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What are the eligibility conditions for a Home Loan?
To qualify for a home loan, most of the financial lending institutions in India require you to be:
• An Indian resident or NRI.
• Above 21 years of age at the commencement of the loan.
• Below 65 when the loan matures.
• Either salaried or self employed.
Can I make a joint application for a Home Loan?
Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount. Some institutions do not require the co-applicants to be co-owners of the property to be purchased.
How much percentage of property value, a loan is given by the financial institutions?
Housing finance companies would normally give a loan upto 80-85% of the property value. The remaining 15% amount would have to be paid by the buyer (to seller), as a down payment before he draws on the loan. However, some financial banks have started giving 90-100% of the property value.
What are the loan repayment period options?
Repayment period options range generally from 5 to 15 years. Some companies also give loans up to 20 years at an additional interest cost of 0.25% - 0.5%.
What are the Tax Benefits available on Home loans?
Yes. Resident Indians are eligible for certain tax benefits on principal and interest components of a loan under the Income Tax Act, 1961. Interest repayment of Rs. 1,50,000 p.a. can get you a tax saving upto approximately Rs. 47,250 p.a. Moreover, you can get added tax benefits under Sec 88 on repayment of principal amount upto Rs. 20,000 p.a. that can further reduce your tax liability by Rs. 4,000 p.a.
What are the interest rates offered for Home Loans?
Interest rates are different from institution to institution and generally range from about 8.00% to around 12 %.
What is an EMI?
EMI (Equated Monthly Installment) is the amount payable to the lending institution every month, till the loan is paid back in full. It consists of a portion of the interest as well as the principal.
What is a fixed and floating rate of interest?
• Fixed Rate of Interest: Fixed rate of interest means that the rate of interest remains unchanged for the entire duration of the loan. So you don't benefit if rates of interest drop in the market.
• Floating Rate: Under a floating rate loan, the interest rate on the loan varies from time to time depending on the Prime Lending Rate fixed by the Reserve Bank. This change can happen as frequently as one in six months. If the PLR falls, you benefit as the effective interest rate on your remaining loan falls. The opposite may happen too.
Choosing between fixed and floating loans?
In the last 2-3 years the PLR has fallen as the Indian economy had slowed down and demand for money was low. If you expect this trend to continue, you stand to benefit from a floating rate loan. If interest rates begin to rise again, you can prepay your floating rate loan and lock in to fixed rate loan. You must then choose a floating rate loan with no repayment charges. However, if you do not want to speculate on interest rates and need a stable loan to help planning the future, then go for a fixed rate loan.
What is Rest/Reducing Balance?
The interest on home loans in India is usually calculated either on monthly rest or annual rest. In some cases, daily rest is also adopted.
- Annual Rest/Reducing Balance: The annual rest quote implies that the company gives you the credit for the monthly principal repayments only at the end of each year. Thus you continue to pay interest on a certain portion of the principal, which you have actually paid back to the lender. Such loans are therefore more expensive than a monthly /daily rest loan.
- Monthly Rest/Reducing Balance: In this system, the principal for whom you pay interest reduces every month as you pay your EMI.
- Daily Rest/Reducing Balance: In this system, the principal for whom you pay interest reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.
What are the Other Costs that usually accompany a Home Loan?
• Processing Fees:
A one-time fee, which is normally non-refundable and payable along with your initial loan application. Rates can vary from 1-2% of the loan amount.
• Administrative Fees:
A one-time fee, which is normally non-refundable and payable before your loan is disbursed. Rates can vary from 1-2% of the loan amount.
• Commitment Fees:
This interest is charged if you do not draw the sanctioned loan within a period of 6-9 months. The rate of interest is usually about 1-2% a months.
• Prepayment charge:
When a loan is paid back before the end of the agreed duration, a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre-paid.
• Refinance Charge:
Some Housing Finance companies do not charge you for prepayments from your own savings. However, if you retire a loan using money borrowed from another Finance Company, you will have to pay a Refinance charge of 1-2% of the loan outstanding.
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