A home loan is a loan taken to pay for purchasing a house. It cannot be used for any other purpose. Typically, the home you buy is mortgaged against the home loan. If you fail to pay back the loan and interest on it, the bank can sell your home to recover its money. Home loan rates are usually lower than personal loan or business loan rates because a home is considered as a relatively ‘safe’ asset.
Features of a home loan
- You need to be an adult and an Indian resident. In some cases, home loans are also given to Non-resident Indians (NRIs).
- You need to have a steady income. You can prove this through your salary slips or income tax returns. The bank will also charge a lower rate if you can prove a regular and stable source of income to repay the loan.
- Good credit history. If you have repaid previous loans and credit cards bills on time, you will have a good credit history and credit score. This will improve your chances of getting a home loan.
Fixed or Floating Rate: Your home loan can have either a fixed rate or floating rate or both. A fixed interest rate such as 10.5% is fixed throughout the tenure of the loan. A floating interest rate is reset every 6 months or 1 year depending on the prevailing interest rate. Most loans have an initial fixed rate period and then move to floating rates. For instance, your loan of a tenure of 10 years may have a fixed rate for 2 years and a floating rate for 8 years.
EMI: An EMI or Equal Monthly Installment includes the principal repayment and interest payment of a home loan. Both these components are aggregated to calculate the EMI.
Flexible Tenure: You can pick a tenure that suits your own needs. Home loan tenures range from 10 - 30 years. Note that a longer tenure can lower your EMI but increase your overall interest payout.
Diminishing Balance: The interest on a home loan is charged on the outstanding balance of a loan. For example after 5 years of repayment only Rs 50 lakh of a 1 crore loan is outstanding, interest is only charged on the balance Rs 50 lakh.
Refinancing: You can refinance a home loan if interest rates change dramatically from the rate under which you have taken the home loan. This involves taking a fresh loan, usually at a lower rate from another bank and paying off the old loan early, in order to save interest.
Home Loan Costs
Benefits of a home loan
- Home Loan Processing Fee: Banks typically charge a home loan processing fee of 0.5-1% of the amount of your home loan. For example, if you take a home loan of Rs 1 crore, an amount of Rs 50,000 - Rs 1 lakh will be charged. You can negotiate this amount with your bank. Also part of this charge may be taken even before your application for a home loan is approved.
- Interest Costs: Home loan carry a fixed or floating rate of interest. This is imposed as a percentage of the outstanding balance on the loan.
- Premature Repayment Penalty: In some cases, if you pay back your home loan before its tenure, you will have to pay a premature repayment penalty or fee. This is usually imposed because the bank loses out on the interest you may have had to pay on the loan, had you not repaid it early.
- Stamp Duty and Registration: These costs are associated with your home loan but they are not payable to the bank. Stamp Duty varies from one state to another but is usually in the range of 5-6% of your home loan. Registration charges are also levied over and above stamp duty but these are usually less than 1% of your home loan.
You can get the following benefits from taking a home loan:
Tax Benefits on a Home Loan
- Ability to buy a house rather than waiting for later. You can buy your dream home right away. Saving money to buy the same may result in a very long wait for you.
- Rent-saving. If you are staying in a rented home, moving into your own home can save you the monthly rental payment.
- Stability: Rental agreements in India are typically no longer than 11 months and subject to annual renewal. Landlords can also evict tenants in between renewals by giving a notice, usually of 1-2 months. This instability is not present when you are staying in a house owned by you.
- Tax Benefit on home loan repayment. You get tax-benefits on the principal repayment of a home loan and the interest component.
- Tax benefit on rent. You can rent out your house and get the benefit of municipal tax set-off against your tax liability as well as the benefit of standard deduction (30%) of your rent. If you don’t rent out your house, you do not have to pay tax on notional rent for up to two houses.
- Wealth Creation. If the price of your home rises rapidly, your total net worth will grow as result of your home purchase. This can happen if the locality of your house becomes more desirable or there is a general boom in the housing market or for a host of other reasons
You get tax benefits on the principal repayment for a home loan under Section 80C of the Income Tax Act, 1961 and on the interest repayment under Section 24 of the Income Tax Act, 1961. The deduction on principal repayment is available up to Rs 1.5 lakh per annum and the deduction for interest payment is available up to Rs 2 lakh per annum. This interest deduction can also be set off against any rental income you get from the property.
A home loan is a loan taken for the purchase of a house. It cannot be used for any other purpose such as starting a business or paying for a wedding. The home loan is typically secured against the house that you purchase by mortgage of the house.
A home loan typically has a lower rate of interest than other types of loans such as personal loans or business loans. The repayment of home loans and interest payments on the same also carry tax benefits.
This depends on what you negotiate with your bank but a home loan tenure ranges from 10-30 years.
Yes, you can take a joint home loan with a spouse or family members. In this case you and the other borrowers become jointly responsible for the repayment of the loan.
A guarantor is someone who can step in to repay the home loan if you are unable to pay back the same. Bank sometimes ask for a guarantor, if they are not sure that you will be able to repay the home loan.
Can I take a home loan from a bank other than the bank which has my savings account?
Yes, you can take a home loan from any bank and in fact you should compare rates and features of home loans in different banks to make the best choice possible.