Buying an own home is
the top most priority of every Indian once he/she settles down in his/her life.
This is one of the most common goals we find while making individual comprehensive
financial plan. Seven out of ten clients come to us with a goal of buying a
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. Secondly the rate
of interest is also competitive compared to other loans available in the
market. There are tax
benefits available against home loan for the payment of principal amount
as well as for interest
payment which 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 us. Mostly people take home loan for a term of 20 years
and above. This gives them maximum loan to buyer and also EMI comes within repayment capacity
of individual.
As per RBI data more than 50% in personal loans segment advanced to individuals
is disbursed for housing loan followed by personal loan, vehicle loan, education
loan and credit card outstanding which all put together constitutes the balance.
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. Home
loan is available from both PSU and private banks and also from housing finance
companies like HDFC and LIC housing finance. The maximum amount of loan
available is approx. 80% to 90% of the agreement or registration value. The registration value of the property is the value as
per the stamp duty ready reckoner for the
purpose of payment of stamp
duty or the agreement value, whichever is higher. Stamp
duty and registration charges are no longer financed and are not added while
calculating the total cost of home.
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. Eligibility criteria is decided on the basis
of income of borrower i.e. repayment capacity of the borrower. There are no
standard norms for the same and every lender has its own set of rules for
deciding the eligibility. Before finalising the loan disbursement, lender also
takes into account EMI for the existing loans and credit card dues if any.
Therefore 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. The age of the borrower and
property is also considered while approving the home loan. Normally lender will
prefer your EMI is complete in working span of borrower. The retirement age for
this is taken at age 58 in case of salaried and up to age 65 in case of
businessman or professional. 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. Normally lender will assume around 40 to 45% of your income is available to
service the loan. You can also include earning spouse, parents, children’s 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.
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.
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.
Borrower has to bear
some charges such as processing fees, legal fees and stamp duty for creation of
mortgage. There is also prepayment charges 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. Therefore it is advisable to take floating rate loan or offset loans
as you can any time prepay your home loan 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. You
must check prepayment charges in the existing loan if it is fixed or dual rate
loan and also check processing fees levied by new lender before opting for
balance transfer option.
Tax Benefits:
Deduction under section 80C:
Principal amount of home loan up to a maximum limit of
Rs. 1,00,000/- in aggregate with other items of investments such as EPF, PPF,
Insurance Premium, ELSS Scheme of mutual fund etc.
Deduction under section 24B:
Interest on home loan to the extent of Rs. 1,50,000/-
if the property is self-occupied. 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.
