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All about Home Loan

Most of us are either having a home loan or are planning for one to purchase that dream home. This article is an attempt to demystify the basic home loan terms.

Eligibility for home loan

The amount of loan is decided mainly based on the value of the property and your repayment capacity. The lender will do the valuation of the property to assess the value of the property. Please don’t mistake this as the market value of the property. If the value of the property is 40 Lakhs, you will have to add around 10% of it (around 4 Lakhs) towards the stamp duty and registration charges. Earlier lenders used to add this cost also to arrive at the quantum of loan. But RBI stopped this practice to stop the speculation in real estate sector.

As per the current RBI regulations, you can get 80% of the value of the property as loan if the cost of the property is above 20 Lakhs. If the value is less than 20 Lakhs, this can go upto 90%.In our example of property valued at 40 lakhs, you can get 32 Lakhs as loan. You should plan for the down payment of balance 8 lakhs and the stamp duty & registration charge of 4 Lakhs. A total of 12 Lakhs from own pocket.

Different types of home loan

There used to be 2 types of home loan earlier, Fixed Rate and Floating rate. Now there is one more category added to it – Teaser Loan!

In a fixed rate loan, the interest rate will remain fixed throughout the term of the loan, while in the case of floating rate loan, the interest rate will change, as per the market rate of interest.

In Teaser loans, banks offer an initial interest rate which is lower than the market rate. So, they would just charge you 8% in the first year, and then say 9% in the second year, and then move to the market rate from the third year onwards. This will make a big difference on your EMI from 3rd year! This is now stopped after RBI intervention.

At present the floating rate loans are more popular and the interest rates are in the range of 10-14 % depending upon your loan amount, credit score, relationship with the lender etc.

Tax Benefits on Home Loan

Home loan repayment through EMI consists of 2 parts – principal and Interest. Both of these are eligible for tax deductions.

Under Section 80C, you will get exemption upto 1 Lakhs for the principal repayment. But this limit of 1 Lakhs is applicable to your PF, PPF, Insurance premium, Tuition fee paid etc. In most cases, you will already have 1 Lakh under this section, which will make the principal repayment out of the tax benefit.

But the interest paid upto 1.5 Lakhs in a year is eligible for deduction under section 24. What is more? If you go for a joint loan with your wife, she can also claim upto 1.5 lakhs deduction. If you are going for a second home loan, then there is no limit of 1.5 Lakhs. You can claim the entire amount of interest paid as deductions!

Prepayment Penalty

Earlier banks used to charge penalty, if you preclose your loan. After lot of criticism and after strong regulatory intervention, now, banks and housing finance companies stopped charging penalty in case of prepayment of home loan on floating rate basis. But in the case of fixed rate loan or Teaser loan, it is still there.

BPLR and Base Rate Linked Loan

Earlier home loan interest was linked to the Prime Lending Rate of the bank. Later, banks switched over to a more transparent system called Base Rate. This results in better rates for the new customers and higher interest rates for the existing customers. But now banks are permitting old customers to switch over to the Base Rate linked loan, after charging a small penalty. Still it makes sense for the old customers to switch over to the new system which is more transparent.

Effect of a 3% increase in loan interest

Suppose you have taken loan for 30 Lakhs for a 15 year term at an interest rate of 8%. The EMI will be around 28670/-. Suppose the interest rate is increased to 11% after you have paid 12 EMIs. There are 2 ways to handle this situation.

  1. Increase the EMI. In this example, the EMI for the remaining 14 years will be 33810/-. An increase of 5140 or 18%.
  2. Ask the bank to increase the term of the loan, without increasing the EMI. In this example, if he continues to pay the same EMI of 28,670, his loan repayment term will be extended by 9.5 Years! In some cases, it may stretch beyond your retirement age.

Don’ go for a loan, as per your eligibility, but go for loan, as per your repayment capacity. Arrange for a large down payment and go for the minimum loan, which you can repay comfortably even if there is an increase in interest rate.

9 Comments

  • Bhupender Singh Posted March 30, 2013 2:55 pm

    Pls guide me that Interest on housing loan for under construction property is eligible for tax exumption.

    • Melvin Joseph Posted April 2, 2013 3:58 pm

      The interest paid during the under construction period can be claimed in 5 equal instalments starting from the year in which you occupy the house.

  • Ravi Posted May 3, 2013 11:25 am

    Hi,
    Builder from which i am buying Plot + Villa is providing only IndiaBull as a home loan provider. I don’t want to take full amonut from IB so if i am taking loan from IB for plot only then will it be possible to take construction loan from other bank. (Builder hasn’t approach any other bank).
    Please reply.

    • Melvin Joseph Posted May 4, 2013 5:22 pm

      You can apply any bank with the documents and you will get it as per your eligibility.

  • Charles Posted October 4, 2013 6:29 pm

    Can you please let me know what needs to be checked carefully when buying a flat in Joint Venture developement project.

    Many thanks in Advance.

  • yogesh Posted September 7, 2014 5:28 pm

    Pl.suggest me..i took Home loan of 17lac frm LIC hoysing fin.ltd in 2009 wt 9.35% rate for 20 yr.,now it is 12%.Till now i paid to lender 10lac through EMI..I m started to transfet this home loan to SBI wt rate 10.15 for 20 or 15years including Term insurance cover as home loan protection fm sbi life included in loan amojnt to b paid by sbi as single premium.sbi has sanctioned me 18.34lac loan for ths transfer…will it be wise descisoion to go for switch over for 15 years considering those 10 lac so far paid towards interest to lic..In ths switch ovef LicHFL is demanding 16.58lac in foreclosure letter.(rediculos business).pl suggest..im in deep dielema. ..pl reply

    • Melvin Joseph Posted September 30, 2014 6:27 pm

      In the early years of the loan, bulk of the EMI goes towards the interest and a small amount goes towards principal. It will be better to go for 15 year loan and clear the loan in short term to reduce your interest outgo. If you go for term policy, it will be better than the single premium home loan insurance.

  • viji Posted October 6, 2014 2:17 am

    Hi,
    I have taken a home loan of 22.55 lakh from GIC housing finance in Sept this year @11.5% fixed interest rate for five years for a tenure of 15 years. I would like to reduce my tenure and bring down the rate of interest. When can I switch my loan to SBT or SBI. Is there any penalty to be paid to GIC and is it wise to switch to another bank. Pls advise.

    • Melvin Joseph Posted October 17, 2014 5:01 pm

      Yes, there will be penalty for switching now. Still it will be better to switch it to SBI or SBT. You may get it at around 10.2%.

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