All you need to know about Home Loans

A boost to affordable housing coupled with the rising number of housing finance companies has propelled the demand for home loans in the country. If you, too, intend to opt for a home loan but don’t know how to go about it, this article will answer your queries.

All about home loans

A home loan is a secured mode of finance in which financial institutions give you funds up to 80-85% of the property’s value as a loan, based on your eligibility. This sum needs to be repaid in equal monthly installments or EMIs over a tenure that can range from 10 to 15 years, sometimes longer. You can procure a home loan on fixed interest rates or floating rates. Fixed interest means the rate of interest remains unchanged throughout the tenure of your home loan. With floating interest rates, the interest changes according to market dynamics.

How to apply for a home loan

Applying for a home loan is easy if you understand the basics. You can approach banks, non-banking finance companies (NBFCs) and housing finance companies for a home loan. You need to fill an application form for the loan and submit the required documents. Though the list of documents varies across lenders, all of them will require the following:

• KYC documents
• Address proof
• Identity proof
• Salary slips
• Bank account statement of the past 3-6 months

Based on these documents, the underwriting team of the lender assesses your home loan eligibility. Since home loans are a secured mode of finance, you will need to provide collateral, which can be property, jewellery or even your life insurance policy (endowment and money-back policies only). In case of a default, the lender has the right to seize the collateral and recover the dues.

Your credit score matters

Before you apply, it is essential to check your credit score. A credit score is a three-digit number between 300 and 900. The higher your credit score, the better your chances of getting a substantial amount as a loan. Most lenders define the eligibility norms on their websites, and credit score is one of them.

You can check your credit score once a year from the four leading credit information companies in India - TransUnion CIBIL, High Mark, Equifax and Experian - for free. Ensure you check your score with all these agencies because your lender might go with a specific agency. A credit score of more than 725 enhances your loan eligibility.

Avoid applying for a loan that stretches your finances thin. Experts advise procuring home loans on floating interest rates because these do not involve prepayment/ foreclosure charges.

What are the tax benefits of home loans?

The most attractive feature of home loans is that it offers tax benefits on the principal and interest component of the EMI, subject to certain terms and conditions. You can claim deductions on the interest portion of the EMI for up to Rs. 2 lakh under Section 24 of the Income Tax Act, 1961. You can claim deductions on up to Rs. 1.5 lakh as the principal component of the EMI under section 80C of the Income Tax Act.

Section 80C also allows for a deduction on stamp duty and registration charges in the year the expenses are incurred.

First-time homebuyers can claim an additional deduction of Rs. 50,000 under section 80EE if the loan is more than Rs. 35 lakh and the property’s value is less than Rs. 50 lakh.

If you have taken a home loan jointly, then each of you can claim a deduction of Rs. 2 lakh each on interest and Rs. 1.5 lakh on principal. However, for this, both of you must be co-owners of the property.

Effect of hike in repo rate on home loans

The repo rate is the rate at which commercial banks borrow from the country’s central bank. When the RBI hikes the repo rate, home loan interest rates tend to surge. This will make EMIs costlier. To counter this, you can:

• Increase the tenure to bring down the EMI amount or
• Prepay part of the loan to lower the principal amount and thus the EMIs

Home loan balance transfer

This concept refers to transferring your existing home loan from one lender to another to benefit from a lower interest rate. However, if your home loan is almost at the end of its tenure, it’s better to stick with your existing lender. If you are in the early years of your loan tenure and the difference in rates is even 50bps, switching lenders will bring you substantial savings.

Home loan foreclosure

Foreclosing a loan is a simple process. You need to write to your lender expressing your desire to foreclose the loan. Once the outstanding amount is paid via cheque or online transfer, the loan is foreclosed. Make sure to collect the no-dues certificate from your lender and ask credit bureaus to update their records mentioning that the loan has been fully paid.

A home loan helps you realise one of your biggest dreams. Pay your EMIs on time to prevent any legal hassles. A default affects your credit score, reducing your creditworthiness.

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