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HOME PURCHASE LOAN The common loan for purchasing a home. HOME EXTENSION LOAN Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc. HOME CONVERSION LOAN A loan available for those who have financed the present home with a Home Loan and wish to purchase and move to another home for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new home, including the additional amount required, eliminating the need for pre-payment of the previous loan. LAND PURCHASE LOAN This type of loan is sanctioned for purchase of land for home construction. BRIDGE LOAN The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home. BALANCE TRANSFER LOAN Balance Transfer Loans help you pay off an existing home loan by availing a new loan from another willing lender institution. REFINANCE LOAN This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of your present home. LOAN TO NRIs This loan is tailored for the requirements of Non Resident Indians (NRIs) wishing to build or buy a home in India. These loans are provided by eligible financial institutions in accordance with the guidelines issued by the Reserve Bank of India from time to time.
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 interest due, as well as a portion repayable towards the principal.
Some of the lending institutions sanction the loan in-principal in advance of your identifying the property. Free accident insurance. Waiving of pre-payment penalty. Waiving of processing fee. Free property insurance.
To qualify for a home loan, most of the lending institutions in India require you to be: An Indian resident or NRI. Above 21 years of age at the commencement of the loan Below 65 when the loan matures. Either salaried or self employed and Worthy of credit facilityFor more details, refer module on “What are you getting into?”.
Interest rates vary from institution to institution and presently range from 8.5% to 10% depending on the customer classifications. The interest on home loans in India is usually calculated on monthly reducing balance. In some cases, daily reducing basis is also adopted. ANNUAL REDUCING In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender through EMIs paid during the year. This means the EMI for the monthly reducing system is effectively less than the annual reducing system. MONTHLY REDUCING In this system, the principal, for which you pay interest, reduces every month as you pay your EMI. DAILY REDUCING In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.
Calculate the total amount payable under the different loan options available for a fixed loan period and amount. The loan under which minimum total amount is payable will be the cheapest source of funds.
Fixed rate of interest means that the rate of interest remains unchanged for the specified duration of the loan. This means you do not benefit if rates of interest drop in the market. Similarly you do not lose if rates of interest increase. Under fixed home loan rates, banks/HFCs retain the right to increase the rate of interest after the prescribed interval. This provision is mentioned in the loan agreement. This is known as reset clause in fine print.
This is the rate of interest that fluctuates according to the market lending rate. This means you stand the risk of paying more than you budgeted for, in case the lending rate goes up
A fee payable to the lender on applying for a loan. It is either a fixed amount or may be a percentage of the loan amount applied. PRE-PAYMENT PENALTIES:
When a loan is paid back before the end of the agreed duration, a pre-payment charge is demanded by some banks/companies, which is usually between 1% and 2% of the amount being pre-paid. COMMITMENT FEES:
Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned. MISCELLANEOUS COSTS:
It is quite possible that some lenders may levy documentation, consultant charges and franking charges. Registration of mortgage deed.
Repayment period options range between 5 to 20 years.
Usually, most companies give home loans up to a maximum of 85% of the cost of the house. Balance 15%, sometimes called ‘seed money’, has to be provided by the loan applicant upfront. The amount, for which the applicant is eligible, is determined by the age, income, number of dependents, monthly outgoing and repayment capacity. This varies from case to case.
In most cases, the property to be purchased itself becomes the security and is mortgaged to the lending institution till the entire loan is repaid. Some institutions may ask for additional security such as life insurance policies, FD receipts and share or savings certificates.
Some institutions ask for guarantors.
It varies from 3 to 15 days.
On an average, loans are disbursed within 3 to 15 days after satisfactory and complete documentation and completion of all relevant procedures, including proof that 20% or 25% of the cost has been paid upfront to the seller of the property.
Most institutions are willing to consider the joint incomes of the applicants to decide the loan amount. Some institutions do not require the co-applicants to be co-owners of the property to be purchased.
Both principal as well as interest of home loans attract tax benefits, under section 80C of the Income Tax Act 1961:
INTEREST PAID ON THE HOME LOAN
As per Sec 24(b) of the Act, a deduction up to Rs. 200,000 towards the total interest payable on the home loan towards purchase/ construction of house property can be claimed while computing the income from house property. The interest payable for the pre-acquisition or pre-construction period would be deductible in five equal annual instalments commencing from the year in which the house has been acquired or constructed. Please remember that in case of self occupied property, this deduction is allowed only for one such self-occupied property. The interest towards home loan taken for purchase, construction, repairs, renewal or reconstruction of house property is eligible for deduction under section 24(b).
If you can afford to, then opt for the 15 or 20 year loan repayment option. The interest rate will be lower, you own your home in half the time, and the payments are not significantly higher.