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.
Availability:
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:
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’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.
Lenders:
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:
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 it’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.
Tax Benefits:
1) Deduction u/s 80C:
Stamp
duty paid, registration charges and Principal amount repayment up to a maximum
limit of Rs. 1.50lakhs 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. 2lakhs 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.
I
hope this will help you understand different aspects of home loan and also take
informed decision.
This article first appeared at indianotes.com
http://www.indianotes.com/Finance-How-to/Home-Loan-Guide-Understand-different-aspects-of-home-loan-and-make-informed-decision/197329/2/T
