Home Loans

Buying your own home is one of the biggest financial decisions you’ll ever make.

Buying a home is an investment which allows a family to create their own small world in their dream house. In order to help people achieve their dreams with the least number of monetary hassles, home loans / housing loans take the lead and play an extremely significant role. Home loan is the amount borrowed by individuals for a fixed period of time, from financial institutions, to purchase, construct, repair or renovate their residential property. Just like any other loan, the lenders charge an interest on the borrowed amount which needs to be paid by the borrowers, along with the principal amount.

So take the time to consider your options, find the right loan for your needs and circumstances and understand all the aspects and charges applicable before you sign-off the loan agreement.

Why to opt for a home loan?

  • Helps to achieve the seemingly impossible dream house of an individual, because the buyer usually does not have the entire cost at the time of buying the property.
  • Bridges the gap between the interested buyer and the seller.
  • The bank pays for you at the time of your need, and you pay to the bank according to the plan and tenure chosen by you in instalments.
  • The bank pays for you at the time of your need, and you pay to the bank according to the plan and tenure chosen by you in instalments.
  • Both the buyer and the banks have a win-win situation, where banks earn profit by earning money along with interest and the home buyer can accommodate the entire cost of the property according to his suitable tenure.
  • Home loans also make the buyers eligible for certain Income Tax exemptions.
    • The amount of principal paid for the year is allowed as deduction u/s 80C with a maximum cap of Rs 1.5 lakhs.
    • A deduction for stamp duty and registration charges is also allowed u/s 80C but within the overall limit of Rs 1.5 lakhs.
    • Further, first time home buyers can claim a deduction under sec 80EE for maximum up to Rs 50,000. To claim this deduction, the amount of loan taken should be Rs 35lakhs or less and the value of property should not be more than Rs 50 lakhs.
    • The amount of interest paid for the year is allowed as a deduction from your total income up to a maximum of Rs 2 lakhs u/s 24 of the Income Tax act.
    • If the loan is taken jointly and the property is also co-owned, then each of borrowers can claim a deduction for Home loan interest up to Rs 2lakhs each and principal repayment u/s 80C up to Rs 1.5 lakhs each. Hence, home loan taken jointly with your spouse, father, mother, brother, son can help you claim larger tax benefit.

How do home loans work?

Typically a Home Loan works this way:

  • Down payment: The more you save, the lower the amount you need to borrow and the less you will pay in interest over the life of the loan.
  • Apply for a loan and get it approved: The lender approves the loan in principle, enabling you to look for a property within a set budget.
    Once you know how much you can borrow and how much you have for the downpayment, it becomes easier to choose the property.
  • Offer the property as security: This means you pay a lower interest rate than for other loans. But, if you fall seriously behind on your repayments, the lender has the right to sell your home to get its money back.

Home loan checklist

  • Calculate how much you can afford: Borrow only to the extent you actually need and can afford. Use our home loan calculator to work out your repayments.
  • Do a budget: Once you know how much you can afford and the margin money you have, look out for a house accordingly.
  • Documents you would need: The documents required at the time of loan application include the Identity Proof, Address Proof, Income documents and property documents.
  • Choose your features: Typically, the interest rate on a ‘no-frills’ loan will be lower than on one that offers more features. So make sure you’re not paying extra for things you don’t need.
  • Read before you sign: Read the terms and conditions in the loan agreement before you sign anything. Ask questions if there’s something you’re not sure about. Never sign blank forms or leave details for the lender or broker to fill in.

Work out how much you can afford to borrow

  • How much do you need for a down-payment?
    As a rough guide, aim to save 20% of the purchase price, plus enough to cover costs. Its always advisable to opt for Loan Insurance as no body would like to leave behind a loan liability. This is a life insurance that protects your family from paying off the loan in case of any mis-happening to you during the currency of loan.
  • How much can you afford to repay?
    Taking out a loan will mean you have less money for other things. Use our home loan EMI calculator to work out how much you can afford in repayments.
  • Can you afford all the costs?
    Add all up-front costs like stamp duty and legal fees; and recurring costs like loan repayments, electricity and water charges, and club or society charges.
  • Are you a first-time home buyer?
    You may be eligible for Interest subsidy on your first home purchase on loan. Its called Pradhan Mantri Awas Yojna. The beneficiaries can be borrowers from Economically Weaker Section(EWS), Low Income Group(LIG) or even Mid-Income Group(MIG-I & MIG-II). Income groups earning ute Rs.18Lac per year can avail interest subsidy under this scheme.

Read More…. Pradhan Mantri Awas Yojna

Check with your lender for the following important information

  • Loan amount and tenure (make these the same on each, for easy comparison)
  • Type of interest rate- fixed or floating. If fixed, then for how many years.
  • Repayment method and frequency
  • Who all can be co-applicants
  • Processing fees (if any) and admin fees
  • Legal and valuation charges to be paid separately or are a part of processing fees
  • Total amount to be paid back (loan amount plus fees)
  • What happens if interest rates increase?
  • How can I repay my home loan faster?
  • Is there any pre-payment penalty incase of early payment?

How do interest rates work?

Type How it works Advantages Disadvantages
Variable rate The rate you’re charged goes up and down Usually able to make extra repayments with no prepayment charges Your lender may put the rate up at any time
Fixed rate
  • Allows you to lock in an interest rate, typically for a period of 1–10 years
  • May be offered for an introductory period
  • Reverts to a variable rate at the end of the period
  • Your interest rate will not go up during the fixed rate period
  • Know how much your repayments will be during this period
  • Won’t benefit from falling interest rates
  • May not be able to make extra repayments without charges
  • May be charged a switching fee for moving to floating rate before the expiry if fixed rate period

What type of Home Loan is right for you?

Type How it works Advantages Disadvantages
Standard loan (principal and interest)
  • Make regular payments to cover the principal amount borrowed and the interest charged
  • As you pay down your loan, you build up equity (the value of your property, less what you owe)
  • Fixed, variable and partially-fixed rate loans (see below) are all variations on a standard loan
  • As you pay off the principal, the balance goes down
  • Can usually repay loan in full at any time
  • May have option of an offset account, where the amount in your linked current account is offset against your loan balance to reduce interest payable
  • May be charged a prepayment fee for early pay out or refinancing of a fixed or partially-fixed rate loan
Split loan (or partially fixed) You pay fixed interest for an agreed portion of your loan and a variable rate on the rest
  • Know what repayments will be on fixed rate portion
  • Usually able to make extra repayments on variable rate portion
  • May benefit if rate goes down on variable rate portion
  • Less flexibility than a fully variable rate loan
  • May be charged a prepayment fee to pay out or refinance the fixed rate portion

A home loan is a major financial decision, so don't rush into anything. Shop around when choosing a home loan and always review the loan terms closely before you sign up.