A home loan is a designated sum of money a person borrows from a financial institution to buy or build a house. Housing loan is a form of secured loan in which the property being purchased is lent to the bank or lending entity until the amount borrowed is repaid along with the interest. In India, interest rates for home loans begin at as low as 7.90% p.a., with loan term extending up to 30 years.
Buying a house can be a difficult task for many people because of higher real estate prices or lack of cash surpluses. A home loan can thus help to take this major financial step without damaging the savings and investments. Home loans come with a host of benefits and features, including balance transfer facility, top-up loan, flexible repayment options and quick approvals.
Home loan features and advantages differ with different borrowers and loan schemes. The following are some of the common ones:
Lower Interest Rates
A home loan is a long-term commitment, so interest rates play an important role in determining not only the amount of the loan but also the repayment period. In order to make home loans more competitive than personal loans, banks and financial institutions offer reasonable and attractive interest rates.
Flexible Loan Tenure
Home loan repayment period is usually up to 30 years, although this depends on the lender, the chosen loan scheme and the repayment ability. Since the length of the loan is too long, lenders provide their borrowers with the option of prepaying or foreclosing their outstanding amount whenever they are in a position to do so. Borrowers may also select their loan term if they are able to convince lenders of timely repayment of the loan.
Tax Benefit for Interest Amount
The Home Loan EMI (Equated Monthly Instalments) has two components – the rate of interest and the principal amount. Interest paid for the year may be stated as a deduction of up to a maximum of Rs. 2 lakh under Section 24 of the Income Tax Act, 1961.
Tax Deduction on Principal Repayment
The principal component of a home loan EMI paid for the year is allowed a tax deduction under Section 80C of the Income Tax Act, 1961. The maximum amount that can be claimed is up to Rs. 1.5 lakh. Furthermore, in order to claim this deduction, the purchased property should not be sold within 5 years of ownership.
Additional Tax Deduction on Home Loan
Home loan borrowers get additional tax deduction of up to Rs. 50,000 and Rs. 1.5 lakh under Section 80EE and Section 80EEA, respectively. In order to claim the tax benefit under Section 80EE, the home loan amount should be Rs. 35 lakh or less, the value of the property should not exceed Rs. 50 lakh and borrowers should not own any other house on the date of the sanction of loan. To claim tax benefit under Section 80EEA, the stamp value of the property should not exceed Rs. 45 lakh and the borrower should not own any other house on the date of sanction of loan.
Easy Balance Transfer Facility
Home loan balance transfer is a process where the outstanding amount of the loan with one lender can be shifted to another lender providing lower interest rates or better loan terms. The new lender shall pay the entire outstanding amount of the loan to the previous lender. After this, the borrower pays the EMIs at the new rate to the new lender.
Top-up Loan Facility
Home loan balance transfer There may be a time when you need more funds than your existing home loan. In such cases, lenders are providing a top-up lending facility. This is an additional amount that you can use over and above your existing home loan. The facility is not provided to all borrowers because various factors, such as the willingness of the borrower to repay and previous credit records are taken into account before this advantage is made available.
Banks and Housing Finance Companies (HFCs) provide home loans for a variety of purposes. So, before applying for any form of home loan, determine the requirements in order to get an acceptable home loan scheme. Some of the forms of home loans available are as follows:
Home Purchase Loan
Is the most common type of home loan available for purchase of ready-to-move property, under construction properties and pre-owned homes / resale properties. As per the RBI guidelines, lenders that offer a loan-to-value (LTV) ratio of up to 75-90 per cent of the value of the property.
Composite Loan
Is a ideal funding option for individuals who wish to purchase a plot of land for investment or house building. The first disbursement is made in this form of home loan towards the purchase of a property. The subsequent payments depend upon the building stage of the home.
Home Construction Loan
Is available to individuals who want funds to build a house. The loan will only be granted if you own a plot of land and plan to build a house thereon. As in the case of a composite loan, the disbursement here depends on the stage of the construction of the house.
Home Improvement Loan may be used to fund the current house's home renovation and home repair costs. On this loan, the interest rate is the same as for a regular home loan. The loan period, however, is shorter than the regular home loan.
Home Extension Loan is for those who need funds to add more space to their place of residence. Financial institutions typically lend 75-90 percent of the construction estimate under this type of loan, depending on the amount of the loan and the ratio of LTV.
Bridge Loan is a short-term home loan and is appropriate for individuals wanting to purchase a new house with the current house's sale proceeds.
The interest saver loan is similar to the overdraft facilities for home loans. In this, the house loan account of the borrower is linked to their bank account. Every money deposited over and above the EMI balance in the bank account is used as an advance payment to the loan, thereby saving on the interest amount.
Step Up Loan is a form of home loan in which borrowers pay lower EMIs during the credit tenure's initial years. There is, however, provision to increase the volume of the EMI over time. That makes the loan accessible to young people who are only starting their careers.
Home lending is allowed either at fixed interest rates or at floating interest rates. For more details please read below.
What is Fixed Rate Home Loan?
In the case of fixed-rate home loans, the interest rate applied at the time of the loan disbursement is constant during the lending period. However, because of the unchanged interest rate, the loan EMIs remain stable. A drawback of fixed-rate home loan is that the interest rate is typically 1% -2.5% higher than floating-rate home loan interest. For fact, the fixed interest rate will remain unchanged at any point during the loan term if the interest rate for home loans falls, giving you little gain from the decreased EMIs.
What is Floating Rate Home Loan?
In the case of a floating home loan rate the interest rate will not remain constant over the loan term. Two sections index and spread are involved in this form of interest rate. The index is the benchmark rate that reflects general market conditions (such as Base Rate, Fund-based Lending Rate Marginal Cost (MCLR), and Repo Rate). Then spreading is the extra amount a bank adds to cover the credit risk, profile markup, etc. The spread varies from lender to lender and will usually remain constant during the lifetime of the loan. Nevertheless, the index varies according to RBI policies and other external factors, causing the interest rates for home loans to increase. An rise in the index could lead to higher house loan and EMI rates, and vice versa.
Floating interest-rate home loans are cheaper than fixed-rate home loans. In addition, RBI does not allow prepaid or foreclosure charges for individuals borrowing a floating home loan. The only concern with a floating rate home loan is that its EMIs change with a rise in the interest rate, which can create problems with handling spending beforehand.
Fixed Rate Vs Floating Rate
Both types of home loan interest rates have their own list of pros and cons. When it comes to choosing between fixed and floating interest rates on home loans, pick the one that suits your needs the best. Check Comparison between Fixed and Floating Interest Rate.
Home Loan Interest Rates Offered by Popular Banks
Home loan rate of interest, in case of most banks, ranges between 8.20% and 13% p.a. These rates are liable to change as per RBI’s directives and bank’s policies.q
| Name of Bank | Interest Rate |
|---|---|
| Axis Bank | 8.55% - 9.40% |
| Bajaj Housing Finance Limited | 8.85% onwards |
| Bank of Baroda | 8.15% - 9.15% |
| Citibank | 8.07% - 8.82% |
| HDFC Bank | 8.20% - 9.00% |
| LIC Housing Finance Ltd. | 8.10% onwards |
| ICICI Ltd. | 8.55% - 9.40% |
| Standard Chartered Bank | 9.21% onwards |
| State Bank of India | 7.90% - 8.55% |
Note: Interest rates offered by banks, NBFCs and HFCs can change in accordance with RBI directives and the banks ' discretion
An EMI calculator is an electronic tool that helps to measure the monthly instalments owed during the entire tenure of the loans. Spocto solutions LLP gives you a free-of-cost EMI home loan calculator so you know the EMI beforehand to make an informed decision about the feasibility of your home loan. In addition, the EMI home loan calculator is an effective tool for evaluating the different loan options on the market. You can test your eligibility for home loans at Spocto Solutions LLP site, and also search and compare different available home loan deals.
The information required for using the calculator are – principal amount, interest rate, and duration of loans. This calculation can be lengthy and time-consuming if done manually; however, the home loan EMI calculator provided by Spocto Solutions LLP gives instant results.
In addition to the interest amount, there are several other fees and charges that your lender will incur from the time you apply for the home loan until you completely repay it. Here are some of the charges
Application Fee is charged by lenders to cover all of the preliminary costs they incur in carrying out the verification.
Processing Fee cover the cost of credit assessment and are based on the credit profile, income and home loan scheme of the borrowers. Not all borrowers charge the processing fee, as well.
Administrative Fee: Those lenders who split the administration fee into two parts incur administrative fee. The portion paid is known as the administration fee after the loan sanction. Citibank is one of the banks where administrative fees are paid.
Foreclosure / prepayment charges are imposed when a borrower either fully or partially prepay the home loan before the end of the loan tenure. Earlier, lenders used to charge home loan fees for prepayment and foreclosure expenses. Yet RBI had banned lenders from paying prepaid fees on floating home loans to individuals. As for fixed-rate home loans, these charges are imposed by some lenders.
Repayment mode Related charges will be paid when borrowers ask their lenders to change their current repayment mode during the lifetime of the loan. The price usually goes up to Rs. 500 (swap) per instance and varies from lender to lender.
Rate conversion / switching fees are charged when, for various reasons, borrowers ask their lenders to increase or lower their current interest rates. The fee varies from lender to lender and usually goes up to 2 per cent of the outstanding amount of principal.
CERSAI Charges (Central Registry of Securitisation Asset Reconstruction and Security Interest) is central online security interest registry of India. Potential lenders visit CERSAI website to check whether the pledged property is not claimed by some other lender. The lenders are paying a nominal fee for that operation, which they then receive from borrowers.
Overdue Charges on EMI are levied when a borrower misses or delays timely payment of loan EMIs. It attracts penal interest rates on the outstanding dues or overdue instalment over the prevailing loan interest rates. Therefore, borrowers must pay loan EMIs on time.
EMI Bounce fees are charged if you fail to make timely loan payments due to insufficient funds in your bank account. Lenders typically charge Rs. 500 on such defaults which may vary from lender to lender.
Legal fee is usually included in the processing fee but it is charged separately by some lenders when they hire firms to scrutinize legal documents of the borrowers.
Franking Fee, commonly referred to as stamp duty fee, is a tax levied by the state government on any form of monetary transaction involving the transfer of rights of a property. The amount varies from one state to another, and depends on state laws, type of property, etc.
There is a collection of conditions defined by lending institutions that borrowers are required to meet in order to receive the correct loan scheme. This varies in lending institutions and in credit schemes. A common set of housing loan eligibility criteria is given below:
| Home Loan Eligibility Criteria | |
|---|---|
| Nationality | Indian Residents, Non Indian Residents (NRIs) and Persons of Indian Origin (PIOs) |
| Credit Score | 750 or above |
| Age Limit | Minimum – 18 years Maximum – 70 years |
| Work Experience | At least 2 years |
| Business Continuity | At least 3 years |
| Minimum Salary | At least Rs. 25,000 per month (varies across lenders & locations) |
| Loan-to-Value (LTV) Ratio | Up to 90% of property’s value |
Note: The values in the table may vary from one lender to another.
Ways to Enhance Home Loan Eligibility
Home loan borrowers can enhance their home loan eligibility in the following ways
Improve your credit score: A good credit score increases your loan approval chances so you can take advantage of a house loan at lower interest rates and better terms. Paying your bills on time and keeping your credit use ratio below 40% are some of the ways your credit score can be improved and maintained.
Pay higher down payments: Financial institutions lend 75-90% of the property value. This implies that the remaining 10-25% of the property value has to be contributed as down-payment by borrowers. To increase your home loan eligibility, make higher contribution towards your home loan down payment. Doing so will lower your LTV ratio; thus, improving your home loan eligibility.
Add an earning co-applicant: To increase your eligibility for home loans, add an earning co-applicant with a good credit history and adequate repayment ability. Joint home loan could even help you get higher interest rates on your home loan sum and concession (if the co-applicant is a woman).
Home loan application forms typically have a checklist of documents required to be sent to their lenders. These documents are generally the same for all lenders; however, certain specific requirements that vary depending on the loan scheme selected, the intent of the loan and the credit profile individually. Some of the common documents required to get a home loan are:
1. Duly filled in and signed home loan application form
2. Passport size photographs, as required
3. Proof of Identity: Copy of anyone (PAN Card, Passport, Aadhaar Card, Voter’s ID Card and Driving License)
4. Proof of Age: Copy of anyone (Aadhaar Card, PAN Card, Passport, Birth Certificate, 10th Class Mark-sheet, Bank Passbook and Driving License)
5. Proof of Residence: Copy of any one (Bank Passbook, Voter’s ID, Ration Card. Passport, Utility Bills (Telephone Bill, Electricity Bill, Water Bill, Gas Bill) and LIC Policy Receipt
6. Proof of Income for Salaried – Copy of Form 16, latest payslips, IT returns (ITR) of past 3 years and investment proofs (if any)
7. Proof of Income for Self Employed: Details of ITR of past 3 years, Balance Sheet and Profit & Loss Account Statement of the Company/Firm, Business License Details and Proof of Business Address
8. Property-related Documents: NOC from Society/Builder, detailed estimate of the cost of construction of the house, registered sale deed, allotment letter and an approved copy of the building plan
Transfer of home loan balance is a mechanism that allows home loan lenders to transfer their unpaid home loan to a new lender for lower interest rates or better terms on loans. One of the factors that help you enjoy the loan transfer facility is paying your loan EMIs regularly. But do a cost-benefit analysis before going for home loan balance transfer. Calculate the difference between the two lenders ' interest rates, the balance of the loan left unpaid, and the remaining tenure.
Home loan balance transfers are not an ideal option if the outstanding loan amount is small, if there are only a few repayment years left or the interest rate gap leads to zero savings. However, don't forget to consider transaction fee charges which would be paid for balance transfer by the new lender.
Home loan prepayment is when a borrower pays part of his / her home loan before the expiry of the loan term. Loan prepayment helps to reduce the amount of the loan principal, which then reduces the amount of EMI. If the borrower has no problem continuing with the current EMI number, he / she can ask his / her lender to shorten the loan period instead of reducing the EMI loan.
Home loan foreclosure, on the other hand, is when a borrower repays the house loan with one payment in full instead of paying in instalments before the end of the loan period.
Previously on floating rate home loans, lenders used to impose fees for prepayment and foreclosure. But now, when individuals pre-close the loan, RBI has allowed all borrowers not to impose loan foreclosure and prepaid charges on floating rate housing loans. Some lenders also levy those charges on fixed-rate home loans, however.
What is the tenure of a Home Loan?
Home loans are long term borrowing vehicles with a minimum 5- year tenure and a maximum 30- year tenure. The term that you are given for your personal loan depends on the amount of the loan that the lender would approve you, along with other factors.
What is the Eligibility Criteria for a Home Loan?
Everyone who has a daily source of income— whether self-employed or salaried individuals / professionals— may apply for Home Loans. Before the loan term starts, one must be at least 21 years old and may not reach 65 years of age when the loan expires or at the time of pension. This is the general eligibility requirement for Home Loans, and details such as minimum and maximum age limits, minimum income level, etc. can vary from lender to lender.
What do banks expect when they offer a House Loan?
When the eligibility to qualify for a Home Loan is determined by the repayment power, lenders find the following factors:
- Income level of the applicant
- Age of the applicant
- Qualification (stability and occupation continuity)
- Resident status (maximum limit for an Indian resident differs from that of a non-resident)
- Spouse’s income (household income is taken into account when there is a co-applicant)
- No. of dependants (it is a measure of repayment capacity)
- Credit history and score (past repayment track record)
- Status of existing loans
Can I apply for a joint loan with my friend?
No. A lender will only authorize you to apply for a joint Home Loan if one or more members of your immediate family have co-signed the request. And your friend's not qualified.
Can I switch from a floating rate Home Loan to a fixed rate?
Yes. A few lenders offer you the option of switching from a floating rate to a fixed rate Home Loan, and the other way around. However, this does not apply to all Home Loans and there are a few charges involved in the implementation of this conversion. Get in touch with your lender to find out more about the procedure and requirements.
How do I repay my Home Loan?
There are different ways to pay off your loan, such as issuing post-dated checks for the tenure of the Home Loan, automatically deducting the amount from your salary or issuing standard instructions to the ECS (Electronic Clearing System) lender, where the EMI is automatically deducted from your bank every month.
Is prepayment of Home Loan allowed?
Yes, the amount of the loan can be repaid before the end of the scheduled loan period by making a lump-sum payment in order to pay off the loan. In such cases, the bank may decide to apply certain penalties in the range of 2-3 % of the principal amount outstanding. Some banks and NMFC (non-banking financial companies) do not charge any penalty for making a Home Loan prepayment.
Can I have a co-applicant when I sign up for a Home Loan?
Yes. If you apply for a Home Loan, you can have a family member like your spouse or your parents co-sign with you. Having a co-signor for your Home Loan will improve your chances of being approved for a larger amount of Home Loan. In particular, a co-signor is recommended if the primary applicant has a low credit score or has had problems applying / paying a loan in the past.
I have low credit score. Can I still apply for a Home Loan?
If you have a poor credit score, you'll find it hard to get a Home Loan. However, by getting a co-borrower, you can improve your chances. The co-borrower must be a member of the family, such as your spouse or parents. Ideally, you should choose a co-borrower who has a regular source of income and a good credit history to boost your chances of a successful application.
What is pre-EMI Interest?
When banks punish you for a Home Loan, payments from the EMI may not start immediately. In this situation, the bank is liable to charge the pre-interest on your loan. This interest is payable on a monthly basis from the time the loan is disbursed to the time the EMI payments begin. The pre-EMI interest amount is lower than the EMI Home Loan, as the main payment portion is excluded for pre-EMI interest payments.
How long is the Home Loan pre-approval valid?
The pre-approved Home Loan offer is only valid for a limited period of time, which varies from one bank to another according to the rules and regulations of the lender. However, these pre-approvals are generally valid for no more than 6 months.
Who can be joint borrowers in case of a Home Loan?
In the case of a Home Loan, immediate family members such as your parents, spouse and children are eligible to become joint borrowers.
What is a floating rate Home Loan?
If the interest rate on the loan changes from time to time over the lending period, then it is considered a floating Home Loan. Lenders have their own base rate which will decide the interest rate paid on a Home Loan. Bank base rates are updated from time to time on the basis of RBI guidelines as well as other factors, leading to an increase or decrease in the amount payable for the EMI.
What is a fixed rate Home Loan?
Throughout the credit period, fixed-rate Home Loans are sold at a set interest rate and they remain constant throughout the credit period regardless of market conditions. It can be a major benefit as market uncertainty is starting to influence interest rates. For example, if the RBI raises interest rates on loans, then no increase or decrease in market interest rates will affect people with fixed rate Home Loans and the EMI sum will remain unchanged. These days, that form of Home Loan is less common.
| Home Loan Provider | Home Loan Interest rate | Processing Fee |
|---|---|---|
| HDFC Ltd. | 8.00% onwards | Up to 0.50% of the loan amount or Rs. 3,000, whichever is higher |
| State Bank of India | 7.90% onwards | 0.35% – 0.50% of loan amount (Min. Rs. 2,000; Max. Rs. 10,000) |
| LIC Housing Finance Ltd. | 8.10% onwards | As applicable |
| IDFC Bank | 8.15% onwards | Up to Rs.10,000 |
| CitiBank | 8.07% onwards | Up to 0.40% of the loan amount |
| DBS Bank | up to 8.95% | Up to Rs. 10,000 |
| Kotak Mahindra Bank | 8.60% onwards | Up to 2% of loan amount |
| Karnataka Bank | 8.90% onwards | Up to 0.5% of loan amount |
| ICICI Bank | 8.25% onwards | 1.00% - 2.00% of loan amount or Rs. 1,500 (Rs. 2,000 for Mumbai, Delhi & Bangalore), whichever is higher |
| PNB Housing Finance Ltd. | 9.25% onwards | Up to 1% of loan amount |
| Axis Bank | 8.55% onwards | Up to 1% of loan amount (Min. Rs. 10,000) |
| IDBI Bank | 8.25% onwards | Rs. 2,500 - Rs. 5,000 |
| Tata Capital | 9.25% onwards | 0.50% of loan amount |
| Bank of India | 8.00% onwards | 0.25 % of loan amount (Min. Rs. 1,500; Max. Rs. 20,000) |
| Syndicate Bank | 7.85% onwards | 0.50% - 1.25% of loan amount |
| Canara Bank | 8.05% onwards | 0.5% (Min. Rs. 1,500; Max. Rs. 10,000) |
| United Bank of India | 8.00% onwards | 0.59% of loan amount (Min. Rs.1,180; Max. Rs.11,800) [Waived up to 31.03.2020] |
| IIFL | 9.00% onwards | Up to 1.75% of loan amount |
| Standard Chartered Bank | 9.21% onwards | Up to 1% of the loan amount |
| YES Bank | 9.85% onwards | 2% or Rs. 10,000, whichever is higher |
Note:
The interest rates provided above are of key Banks and Housing Companies Operating in India, indicative and liable to change periodically.
Figures mentioned in the above table are subject to change without prior information.
The Bank's final interest rate paid to the customer would be based at the lender's discretion on various other factors.
The difference in Home Loan Interest rates that occur on the basis of key factors such as the credit score of the applicant, the preceding lender-borrower relationship and the amount of the loan applied for.