its interest rate is usually 1% - 2.5% higher than the interest rate for floating rate home loan. Furthermore, at any time during the loan tenure if home loan interest rate decreases, the fixed interest rate will remain unchanged, giving you no benefit of the reduced EMIs.
What is Floating Rate Home Loan?
In case of floating rate home loan, the interest rate does not remain constant during the loan tenure. This kind of interest rate comprises two parts – index and spread. The index is the benchmark rate (such as Base Rate, Marginal Cost of Funds based Lending Rate (MCLR) and Repo Rate) that reflects general market conditions. And spread is the additional amount that a bank adds to cover the credit risk, profile mark-up, and so on. The spread varies from one lender to another and usually remains constant throughout the loan tenure. Index, however, alters as per RBI policies and other external factors, causing the home loan interest rates to change. An increase in the index can lead to an increase in home loan rates and the EMIs, and vice-versa.
Floating interest rate home loans are cheaper compared to fixed interest rate home loans. Also, RBI mandates no prepayment or foreclosure charges for individuals borrowing a floating rate home loan. The only problem with a floating rate home loan is that its EMIs change with the change in the interest rate, which can create difficulty in planning expenses in advance.
Fixed Rate Vs Floating Rate
Both types of home loan interest rates have their own list of pros and cons. When it comes to choosing between fixed and floating interest rates on home loans, pick the one that suits your needs the best. Home Loan Interest Rates Offered by Popular Lenders
Home loan rate of interest, in case of most lenders, ranges between 6.40% and 13% p.a. These rates are liable to change as per RBI’s directives and lenders’ policies.
Charges associated with Home Loan
Besides the interest amount, there are several other fees and charges that your lender might levy from the time of applying for the home loan till you repay it entirely. Here are some of the charges:
Application Fee is charged by lenders to cover all the preliminary expenses that they bear for conducting verification.
Processing Fee covers the cost of credit appraisal and depends on the borrowers’ credit profile, income and the home loan scheme. Also, not all lenders levy processing fee.
Administrative Fee is charged by those lenders who split the processing fee into two parts. The part charged after the loan sanction is known as the administration fee. Citibank is one of the banks to levy administrative fee.
Foreclosure/Prepayment Charges are levied when a borrower prepays the home loan either fully or partially before the end of loan tenure. Earlier, lenders used to charge prepayment penalties and foreclosure charges on home loan. But RBI banned lenders from charging individuals with prepayment penalties on floating rate home loans. As far as fixed rate home loans are concerned, some lenders levy these charges.
Repayment Mode Related Charges are levied when borrowers request their lenders to change their existing repayment mode during the loan tenure. The fee usually goes up to Rs. 500 per instance (swap) and varies from one lender to another.
Rate conversion/switching fees are charged when borrowers request their lenders to switch or reduce their existing interest rates due to various reasons. The fee varies from one lender to another and usually goes up to 2% of the outstanding principal amount.
CERSAI Charges (Central Registry of Securitisation Asset Reconstruction and Security Interest) is central online security interest registry of India. Potential lenders visit CERSAI website to check whether the pledged property is not claimed by some other lender. For this process, the lenders pay a nominal fee, which they later collect from borrowers.
Overdue Charges on EMI are levied when a borrower misses or delays timely payment of loan EMIs. It attracts penal interest rates on the outstanding dues or overdue instalment over the prevailing loan interest rates. Therefore, borrowers must pay loan EMIs on time.
EMI Bounce Charges are levied when you fail to make timely loan payment due to insufficient funds in your bank account. Lenders usually levy Rs. 500 on such defaults which may vary from one lender to another.
Legal Fee is usually included in the processing fee but some lenders charge it separately when they engage firms to scrutinise borrowers’ legal documents.
Franking Fee, commonly referred to as stamp duty fee, is a tax levied by the state government on any form of monetary transaction involving the transfer of rights of a property. The amount varies from one state to another, and depends on state laws, type of property, etc.To get more details on costs associated with home loan, click here.
Documents Required for Home Loan
These documents are usually same for all lenders; however, a few specific requirements may vary depending on the chosen loan scheme, purpose of the loan and individual credit profile. Some of the common documents required for getting a home loan are:
Duly filled in and signed home loan application form
Passport size photographs, as required
Proof of Identity: Copy of any one (PAN Card, Passport, Aadhaar Card, Voter’s ID Card and Driving License)
Proof of Age: Copy of any one (Aadhaar Card, PAN Card, Passport, Birth Certificate, 10th Class Mark-sheet, Bank Passbook and Driving License)
Proof of Residence: Copy of any one (Bank Passbook, Voter’s ID, Ration Card. Passport, Utility Bills (Telephone Bill, Electricity Bill, Water Bill, Gas Bill) and LIC Policy Receipt
Proof of Income for Salaried – Copy of Form 16, latest payslips, IT returns (ITR) of past 3 years and investment proofs (if any)
Proof of Income for Self Employed: Details of ITR of past 3 years, Balance Sheet and Profit & Loss Account Statement of the Company/Firm, Business License Details and Proof of Business Address
Property-related Documents: NOC from Society/Builder, detailed estimate of the cost of construction of the house, registered sale deed, allotment letter and an approved copy of the building plan
Home Loan Balance Transfer
Home loan balance transfer is a facility that allows home loan borrowers to transfer their outstanding home loan to a new lender for lower interest rate or better loan terms. Almost all lenders offer the home loan transfer facility to their customers. Paying your loan EMIs regularly is one of the factors that help you enjoy loan transfer facility. But before going for home loan balance transfer, carry out a cost-benefit analysis. Calculate the difference between the interest rates offered by the two lenders, the amount of the loan left unpaid and the remaining tenure.
Home loan balance transfer is not an ideal option if the outstanding loan amount is low, if only a few repayment years are remaining or the difference in the interest rate is leading to negligible savings. Also, do not forget to consider processing fee charges, which the new lender would be charging for balance transfer.
Repayment & Foreclosure of Home Loan
Home loan prepayment is when a borrower prepays his/her home loan partly before the end of the loan tenure. Loan prepayment helps in reducing the loan principal amount, which subsequently reduces the EMI amount. If the borrower has no issues with continuing with the on-going EMI amount, he/she can request his/her lender to reduce the loan tenure instead of reducing the loan EMI.
Home loan foreclosure, on the other hand, is when a borrower fully repays the home loan in a single payment instead of paying in instalments before the end of loan tenure.
Earlier, lenders used to charge prepayment penalties and foreclosure charges on floating rate home loans. But now RBI has mandated all lenders to not levy loan foreclosure and prepayment charges on floating rate housing loans when individuals pre-close the loan. However, on fixed rate home loans, some lenders still levy these charges.
How to choose a Home Loan offer
Rate of Interest: Some home loan providers charge fixed and some floating rate of interest on home loans. Fixed interest rates are considered ideal for loans with shorter tenure, while floating is suitable for loans with longer tenure. Some lenders even offer hybrid home loans in which the borrower can enjoy the benefit of both fixed and floating interest rates.
Loan Disbursal Time: The time for home loan disbursal varies from one bank to another. It usually takes around 10-15 days for loan processing and disbursal. Choose a home loan provider which takes lesser time and does not cause unnecessary delays in home loan processing.
Loan Eligibility: Home loan eligibility criteria vary from one lender to another. The usual home loan eligibility of an individual is determined by the borrower’s age, income, work profile and stability, credit history, etc. Always use home loan eligibility calculator to be sure whether you are eligible for the home loan or not.
Hidden Charges: Loan providers levy a number of additional charges, such as the processing fee, prepayment or foreclosure charge, etc. It is best to read the fine print before making the final choice so that you do not end up feeling pick-pocketed when such charges are levied.
Terms and Conditions: List of terms and conditions pertaining to repayment, prepayment, loan transfer, and many other things related to the home loan should also be taken into account while choosing a home loan.