Buying a home is the most significant financial decision for many individuals and certainly involves much financial planning. Availability of Home loan makes it easy.
A house loan or home loan is a form of secured loan borrowed to purchase a residential house/flat or a plot of land for construction of a residential house, or renovation, extension and repairs to your existing residential house. It has a fixed tenure and is repaid by Equated Monthly Installments (EMI) over the sanctioned tenure.
A home loan can only be availed by an individual. Non-individuals buying property is treated under Loan against Property.
Individual deriving income from any lawful business activity, which may be in the following forms are eligible for HL:
- Salaried individuals
- Self-employed sole proprietors
- Self-employed individuals/professionals at – partnership firms
- Self-employed individuals/professionals who own private companies
- Self-employed individuals in public-limited companies including directors
Loan for buying a commercial property does not qualify to be Home Loan. Certainly, one gets a loan for buying commercial property, and the rate of interest applicable is as of loan against property. As the loan does not qualify for a Home loan, the tax benefits associated with Home Loan are not available. However, if the business entity is borrower, the interest expenses can be tax-deductible under sec 37 of the Income Tax Act.
While considering constructing a house, it starts with acquiring a piece of land and building on it rather than going for a ready-made home. A Land-Purchase Home Loan comes handy in such a situation. The loan is given to purchase land alone. Lenders usually finance up to 75% of the land cost.
The borrower has a piece of land, and need to put up the building over it, Home-Construction Loan is the need. A Home-Construction Loan is exclusively taken for constructing a house rather than purchasing a constructed property.
Purchasing A Home: One can decide on buying a ready-made house or flat in an apartment complex, Home Loan is the product to look for to buy either a new or an old property. Home Loan lenders usually finance up to 80% to 90% of the property value.
If one wishes to add another Level/Floor to the house or add a few more rooms to the existing building, the loan falls under the category of Home-Expansion Loan.
Home-Improvement Loan: Home-Improvement Loan is taken to refurbish the existing old home. If the house is a palatial one and the cost refurbish may run into lakhs, such loans are a real help.
It refers to the process of transferring your Home Loan from one lender to another. Homebuyers mainly opt for a Home-Loan balance transfer to get attractive and lower rates of interest on their principal amounts. A Home Loan transfer is also known as loan switching.
Existing Home Loan borrower can take a Top-Up Loan on the existing Home Loan to meet personal expenses or investment in the business as equity. Having a Home Loan is mandatory to get a Top-Up Loan. Top-Up Loans are ideal for those people who are in need of urgent cash. The rate of interest charged is as like Loan against Property.
The age group for availing credit facility is in the range of 21-65 years. The maximum age of 65 should be at the time of maturity of the loan. Lenders do insist on taking insurance cover in the form of loan shield, and the premium starts increasing with an increase in age. Therefore, the younger generation enjoys a better price as well as terms and conditions while availing a loan as compared to the older generation.
The risk associated with higher age factor can be mitigated by adding one or more younger generation individuals as co-borrower or guarantor to the loan structure.
Turnaround time, in short TAT, is the time required for the lender to process the loan application. TAT starts from the login of the file and ends with loan disbursement.
Home Loan processing involves scrutiny of KYC, Financial documents and copies of collateral papers. Financial appraisal, scrutiny of Title flow of the collateral and valuation happens simultaneously.
Sanction or Rejection of the proposal is decided in a week, which includes a valuation and legal scrutiny. One must keep in mind, providing a full set of documents and information in one go, helps the lender to decide faster.
Few builders approach lenders to evaluate the project and provide either a pre-approved home loan or pre-approval for the project. In such cases, crucial time is saved as legal scrutiny, and property valuation is not required, and the loan application is decided in 3 to 4 working days.
On acceptance of the Sanction and signing of the loan agreement, the amount is disbursed to the borrower. The total time taken from signing the application form to releasing the fund can be completed in 2 weeks.
If the process involves the takeover of loan from another lender, additional time is elapsed in getting the co-lateral papers from the existing lender and creating mortgage in favour of the new lender. This process itself takes about 2 to 3 weeks, depending on the lender’s policy and place of document storage.
Loan Tenure is dependent on Risk Profile, Credit Score and scheme under which the loan is being sanctioned.
The general repayment tenure of Home Loan starts from 5 years, and maximum tenure could be 30 years. Most borrowers prefer 20 years tenure for repayment.
The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 20-30-year loan. However, it is advisable to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high.
HL is based on property value and income eligibility. Generally, the lender provides a maximum of up to 85% of loan against the value of the property. Therefore, if you want a home loan for buying a property of Rs. 50 Lakhs, the maximum amount you can get is 85% of that, i.e., Rs. 42.50 Lakhs. The total financed amount also includes registration, transfer and stamp duty charges. There is no upper limit of the loan amount one can avail. However, to be eligible under Pradhan Mantri Awas Yojana, the home loan is to be restricted under Rs. 18 Lakhs.
The repayment of the loan should be made according to the repayment schedule of the lender through banking mode.
A lender and borrower can agree on the repayment mode according to convenience. Repayment of EMI can be made through NACH, ECS or SI. The lender set the repayment mode for each loan account to ensure automatic repayment on a specified date. If payment is not cleared through the set process, it is termed as default in payment.
The lender generally collects updated PDCs for security purpose and may present whenever EMI get bounced or to take legal steps to recover the outstanding loan.
Eligibility, Rate of Interest and Charges
The eligibility of an HL depends upon various factors, including the following important ones:
- Income of applicant
- The credit score of applicants
- Property Type and Value
- Income and creditworthiness other co-borrower or guarantor
- Other non-financial information
Though the Home loan is sanctioned in the personal capacity, individuals in Businesses having established more than 3 years are considered stable and business more than 5 years are most preferred by lenders. An individual in business less than 3 years have fewer lenders as options and limited schemes to choose from. However, personal income and experience are the key factors to persuade a lender for sanctioning the desired loan amount.
Recent loans taken affect the credit-ability of the customer in two way first decrease in credit score if there are multiple Enquiries but few disbursements and second low or no financial eligibility. Recent loans in the sense that loans are taken in the last 6 months. It indicates that customer is credit hungry unless proper justification of the end-use of the recent loan is given. There is no restriction on the number of recent loans taken provided there is financial eligibility and customer has justified the purpose of the recent loans.
Rate of Interest is positively correlated with the risk involved in the lending. The other guiding factors which govern the rate of interest are Credit Score, Loan amount, Tenure, Risk Profile, scheme etc. Home Loan attracts ROI of 8% to 11.5% depending upon whether it is site purchase or independent house purchase or apartment purchase or composite loan.
Home Loan is available under Fixed, Floating or Hybrid Rate of Interest and is linked to the Reference Rate. Reference Rate is dependent on the risk profile of the lender and Rate of Interest is decided based on the Spread the lender wants to keep over and above the reference rate.
The charges for availing loan may include initial Login fee, Processing fees, documentation charges, stamping, mortgage, affidavit and Notary fees etc.
Certain charges like Documentation Fee, Legal & valuation fees, affidavit and Notary fees are absolute figures, whereas Processing fee, stamping and mortgage fees are a percentage of the loan amount.
Documentation, affidavit and notary fees put together ranges from Rs. 5,000 to Rs. 25,000 depending on the terms of lenders.
The processing fee ranges between 0.20% to 1.00% of the loan amount. Few of the lender on good gesture waive processing fees. Stamp duty and mortgage charges are at actual, which is a fee charged by the State Govt on the lending and mortgaging the assets.
All these charges are borne by the borrower. The borrower either pays upfront or the same is deducted from the loan amount.
Loan to Value is the ratio of Loan Amount to Collateral Value. This concept is the key factor for all types of secured loans.
Home Loan, where the fund is used to acquire immovable properties. The LTV can range from 75% to 90% of the property value depending on the borrower’s risk profile as judged by the lender and the scheme availed. A higher LTV implies a greater loan amount and therefore, lesser down-payment that you need to arrange out of your pocket. However, it also means a higher EMI. A lower LTV means that you have to arrange for a larger sum to be paid as down-payment.
LTV ratio also affects the rate of interest offered by the lender. Lower the LTV, lower mortgage rate as the loan is considered to be less risky with higher co-lateral cover to the loan and higher the LTV, rate is also on the higher end, the loan is considered more risker.
Multiple business entities having common promoters, income from those entities can be combined to get higher eligibility. The lender insists on taking all the entities considered for eligibility calculation as parties to the loan structure.
A Home loan can be for the purchase of a completely constructed house or apartment; purchase of land now and construction later; or composite.
Purchase of land and construction later and are in the range of 10 to 11%, whereas composite loans are at 1% spread on the reference rate. Buying a completed house or flat is possible at the best rate, which ranges from as low 8.25% to 9.50%.
While buying a home or constructing a home, a borrower needs to understand 3 values of the property – Market Value, the value mentioned in the Agreement and value at which the property is registered. For Home loan, Market Value of the property and value mentioned in the Agreement are two yardsticks based on which loan is sanctioned with LTV as deciding factor. The lender considers lower of market value or agreement value to apply the LTV and arrive at the loan amount.
Existing Loans are part of credit decision making. The lender verifies the repayment track of existing loans and impact of existing loans taken on business to determine borrower had used the borrowing effectively in the business. There are no restrictions on having multiple loans as long as such loans are justifiable, and the borrower is still eligible for a further loan. However, lenders prefer to evaluate such borrowers more stringently than a borrower with fewer loans.
Purpose, Usage, Benefits, Disadvantages
As the name suggests, Home Loan is availed to buy or construct a residential house. The lender disburses the loan directly to the seller of the property in case the borrower is acquiring the property, or disburse to the borrower account on submission of proforma invoice, bills or engineer’s certificate. Hence, the use of the home loan is specific, and the borrower cannot use the fund otherwise stipulated.
Considering the substantial amount and the long tenure involved, a home loan is certainly a liability. It also offers certain benefits:
Financial Investment: Buying a home is one of the biggest financial investments one may make in their lifetime. The sum that sinks into the home does make it the largest component of an investment portfolio.
Capital Appreciation: Property offers a safe investment option with noticeable appreciate over the years. This can shield one from inflation in the long run.
Low-Interest rate: Interest on a home loan is lowest among any other loans and coupled with various benefits one can avail on the Income-tax deduction, it is certainly one of the preferred lending products that the banking industry offers.
Tax Benefits in Interest Payment: As per Section 24(b) of the Income Tax Act, 1961 a deduction up to Rs. 2 Lakh 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. Further, Principal payment also qualifies to be deductible under sec 80C up to Rs 1.50 lakhs. If the property is let out, entire interest can be claimed as a deduction.
Tax Benefits in Principal Payment: As per Sections 80C of the Income Tax Act, 1961 the principal repayment up to Rs. 1 Lakh on home loan will be allowed as a deduction from the total gross income.
Home Loan comes with a slew of Income-tax benefits to the borrower.
Deduction for Interest Paid on Housing Loan: Home Loan EMI has two components – interest payment and principal repayment. The interest portion of the EMI paid for the year can be claimed as a deduction from the total income up to a maximum of Rs. 2 Lakh under Section 24. For let out property, there is no upper limit for claiming interest. However, the overall loss one can claim under the head of House Property is restricted to Rs 2 lakh only. This deduction can be claimed from the year in which construction of the house is completed.
Deduction in respect of interest paid during pre-construction period: Interest on Home Loan can be eligible for deduction only if the construction of the house is completed. The pre-construction interest is allowed as a deduction in five equal instalments starting from the year in which the property is acquired, or construction is completed, over, and above the deduction you are otherwise eligible to claim from your house property income. However, the maximum eligibility remains capped at Rs. 2 Lakh.
Deduction on Principal repayment: The Principal portion of the EMI paid for the year is allowed as deduction under Section 80C. The maximum amount that can be claimed is up to Rs. 1.5 Lakh. But to claim this deduction, the house property should not be sold within 5 years of possession. Otherwise, the deduction claimed earlier will be added back to your income in the year of sale and taxed at the rate in which the property is sold.
Deduction for Stamp Duty and Registration Charges: Besides claiming the deduction for principal repayment, a deduction for stamp duty and registration charges can also be claimed u/s 80C but within the overall limit of Rs. 1.5 Lakh. It can be claimed only in the year in which these expenses are incurred.
Additional deduction under section 80EEA: Borrowers can claim maximum up to Rs 1.50 Lakh if the stamp value of the property does not exceed Rs. 45 Lakhs. The loan must have been sanctioned between 1 April 2019 to 31 March 2020. And on the date of sanction of loan, individual does not own any other house.
Deduction for Joint Home Loan: If the Home Loan is taken jointly and the property is co-owned by the joint borrowers, then each of the loan holders can claim a deduction for home loan interest up to Rs 2 Lakh each and principal repayment u/s 80C up to Rs 1.5 Lakh each in their tax returns. So, family taking a joint home loan can claim larger tax benefits.
Buying a property on Home Loan is a major financial decision and one needs to know the impact of such a financial decision. 80% of the property purchases in India are done through Home Loans, and it is now a norm to have Home Loan as a tax planning tool. Still, this product has a few disadvantages:
High-Interest outgo: Though the rate of interest on HL is low, the long term in nature makes the total interest outgo offset the appreciation in the property value over the years.
Loss of HRA exemption: A salaried borrower needs to forego HRA exemption once he avails Home Loan. On a self-occupied property, maximum interest claimed as an exemption under sec 24 is Rs. 2 Lakh, that is monthly Rs. 16,667/-. In a higher salary band, the HRA component of the salary is much higher, which becomes taxable. Further, the allowed deduction of Rs. 1.50 Lakh under sec 80C is mostly not used, as the borrower’s saving in PF, Insurance, school fees have left little room for home loan principal.
Long Term Commitment: Though the average sanctioned term of home loan is 18 years; the average duration of home loan is 8 years. Average salary increment is 7% which may be just equal to inflation. If any unplanned expenditure comes up during this period, the borrower faces a challenge in making the Home Loan repayment. Unless some years the salary has a sharp jump, Home Loan could be a real burden.
Adverse Interest Rate Movement: Being home is a long-term loan; it subject to volatility in interest rate movement. On the increase in interest rate, lenders increase the tenure keeping the EMI unchanged; thus, interest component increases in EMI. This further pushes the overall interest payment to the north.
Home loan as a product always lends to the individual person. If an entity buys a property, the loan taken to buy the same is termed as Property Purchase Loan and carry features of Loan Against Property.
Products & Schemes
Buying home is the single largest financial decision for many individual and home has an emotional factor to the Indian. These two aspects and the appreciation in the value of the property has redefined the risk-taking ability of lenders. Lenders has evolved in designing various unique schemes suitable to the requirement of different category of borrowers. A borrower should apply under the most suitable scheme to be most benefited. Aagey.com, With its rich and extensive studies and experience has evolved proprietary algorithm which analyses 1,000+ schemes offered by 75+ lenders to bring the best fitment possible. Few of the schemes are:
- Income to Obligation method
- Based on the transaction and average balances maintained in the accounts. Lenders expect 1 to 2 times of the proposed EMI as an average balance to be maintained in the account.
- The perceived margin of the industry to which the borrower belongs
- based on monthly GST returns filed
- Rental income received from individuals
- Assessed income by qualified, certified professionals
- Funding a limited portion with an assumption, the borrower would honour the obligation considering the value of the property to lending
Home Loan is available in two forms – Term Loan and Overdraft.
The term loans allow to borrow a bulk amount of money from the financial institutions or banks and to repay it over time along with interests calculated on the amount of money remaining to be paid back. Term loan repayment involves payment of interest and principal, and the same is repaid through easy EMIs.
Overdraft facility provides the flexibility to the borrower to withdraw money from his account through cheques or other withdrawal processes as and when there is a requirement. The credit is extended by the lender is up to a certain limit known as the overdraft limit. The arrangement of paying the interests is similar to that of the other form of a loan. As the overdrafts are of revolving nature, thus instead of repaying the borrowed amount within a fixed time period, a borrower can actually keep on borrowing the money and repaying it simultaneously within the sanctioned limit. This is the reason why overdraft is also known as the revolving line of credit. The overdraft limit reduces with a certain amount or percentage of the original limit either monthly/quarterly/half-yearly / yearly and thereby at the end of the tenure the limit zeroed, and the loan is fully repaid. One major benefit of having overdraft is that the borrower can park his free fund in overdraft account and save on interest outlay.
Top up is the loan facility given by the lender based on servicing of an existing loan.
In case of HL, if the borrower has paid 18 months of the sanctioned tenure, the lender may offer an additional loan. Such additional loan is called Top Up and is subject to verification of income documents, re-valuation of the co-lateral and other eligibility criteria laid down. This additional loan could be given as Home Improvement loan for additional work to be undertaken to the existing home or offered as LAP. This is offered as a fresh loan which would run parallel to the existing loan.
Non-resident Indians holding Indian passport can be sanctioned Home loan. Even PIO’s (Person of Indian origin) and OCI’s (Overseas Citizen of India) possessing a foreign passport can also be sanctioned Home loan. While sanctioning loans to NRI/PIO/OCI, the following conditions will be taken into account:
- The loan amount will not be credited to NRE/FCNR account of the borrower and paid directly to the seller of the property.
- The loan will be fully secured by equitable mortgage of the property proposed to be acquired and if necessary, also by a lien on the borrower’s other assets in India.
- The repayment or the EMI of these loans can only be paid through NRE or NRO accounts with remittance from abroad. No other funds can be used for repayment of these loans. The repayment needs to be made in Indian rupees only.
Few lenders insist on taking the GPA holder as a party to the loan structure for added risk mitigate. An NRI/PIO/OCI cannot purchase more than two properties in India.
When taking a Home Loan, lenders usually finance 80% to 90% of the total property cost. The difference between the purchase price or cost of the property and what the lender finance is called down payment or Own Contribution. This own contribution is also known as margin. The more the down payment, the less you’ll need to borrow. The margin is asked to safeguard the lender’s interest by ensuring the borrower also has a financial interest in the property other than paying monthly EMIs.
Foreclosure or Pre-payment is the process when one repays the loan before the loan tenure ends. Generally, foreclosure of loan comes with penal charges depending upon the number of EMIs paid. Shorter the EMI servicing period, higher the penal charges. However, in pursuant to RBI guidelines, foreclosure charges/pre-payment penalties on any floating rate term loans sanctioned for purposes other than business to individual borrowers are waived off. Home Loan is invariable sanctioned to Individual, for non-business purpose and is floating in nature, does not attract foreclosure charges/pre-payment penalties on closure, irrespective of the fact the loan is closed from own fund or borrowed fund. Minimum EMI servicing period to be eligible for foreclosure is 6M to 12M depending upon the policies of each lender.
Home Loan is called as “No Cash out Loans”, that means the lender does not disburse any fund to the borrower, rather the disbursement amount gets credited to the seller account directly. If the borrower wishes to close existing loans, he has to do so from his own fund. Closing of existing loans has two benefits – reducing running EMIs increases eligibility under Home Loan and diverting disposable income towards clearing Home Loan EMIs to repay faster. Since Home Loan are offered at a very low rate of interest among all the loan products, it is advisable to close high-cost loans before taking Home Loan.
If borrower has sufficient funds, but not enough to pre close entire loan amount, then part payment option can be considered. Such payment brings down the EMIs and the total interest paid and to be paid. This is easy, but an effective way to save on the interest outgo during the tenure of the loan.
Lenders allow part-payment up to 20 to 30% of the loan amount twice in a year. Part-payment option exercised regularly will go towards bringing down EMI amounts, the total interest paid and repaying the entire loan faster.
If the borrower is facing a temporary liquidity crunch, may apply to the lender for extending loan tenure so that EMI burden can come down. However, tenure extension may amount to “Debt Restructuring” as per RBI guideline.
Upon borrowing, the borrower creates the mortgage in favour of the lender and hand over the original documents to the lender. The lender has the responsibility of safekeeping the securities, documents, title deeds till the loan is fully repaid.
The Banking Codes & Standards Board of India (BCSBI) constituted by the RBI has recommended banks to put in place mechanisms to ensure that securities and title deeds of borrowers are properly preserved. Also, banks are to return all securities, documents, title deeds within 15 days of the payment of all dues. Banks and NBFCs store documents in strong rooms and non-basement storage places that could help against floods and fire.
Nevertheless, on the safer side, we recommend all borrowers to keep a set of photocopies of all the documents submitted to the bank and a letter from the lender listing out the documents in their custody.
Another aspect of document safety is the copies of documents submitted may get misused by fraudsters. To protect from any fraudulent activity, it is advisable to scribe “Submitted to XYZ Bank for Loan Application” on each and every photocopy of the document submitted.
A fall in Turn Over or Profit or both affects the eligibility prospect. However, lenders may consider funding based on general industry trend; recovery is shown in last 3 to 6 months or appropriate reason justify such fall may not be considered as risky.
There may be a situation where business and property location is in a different place. In such case, valuation and legal of the property to be acquired is initiated in a place where the property is located, and Income document verification along with discussion happens at the borrower’s business place. One must choose a lender who has facility or operation at both the location to make the process easy.
Pre EMI is an option that borrowers can choose only if they are taking on a home loan for a property which is under construction. This is an option most borrowers choose because lenders disburse the loan amount partially and borrowers only have to pay the interest component of the loan and not the entire EMI (consisting of both principal and interest payment) until the entire loan amount is completely disbursed. You can start repaying the full EMI amount once the entire loan amount sanctioned is completely disbursed. Typically, you can pay pre-EMIs for a period lasting up to three years, under which construction should be completed.
Full EMI is a term used in reference to the EMI amount paid by borrowers immediately after the lender disburses the principal loan amount. Here, the principal amount may be disbursed partially or completely, but the borrower chooses to pay the entire monthly EMI regardless. If you opt for full EMI repayment, you have to pay the complete EMI and not as per the amounts disbursed.
The difference in loan disbursal: If the borrower opts for full EMI, entire loan amount will be disbursed at one go, whereas in case of pre-EMI, the loan amount is disbursed partially.
The difference in loan repayment: The EMI amount paid by the borrower in the beginning is significantly lower in case of pre-EMIs. Whereas, in case of Full EMI, Entire amount EMI has to be paid irrespective of amount of loan disbursed.
The difference in interest: Full EMI interest is calculated in accordance with the entire principal amount. Pre EMI interest is calculated in accordance with the disbursed loan amounts. To be noticed, in both forms, the Rate of Interest remains the same.
Repayment track includes repayment of EMI based loans, term loans and interest on working capital utilization. In case of EMI based loans and TLs; payment should happen on the designated date and working capital interest to be served within 7 days of interest debit. Any bounce in EMI due to insufficient funds or delay in interest service affects creditability of the customer and may lead to rejection of the loan application by the lender.
A home improvement loan is offered to facilitate the improvement of a self-owned property to existing or new customers. This loan may be used for repairs, renovations, improvement, and extension of the house. The borrower has to submit a cost estimate of the work intended to be done, preferably certified by a Chartered Engineer to the lender. The money is released at stages according to the percentage completion of the construction work to the contractor to whom it is due.