About Home LoanA home loan is a credit availed by the home buyer to fund the purchase of the home. In India, over the years, home loans have gained immense popularity as it has allowed the masses to afford to buy a home. Many lenders in India offer home loans and allow the borrowers to repay the same in equated monthly instalments (EMIs), over 25-30 years (depending on the loan tenure you opt). Also, the financial institutions in India provide you loan up to 80% of the property value. Some lenders even offer loan up to 90% of the property value if the value is over 20 lakhs.
What are the documents you must submit for home loan approval?Typically, every lender in India have their own home loan eligibility requirements and when they provide a full checklist of documents along with the application form. Apart from the legal documents relating to the property, the lender will require you to submit your residence proof, identification proof, bank statements of last six months, salary slip of the past 3 months, proof on the income-tax return filed or Form 16, balance sheet (applicable only for business owners) and photographs. Besides, some lenders may also ask for collateral like bank deposit certificates, insurance policies and/or pledge of shares. It is advisable that you keep all your documents ready well in advance to avoid any delay in the processing of the home loan.
Benefits of availing a home loan
1. Helps boost the credit scoreA good credit score is an important criterion that most lenders in India consider while sanctioning loan. As you take a home loan, your credit score may take a slight tip. But, over the course, as you make timely payments, your score will increase. A good history of EMI payments regularly shows the lenders that you are a responsible borrower. The Credit Information Bureau Indian Limited or CIBIL awards higher scores to those who have availed loan and have been diligent with their repayments.
2. Property verificationBefore forwarding the loan to you, the lender will first thoroughly assess the property-related documents to make sure that it is legal and has all the necessary approvals and clearance from the authorities. Also, most lenders inspect the property and do a background check of the builder. This is favourable to you as you need not do the background check yourself. And, if the lender is satisfied with the inspection, they would sanction the loan, which means that your investment is a safe one.
3. High repayment tenureAmong other types of loans, home loans have the highest repayment tenure, which usually ranges between 20 to 30 years. Thus, you have the flexibility to repay the loan amount as per your convenience and financial standing through the years. Higher the duration means lesser the EMI and vice-versa. However, make sure that you assess your finances thoroughly before deciding the loan duration as higher duration also means that you will have the financial obligation for a longer period.
Tax BenefitsApart from getting the capital to fund the purchase of your dream home, tax benefits are one of the significant home loan benefits. The tax benefits on home loans are of two types – one on the repayment of the principal amount and the other is based on interest payment. As you repay the loan, under the Section 80C of the Indian Income Tax Act, you are subject to get a tax deduction on the principal amount. The deduction can be claimed only up to 1.5 lakhs INR. The interest portion of the EMI is also subject to a tax deduction, and you can claim the benefit under Section 24 up to a maximum limit of Rs. Two lakhs.
You can claim an additional tax deduction under Section 80EE if the loan availed is less than 35 lakhs INR, and the value of the property is less than 50 lakhs INR. You can claim a maximum deduction of Rs. 50,000 under this section.
Interest on Home LoanWhen you talk about home loan, you would inevitably talk about home loan interest. It is an important aspect of the repaying the loan amount. However, not many borrowers understand the basics of the home loan rates, what are the type of interests applicable, how is the interest calculated, and what are the factors that affect the interest.
In India, the lenders charge two types of interest rates – Fixed interest and Floating interest.
• Fixed interest rateAs the term itself suggests, in this method of interest computation, the interest rate remains the same through the loan term. There will no change in the interest charged by the lender, and it is pre-determined at the time of loan sanction. Depending on the arrangement you have, the lender may allow you to switch to a floating interest rate system after certain years.
The main advantage of a fixed interest rate is that the interest remains fixed throughout the tenure, and you would know exactly how much interest you are liable to pay upfront. You need not worry about the frequent interest fluctuations, and it would help you save money if the interest rate increases in the long run. On the downside, if the interest rate falls, you do not get the benefit of the low-interest rate as your interest component is frozen.
• Floating Interest rateThe home loan interest rates charged by the lender is subject to the prevailing lending rate, which depends on various factors like the monetary policies of the RBI (Reserve Bank of India) and the lender’s response to the policy revisions.
A significant advantage of the floating rate interest is that the interest charged is based on the prevailing interest rate. So, if the interest rates fall, you save on the interest payment and vice-versa. However, you must know that in the long run the floating home loan interest rates are much cheaper than fixed home loan interest rate.
Factors that affect the home loan interest rateMany factors influence the home loan interest rates offered to you by the lender. Some of the important factors are:
• The loan amount– The amount you are applying for has a bearing on the interest rate. The rule of thumb is, the higher the amount you apply for, the higher is your chances of getting the loan at a lower interest rate.
• Type of loan– the interest rate on home loans varies based on the type of loan you avail. Standard loans such as home purchase loan come at a standard rate while home improvement loan attract higher interest
• Employment– Salaried employees get a home loan at a lower interest rate as compared to the self-employed. This is because of the risk involved; the lenders typically have a different interest slab for salaried and self-employed applicants.
• Loan tenure– When the lenders decide the interest rate, they consider the loan tenure. If you opt for a longer term, the interest rate will be lower
Home Loan CalculatorTo help the home loan borrowers make their repayment process easy, many lenders in India offer free home loan calculator tool to calculate the EMI on loan. The calculator is a free and easy to use tool that helps you exactly know the EMI amount you must repay every month in just a few steps. To know the EMI amount, you must input a few details including – the amount borrowed, the loan tenure and the interest rate.
Benefits of using EMI calculator
• The home loan calculators are specifically designed to make the tedious and complex calculations easy for the loan borrowers. You can calculate the exact EMI with just a few clicks of the button.
• The tool is very easy to use; anyone can use it without having any prior training. You must enter the details required in the specific space provided, and the tool will give instant results.
• You can use the tool to try different combinations of interest rate, tenure and amount to arrive at the EMI amount that is affordable to you. You can recalculate the EMI as many time as you want.
• The tool is available online for free 24x7
• Calculating the EMI manually can often yield wrong results, which in turn can affect your overall EMI calculations and financial planning. Therefore, you cannot rely on the manual calculations, and it is wise to use the home EMI calculator to get accurate results.
Do your research
Now that you know about the benefits of availing a home loan, factors that affect the interest rate, documents required and how to use EMI calculator, one more important thing to do is making a comparison of the different lenders. In India, many lenders offer a home loan, make a thorough comparison in terms of interest rates, processing fees, prepayment charges, repayment flexibility and choose the one that is best suited to your needs.
Click here to learn more about your eligibility and apply for a home loan.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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