What is a home loan or Housing loan?
A home loan or housing loan is an amount borrowed by individuals for a fixed tenure from either the banks or from the NBFCs to buy, construct, repair or renovate a residential property. Lenders charge an interest on the amount borrowed, which has to be paid by the borrowers along with the principal amount.
A home is not just a place where you live but a place to make memories with your loved ones. Owning a home is very important for your own present and future life. It is also a major decision in a person’s life. The cost of purchase, construction, renovation or repair of residential house property is very expensive these days. This is where the need for home loan arises. Home loan or housing loan is one of the most popular products offered by banks and NBFCs to customers. Home loan is also the largest selling banking product and the one that ensures the longest banking relationship with the lender.
Features of Home Loan
- A home loan can be taken for the following purposes:
- Purchase/ construction of house/ flat
- Purchase of plot and construction of house thereon
- Repairs/ improvements/ extension of the existing residential property.
- Take-over of housing loan availed from another bank / FI
- Home loans are secured loans i.e. as collateral is essential for taking a home loan.
- Home loan interest rates are lower when compared to unsecured personal advances
- A housing loan interest rate is lower as compared to the unsecured personal loans. The interest rate for housing loans is lower because these are secured loans.
- Repayments are to be made in EMIs
- Considering the cost of buying property as compared to any other commodity, the loan amount offered and sanctioned is substantial as compared to other types of loans.
- The home loan tenure is usually long-term and ranges from 5-30 years.
- Co-applicant/joint applicants are allowed
- Pre-payments are allowed on home loans
- The interest rate varies from a minimum of 8.35% to a maximum of 16%. It also varies for self-employed and salaried individuals.
- Insurance of the property is compulsory to the tune of the value of the property.
- Home loan qualify for tax benefits under the Income Tax Act,1961 under the following sections
- Section 80C: Tax benefit on Home Loan (Principal Amount)
- Section 24: Income Tax Benefit on Interest on Home Loan.
TYPES OF HOME LOANS
Different types of home loans are available to suit the requirements of the customers. Following is the list of types of home loans offered by the banks and NBFCs:
- Home purchase loans: As the name suggests these loans are taken in order to purchase houses or flats. These are the most common and the most availed type of home loan taken.
- Home loan for construction: The home loan for construction is taken when the home loan is taken for construction of a house on an own piece of land. The catch is that the land for construction should have been brought within a year of availing the loan for the cost of land to be counted as part of this loan. In case the land was bought earlier than one year, then the cost of land is excluded from the loan amount. The formalities for construction loan are slightly different than those for regular home loans. The loan applicant needs to give a lump-sum construction cost estimate to the lending entity and thereafter the lender evaluates and decides to sanction or reject the loan.
- Plot loan: This loan is taken to purchase a land or plot.
- Home extension/renovation loan: this type of loan if for those who already have a house and want to either extend it or renovate it.
- Home conversion loan: in case you have taken a loan for the purchase of a house and then after you wish to shift to another house then this type of loan will help to get the loan transferred from one house to another.
- NRI Home Loans: These are designed for NRIs who wish to purchase a residential property in India. The procedure and documentation for NRI Home Loan is different.
FEES AND CHARGES APPLICABLE TO HOME LOAN
Apart from the rate of interest that is charged on home loan products, there are various fees and charges that are applicable to housing finance offered by different banks. Following are the various charges charged by the banks:
- Processing Fee: Banks generally charge a fee for processing your home loan request. These charges vary with different banks. This fee is non-refundable and is either a specific percentage of the loan amount or a fixed amount of money. Some of the banks waive this charge depending on the terms and conditions.
- Late payment charges: Late payment charges as the name suggests are levied for the late payment of EMI.
- Pre-payment charges: Pre-payment charges are levied in case of pre-closure of the home loans. This means that if you repay the home loan before the decided tenure then the banks might charge pre-payment charges. Most banks have stopped charging any kind of fee for pre-closure of home loans. However, some banks still charge some percentage of home loan balance as pre-payment charges.
- Conversion charges: Typically, home loans are offered by banks either on a fixed interest rate or at a floating rate of interest. The customer does have a choice of switching between these two rates. Every time a customer applies for switching from fixed rate to floating or vice versa, conversion charges are levied by the bank. These charges are some specific percentage of the principal outstanding amount.
- Legal Fee: a Legal fee is charged in order to pay the lawyer who does the task of verification of property that is being bought with the loan amount.
- Administrative Fee: Some banks charge administrative fee separately from the processing charges. This fee is levied to pay for the administrative cost that the bank incurs for processing of home loan application. Broadly speaking, the administrative fee is levied by banks to compensate for the back-end administrative processes that are performed while processing of home loan applications.
- Statement of account: One copy of home loan statement is provided by the bank free of cost, more than that is chargeable. This fee is generally specific to the bank and hence varies from one bank to another.
The actual loan amount will be determined by taking into consideration such factors as applicant’s income and repaying capacity, age, assets and liabilities, cost of the proposed house/flat etc. To enhance loan eligibility you have the option to add:
1) Income of your spouse/ your son/ daughter living with you, provided they have a steady income and his/ her salary account is maintained with SBI.
2) Expected rent accruals (less taxes, cess, etc.) if the house/ flat being purchased is proposed to be rented out.
3) Depreciation, subject to some conditions.
4) Regular income from all sources.
- Indian citizen above 21 years
- Individual, either singly or jointly with other family members viz. father, mother, son and/or spouse, who have regular sources of income as co-applicants.
- Siblings, i.e. brother-sister, brother- brother, sister-sister can be permitted as an applicants/co-applicants subject to the property must be in the joint names of the siblings.
- NRIs are also eligible for the home loan. Contact our nearest branch for further details.
MARGIN/LOAN TO VALUE RATIO
This is the margin/loan to value ratio opted by most of the banks. Margin refers to the percentage of the value of the property that will not be funded by the banks. It will give the remaining amount as loan.
- Equitable mortgage (E.M.) of the residential property
- If the house/ flat proposed to be purchased is yet to be constructed or is under construction, interim security may be required (till the period of its completion)
- Third party guarantee is not mandatory for Resident Indian
- One/two guarantors of Indian Residents, having means equivalent to that of the loan amount, is to be provided by the NRI applicant.
- The maximum repayment period is 30 years within which the loan is to be repaid.
- In case of repairs, the maximum repayment period is 20 years.