Home Loan

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Home Loan

A home loan is a specified sum of money that an individual borrows from a financial institution to buy or construct a house. Home loans can also be used for expanding, repairing and renovating an existing property. Housing loan is a type of secured loan, wherein the property being purchased is pledged to the bank or lending institution till the borrowed amount is repaid along with the interest. In India, home loan interest rates start at as low as 6.70% p.a., with loan tenure stretching up to 30 years.

 

For many people, buying a house can be a difficult task because of increasing real estate price or lack of surplus cash. Thus, a home loan can help in taking this big financial step without breaking 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 & Benefits

Features and benefits of home loans vary for different lenders and loan schemes. Some of the common ones are listed below:

Lower Interest Rates

A home loan is a long-term commitment, thus, interest rates play an important role in deciding not only the loan amount but also the tenure of repayment. Banks and financial institutions offer reasonable and attractive interest rates to make home loans more affordable than personal loans.

Flexible Loan Tenure:

Home loan repayment period is usually of up to 30 years, though this depends on the lender, the chosen loan scheme and repayment capacity. Since the tenure is too long, lenders provide their borrowers with the option to prepay or foreclose their outstanding amount whenever they are in a condition to do so. Borrowers can also choose their loan tenure, if they are able to convince the lenders of timely loan repayments.

Tax Benefit for Interest Amount

A home loan EMI (Equated Monthly Instalments) has two components – interest amount and principal amount. The interest paid for the year can be claimed as deduction 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. But to claim this deduction, the purchased property should not be sold within 5 years of possession.

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. 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 facility in which the outstanding loan amount with one lender can be transferred to another lender, which offers a lower interest rate or better loan terms. The new lender pays off the entire outstanding loan amount to the previous lender. After this, the borrower pays the EMIs at the new rate to the new lender.

Top-up Loan Facility:

There may come a time when you would need money over and above your existing home loan. For such situations, lenders offer a top-up loan facility. It is an additional amount that you can avail of over and above your existing home loan. The facility is not offered to all the borrowers as various factors like borrower’s repayment capacity and past credit records are taken into consideration before doling out this benefit.

Types of Home Loan

Banks and Housing Finance Companies (HFCs) offer home loans for different purposes. So before applying for any type of home loan, assess your requirements in order to get a suitable home loan scheme. Some of the types of home loans available are as follows:

1 Home Purchase Loan

is the most common type of home loan availed usually to buy ready-to-move-in properties, under construction properties and pre-owned homes/resale properties. As per RBI guidelines, lenders can offer loan-to-value (LTV) ratio of up to 75-90% of the property value.

4 Home Improvement Loan

can be availed to fund home renovation and home repairing expenses of the existing house. The interest rate for this loan is same as that for a regular home loan. However, its loan tenure is shorter than the regular home loan.

7 Interest Saver Loan

is similar to home loan overdraft facility. In this, the borrowers’ home loan account is linked to their bank account. Any amount deposited in the bank account over and above the EMI amount is used as prepayment towards the loan, thus, saving on the interest amount

2 Composite Loan

is a perfect financing solution for individuals who want to buy a plot of land either for investment or for building a house. In this type of home loan, the first disbursement is made towards the purchase of plot. The subsequent payments depend on the stages of construction of the house.

5 Home Extension Loan

is for those who require funds to add more space to their abode. Under this loan type, financial institutions usually lend 75-90% of the construction estimate, depending on the loan amount and LTV ratio.

Step Up Loan

is a type of home loan in which borrowers pay lower EMIs during the initial years of the loan tenure. However, there is a provision of increasing the EMI amount over time. This makes the loan affordable for young professionals who just start their career.

3 Home Construction Loan

is available for individuals who want funds for the construction of a house. The loan is granted only if you own a plot of land and plan to construct a house on it. Just as in composite loan, here too the disbursement depends on the stages of construction of the house.

6 Bridge Loan

is a short-term home loan and is suitable for individuals who wish to buy a new house with the sale proceeds of the existing home. The loan helps in covering the gap between the purchase of a new house and the sale of an existing house.