A home loan is an amount of money you borrow from a bank or non-banking financial institute that you use for the purchase of a home (this amount can also be used to cover other causes that will discussed further below). In exchange for providing you this amount, the lender will charge you interest on the loan amount borrowed. You are given a number of months to repay the borrowed amount with interest. The amount you repay every month is called an installment or EMI.
Why take a home Loan?
Home loans are probably the easiest way to finance the purchase of a home. The price of property is just too high these days. It makes it next to impossible for most to self-finance their home-ownership plans. Even if you have the funds to buy your dream home, it is probably your entire life savings and you wouldn’t have anything to fall back on in case of an emergency if you committed it all in to buy your home.
Home loans offer an easy way out of this situation. They provide up to 90% of the financing required to make the home yours. You just need to provide the remaining 10% and then you’ll be walking into the door of your home very soon.
Details of a home loan you should know!
Whether it is your first step towards owning that dream home for your family or transferring your existing house loan from another lender for better terms or buying a property for investment, it is very essential to get the right loan that is best suited to your requirement at the right cost.
A little knowledge about home loans and what is being currently offered in the market will go a long way in getting that best deal on your housing loan.
But before you proceed to meet the lender, it is beneficial to have some knowledge about the product, even though you may have an earlier experience of availing the house loan. Some of the key points are listed below for your consideration before you approach the lender for home loan.
Purpose of Home Loan
Lenders generally finance for –
- Buying under-construction / new or resale residential property
- Construction of house
- Buying a plot of land for construction of dwelling unit
- Renovation and Extension of exiting residential property
- Refinance of existing housing loan
Home Loan Amount
Normally housing finance companies provide a maximum of up to 80% (90% for loan amount below Rs. 20 lakhs) of the agreement value of the property. As per RBI notification, banks & housing finance companies do not fund stamp duty and registration charges anymore. This means that your down payment will have to be at least 10% – 20% of the agreement value of the property plus 100% of other costs such as stamp duty, registration charges, etc.
The final loan amount is dependent on host of other factors like income and regular outgoings, existing loans, repayment track record, valuation of the property by the lender, etc.
To increase the eligibility amount, you can add your earning parents / spouse / children and in some cases brothers as co-borrowers to the loan.
Home Loan Interest Rates
Very few financial institutes offer pure “Fixed” home loan interest rates that remains fixed for the entire duration of loan. Nowadays, some lenders offer “Dual Rate” where the home loan interest rate remains fixed for duration 1 – 10 years and then gets converted to floating rate of interest.
In “Floating” rate, the interest rate fluctuates with market conditions. The rate of interest is tied up with the Base Rate (BR) of the bank or Prime Lending Rate (PLR) of the Housing Finance Companies and gets affected whenever there are changes in the repo rates announced by RBI or any changes in Base Rate / PLR of the lender.
Home Loan Spread
Normally, the home loan interest rate is calculated as certain point above Base Rate for Banks and certain point above or below PLR ( Prime Lending Rate) for Housing Finance Companies. This difference is popularly known as spread.
You can periodically review your loan account to ensure that whenever there is a reduction in Base Rate / PLR, corresponding changes happen in your home loan interest rate. The lender tends to provide the benefit of lower rates selectively to new borrower by changing the spread rather than by decreasing the Base Rate / PLR.
Therefore, you should ideally consider the spread (preferably lowest or nil in case of banks and highest in case of housing finance companies) along with the BR / PLR, if you want to get the benefit of lower home loan interest rates on par with new customers.
Home Loan Repayment
Most banks & housing finance companies offers maximum tenure of 30 years but it is also restricted by the borrower’s age at the end of the tenure so as to ensure that the loan repayment ends on or before the retirement age of the borrower which is usually 60 years for salaried and 65 years for self employed borrowers.
Fees and Charges of a home loan in India.
Every home loan in India has a costs attached to it like Processing Fees or Administrative fees which are non-refundable, Legal fees payable to the lender or to the legal consultants of the lender, Stamp duty on creation of mortgage, etc.
Foreclosure charges are applicable only on fixed rate loans taken from bank, whereas housing finance companies levy prepayment penalty only on fixed rate loan if prepaid from other than own sources.
It is very important that you as a prospective borrower do your own research or take help of online price and feature comparison like ApnaLoan to compare the latest interest rates, features, fees, etc. and shortlist the lenders that will offer you right loan at right cost.