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. Owning a home of your own is generally an obvious as well as a major decision in a person’s life. However, the cost of construction or purchase of property is quite high and this is where home loans play a major, almost indispensable role for majority of home buyers. Home or housing loans are advances made to borrowers who require funds to purchase houses/flats/land. They can also be availed of for construction, extension and renovation of houses. Lenders can be banking or non-banking financial institutions.
Why Home Loan:
In the last few years, real estate has been one of the most lucrative investment options for investors. No matter how profitable it sounds, the rising stature of real estate as an investment option has led to soaring prices of property in the country. Both land and buildings have become extremely expensive for customers to buy. This has led to a surge in the number of home loans that are applied for each day.
- Even though rising prices of real estate is one reason for borrowers availing home loans, another one major reason behind this is that property transactions are generally hefty as compared to other day to day financial transactions. As such, it is not at all necessary that the buyer will have the entire property cost available with him or her, at the time of buying property. This is where home loans step in and bridge the gap between property seller and buyer.
- Banks chip in to pay on behalf of property buyer in return for a particular rate of interest. The general rule is 80-20 which means that banks offer only 80% of the value of home to customers and the rest 20% is to be borne by the property buyer. This serves as a win-win situation for both banks and property buyers, since, banks are able to make profits by loaning out money while buyers are able to assimilate the entire cost of property and pay it back over a fixed period of time.
- Home loans are eligible for certain income tax exemptions which can be used to save up on the amount of income tax that an individual pays every financial year. Under section 24 of the Income Tax Act, tax benefit can be claimed on up to Rs.1.5 lakh out of the interest component of your home loan. In case you are staying in the house bought on loan, then you can claim a maximum exemption of Rs.1 lakh on the principal amount of the home loan too.
Types of Home Loan:
Depending upon the type of property being purchased and the quantum of loan being availed, home loans can be classified into the following different types. In India, banks and NBFCs generally offer home loans under any one of the following listed variants of housing loans.
Home Purchase Loans
As the name itself indicates, home purchase loans are specifically given for purchase of flats or homes. These are the most popular type of home loan and are availed by most home loan borrowers. Almost all banks and Non-Banking Financial Corporations offer home purchase loans.
Home Loan for Construction
Home loan for construction is offered to customers who want cash to construct their own house on an existing piece of land. The catch is that the land for construction should have been bought 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 loans are loans offered by banks for purchase of land or plot. These loans are not necessarily offered by all banks or NBFCs.
Home Extension/Renovation Loans
Home loans for extension or renovation of home are offered to those home loan borrowers who already have a house but are looking for further construction or renovation on their existing piece of property. For example, addition of an extra room or renovating a staircase etc.
Features of Home Loan:
Some of the most prominent features of home loans are outlined below.
- Home Loans are secured advances.
This means that home loans are offered in turn for a security deposited by the loan borrower. Collateral is usually the property that is being funded. Existing property can also be put up as security.
- Interest rates are flexible being either Fixed, Floating or a combination of fixed and floating. The Indian government has come up with the new marginal cost of funds based lending rate or MCLR which is to be used by banks to decide the rate of interest at which they can lend money to a home loan applicant. Earlier base rate used to be the rate based on which banks used to decide their lending rate. MCLR is a more flexible rate which takes into account a lot of factors like funding composition and strategies. MCLR will be reset by banks after every specific interval of time. For example, if a bank decides to reset their MCLR annually then your home loan rate will get reset after every one year.
- Home loan interest rates are lower when compared to unsecured personal advances. Unsecured personal loans have a higher risk ratio associated to them since the bank does not have any security deposit to fall back on in case of a loan default. Hence, these loans are charged a higher rate of interest as compared to home loans which expect the borrower to deposit some kind of collateral as security.
- The advance can be used to fund property for residential or investment purposes.
Whether you need a house to stay in or for investment purposes, home loan can be availed from a bank of your choice.
- Amounts offered are higher than under other types of loans; up to 85% of the property value.
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. Hence, the loan tenures offered for home loans are also longer than those for other types of loans.
- Repayments are made in EMIs (Equated Monthly Instalments).
Since, the amounts sanctioned towards home loans are usually huge and the tenure also is long, the repayment of home loans is done in equal monthly installments.
- Pre-payments are allowed, to reduce liability.
Pre-payment of home loan is allowed by all banks, private and public. Earlier, some banks used to charge pre-payment fees for earlier than stipulated repayment of home loan amount. However, these days most public and private banks let borrowers pay off their home loan as and when convenient. Most banks have stopped charging any pre-payment charges for the same.
- They are long-term in nature; tenors usually vary between 5 - 30 years
Since the loan quantum for home loans is generally greater than all other types of loans, the repayment period also is longer than that for any other loan type.
- Non-interest charges include processing fees, pre-payment charges, inspection fees, documentation fees etc. Apart from the interest charged on home loan amount, there also are various charges that are levied while the loan sanction process is underway. These charges are communicated to loan applicants at the time of application.
- Co-applicants/joint-applicants are allowed.
Home loans allow for joint loan applications. Since the loan quantum is high and the tax benefit also is good, banks allow for co-application or joint application of home loans.
- They qualify for tax benefits as per provisions of the IT Act, 1961 and hence, make for a good investment option.
Home loan Interest Rates:
Interest rate charged on any home loan scheme is one of the primary features. The rate of interest is what generally helps a customer decide in favor of or against a home loan scheme or lending entity. Fixed rate of interest and floating rate of interest are the two types of interest rates that banks normally ask customers to choose from at the time of home loan application. There are banks that give their home loan customers the flexibility to switch from one type of interest rate to another.
Home Loan Eligibility:
Home loans are secured advances and therefore the eligibility criteria for these loans is laid out differently by different banks. Here are some of the most important factors that feed into determining home loan eligibility criteria for almost all banks in India.
Age: The minimum age at the time of application should be 21 years. Repayments have to be completed before the age of 60 or 65.
Employment: Ability to service interest charges, as reflected in the borrower’s earning capacity, is important. Borrowers should:
- Be salaried employees or self-employed persons (professional/non-professional)
- Have been in employment/business for at least 3 years of which current employment should account for at least 1 year.
Income: A minimum income varying between Rs.5 - 7 lakhs would be required. This depends on the nature of employment i.e. salaried or self-employed.
Residence: At least one year of stay at the current residence is required to display stability with respect to employment as well as financial. This is an indirect indicator but is taken into account by almost all banks while calculating home loan eligibility.
Credit Rating: A good credit score is required (a score of 750-900 from CIBIL is considered good). Besides this, a healthy financial background is vital for approval and to determine the interest rate and loan amount.
Parallel debt channels: While sanctioning home loan to customers, banks also look into the current credit standing of the loan applicant. If a borrower has other home loans, personal loans or car loans in-progress then the lending entity calculates the loan quantum eligibility accordingly. Banks do this to make sure that the loan applicant is able to pay the minimum monthly installment towards his/her home loan.
Documents Required for Home Loan:
Documents to be submitted differ according to the eligibility requirements. The following, however, are commonly requested for:
- The application form which has to be signed and affixed with the specified number and size of photographs
- Proof of identity
- Proof of address
- Proof of employment, income and tax paid as per KYC requirements.
- Documents furnished as proof of address or identity are the following:
- Passport/Voter ID/Driving License/Ration Card/Utility Bills/Lease Agreements/Property Deeds/Salary Slips (3 most recent months)/Salary Certificate/Bank Statements (3-6 most recent months)/Audited financial statements/Form 16/ITR/Business deeds e.g. MOA, Partnership Agreement etc./Appointment Letter
- Documentary evidence of the property for which loan is being applied
- Cheque for payment of fees charged to process the application.
- In case of a joint application, the co-applicant also is required to furnish documents pertaining to the above listed details.
Top Banks That Offer Home Loan in India:
India has a long list of both private and public sector banks that offer home loans. The main confusion which plagues most first-time home loan applicants is which bank to apply with. There are pros and cons applicable to every bank. Public sector banks are more stable and less likely to go bankrupt in the long run than private sector banks. Alternatively, private sector banks offer smoother customer service and processing time as compared to public sector banks.
One of the most popular strategies that customers employ is to avail home loan from the bank where their salary account or savings account is hosted. This eases out the approval process a bit since all the KYC details and financial data is already available with the lending bank.
Various surveys have come up with a list of most popular banks for home loans in India. However, the 5 names which are always present in these lists are State Bank of India, HDFC Bank, Axis Bank, LIC Housing Finance and ICICI. While SBI is the most trusted brand because of its public holding, HDFC despite being a private lender is popular since it is basically aimed at offering housing finance to customers in India. Most customers look for an established brand name before zeroing down on a particular bank name. The main reason for this is home loan as a product is a long-term offering and it is wise to choose a bank that has been around for some time and one that has a substantial customer base.
Apart from banks, there are several NBFCs or Non-banking financial companies which offer home loans to customers. These companies too, offer home loan to customers. The biggest differentiating factor is that the eligibility guidelines for NBFCs are slightly flexible than those of banks. Also, the loan amount sanctioned by an NBFC is generally greater than that sanctioned by any bank, public or private. Top NBFCs that offer housing finance to customers in India are India bulls Housing Finance, Dewan Housing Finance, Reliance Capital, Shriram Transport Finance, Muthoot Finance, LIC Housing Finance.
Fees and Charges Applicable to Home Loans:
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. These charges may differ in value from one bank to another, however, the types of charges remains the same for almost all banks.
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. There are times when banks are willing to negotiate on the processing charges and lower this fee or waive it off completely depending upon certain terms and conditions.
Late payment charges:
Late payment charges are levied by almost all banks when a loan borrower is late in paying loan installment. There are times when financial crunch or some other financial liability or plain oversight might result in non-payment of home loan installment on time. This results in a late payment fee being levied by the bank.
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. This fee is typically levied when any home loan customer repays his/her home loan prior to the stipulated home loan tenure.
Typically, home loans are offered by banks either on a fixed interest rate or on 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 is charged in order to pay the lawyer who does the task of verification of property that is being bought with the loan amount. Most banks do not have in-house lawyers and as such pay fees and recover it from home loan customers.
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, 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.
Online Application of Home Loan:
The days of running from pillar to post to submit just one loan application form are over. Online home loan platforms like BankBazaar are the latest fad. You no longer need to perform the age-old task of going to each financier, finding out what offers are available, collating the information, calculating EMIs, submitting the required documents and following up on applications. The easiest way is to go online and compare various home loan offers in the market and then make a list of your chosen lenders. This saves a lot of time and effort of home loan borrowers as well as financial institutions.
With technology leading the way in almost every sector, online information gathering and application of home loans is gaining momentum. Online application is a time-saving and convenient way to apply for loans and is fast becoming the preferred mode of choice for many loan borrowers.
Why Choose BankBazaar?
BankBazaar is India’s leading portal for financial services where different home loan offers from various banks can be compared at one place and applied for without having to visit any lending institution. Here’s what users can do:
- Define loan parameters to receive free quotes, instantaneously, in an easy-to-understand manner.
- Compare offers to identify the right lender to deal with.
- Make real-time home loan comparisons to find the lowest rates in the market. At BankBazaar, interest rates are constantly monitored and updated to reflect the latest changes made by financiers.
- Avail exclusive discounts and deals for huge savings through BankBazaar’s active collaboration with leading financial institutions and banks.
- Check home loan eligibility online using BankBazaar’s home loan eligibility calculator and get immediate e-approvals.
- Determine repayment amount as well as schedule using BankBazaar’s home loan EMI calculator which also provides amortization tables.
- Browse user reviews to gain insights on service provided by various institutions.
- Apply online for the chosen home loan product directly through the BankBazaar website.
- Receive end to end guidance from a dedicated customer care team for smoother processing leading to quick disbursal of money.
- Get regular status updates via emails and SMS for easy processing of your home loan.
Points to watch out for While Choosing a Home Loan:
Buying a house can be one of the most important financial decisions of an individual’s life and as such there are a host of things that one needs to be careful about while availing home loan.
Listed below are some of the most prominent points that should be kept in mind when one is looking to obtain housing finance.
Perform thorough research:
The first and foremost point which marks the beginning of any home loan application is finding about various home loan schemes in the market and the various banks and lending institutes that are running those. A thorough research will give not just specific details about different loan schemes but will also help you understand the various pros and cons that lenders might have.
Learn about interest rates:
For any home loan borrower, there are two types of interest rates that they can choose from. These are fixed and variable interest rates. Choosing one of these and knowing why to choose it is a major step that determines your home loan repayments installments and the overall interest amount that you pay towards your home loan.
Find out the various fees and charges:
Different banks charge different amounts as loan processing charges. Apart from this there are various other types of fees and charges that banks levy from their customers. Checking on these charges can help you save quite a bit of money when applying for home loan.
Check your CIBIL score:
Home loans are huge financial liabilities and as such banks make sure that you have the necessary financial capability to repay the same. This is why credit scores of loan applicants pay a huge role in deciding the home loan eligibility. Applicants with a mediocre or a poor credit score may end up with their home loan application being denied or with a higher rate of interest being charged.
Understand pre-closure terms and conditions:
Certain banks allow free pre-closure of home loans while other charge a specific pre-payment fee. Depending upon your preference, you should find out all about pre-closure terms and conditions and then apply for home loan with the bank of your choice.
Read the fine print carefully:
Home loan is a huge as well as long financial liability. Hence, reading everything that is listed in the home loan document that you sign is a primary step. Most home loan applicants get their loan agreement reviewed by a private lawyer so as to ensure that all terms and conditions listed in the document are in-line with their understanding of the financial product.
Generally, a host of tiny but crucial information is listed in the fine print that comes along with your loan document. Reading through the full document is crucial to you not feeling cheated at any point of time, later.
Understand your financial stand:
Availing a home loan scheme that suits your financial stand and zeroing in on a house that is well-aligned with financial capacity is a sure way to ensure a comfortable loan tenure. There are times when customers make the mistake of buying a property that is way too expensive for their pocket. At other times, customers may end up availing a loan that has installments which are too high for them to pay. Any such situation will lead to delayed repayments and thereby a higher final amount being paid to the bank as interest and fees.
Home Loan FAQs:
When do I make my home loan application?
There is no particular right time for making your home loan application. As soon as you have figured out your budget and zeroed down on the property that you want to buy, you should apply for home finance.
Is visiting the lending bank compulsory to avail home finance?
Yes, mostly. Although a lot of loan processing work has been shifted to online platforms, still a loan applicant is required to visit the lending bank branch at least once to formally close the loan processing formalities. Many private banks have started sending their representatives to borrowers’ place to get documents and forms signed and verified.
Will the lending bank provide the entire cost of the property that I wish to buy?
No. Generally, banks only lend 80% of the cost of your property. The rest 20% is to be borne by the loan borrower. However, to ease out the process for customers, most banks have broken up this ration into 10-80-10 so that at the time of availing the loan, customers are only required to pay 10% of the total cost and the rest is paid by the bank.
When does the repayment period start?
Repayment of loan starts after the entire home loan is disbursed to the borrower. In case of under-construction properties banks allow payment of the partially disbursed amount. Towards this partially disbursed loan amount, customers are free to either repay the principal and interest amount both or just the interest amount or none at all.
Can loan repayment be made ahead of schedule?
Yes. All banks allow pre-payment of home loans. Some banks charge a pre-payment fee for that while others do not.
Do I have the right to choose between base rate and MCLR for my home loan request?
Current home loan borrowers who have a running home loan account can choose to continue with base rate or switch to MCLR. New home loan borrowers need to avail the new MCLR rates which are subject to change every set interval of time as mandated by the RBI.
How long does it take for home loan to get sanctioned?
Your home loan will get sanctioned as soon as all the required documents are submitted and verified successfully. This may take anywhere between 10 to 30 days.
Do I get to avail tax benefits on home loan?
Yes. Home loans are a great instrument to avail tax benefit. This is offered to both the interest and principal components of home finance. Under section 24(1) interest repayment of Rs.1,50,000 is eligible for exemption and on the same housing loan a principal amount of Rs.1,00,000 is eligible for exemption from tax.
Is taking a home loan a smart investment move?
Any kind of property is considered an asset and hence buying a property is considered as a wise decision. Also, real estate prices have been appreciating on an annual basis. If you are confident that your income is sufficient to cover you for a long term liability like home loan then you can surely avail one to buy a property.
What is meant by EMI?
EMI stands for Equated Monthly Installments. An EMI is made up of two components, principal and interest. Any loan availed by a borrower is repaid in EMIs over the loan tenure.
What collateral do I need to furnish as security?
Since home loan is a huge loan amount and the tenure also is long, hence, almost all banks ask borrowers to furnish some collateral as security against the loan. This include the papers of property for which loan is being sought, some other property papers, any fixed deposit schemes or insurance schemes etc. that are on the loan borrower’s name.
Can I apply jointly for a home loan with my spouse? Will both our incomes be considered for loan quantum?
Yes. You can apply jointly in your and your spouse’s name. Both of your incomes will be considered for determination of loan quantum.
What documents do I need to submit to avail home loan in India?
Generally, all banks ask for proof of address, proof of identity, bank account statements and salary details from home loan borrowers. This list may differ a bit from one bank to another.
How can I make EMI payments against my home loan?
Home loan EMI payments can be made to the bank either by using offline channels like cheque, demand draft and cash or by availing the net banking facility that all banks offer to their home loan customers. Post dated cheques and Standing Instructions are another popular way to make EMI payments.
If I deposit my property documents as security with the bank, when will I get those back?
Any property document that you submit as security collateral is returned to you only once the entire home loan amount is repaid and the home loan on your name is closed.
Can I avail home finance for renovation or construction of house?
Yes. Home loans are offered under various sub-heads. Housing finance for renovation of property or construction of house is also offered by all major banks in the country.
Can I switch from fixed to floating rate of interest and vice versa during the tenure of my home loan?
Yes. Most banks allow switching between fixed and floating rates. However, customers may be charged a particular fee for the same.