Making your dream home a reality: Home Loans

Prashanth, aged 32 years had finally zeroed-in on the dream home that he always wanted to own. Scraping through his savings and investments which he had been setting aside over the years for acquiring a home, he could only manage a 20% down payment and now started looking at bank loans to fund the balance amount. Most banks in fact, provide up to 85% of the project cost as loan – but how to approach different banks and get best competitive rates was what he was unaware of .

There are indeed a slew of people who want to know how to go about scouting for a loan and what are the tax implications. Let us start-off with the tax implications and then gradually move towards the type of home loans and the common documentation required while availing a loan.

House ownership & Home loans
Before you buy a house, it is important to understand the tax benefits of the same. No matter what type of loan you avail, there is always an EMI (Equated Monthly Installment) which has to be paid to the Bank. Such EMI has two components – Principal & Interest. Both such components avail tax benefit on a housing loan, however, it depends on the type of house – Self – Occupied or Let out property.

With homes there could be 2 scenarios – you stay in it or you rent it out – When you stay in it, it is termed as Self – occupied property, when it is given out on rent it is termed as let out property. The tax benefits of house property are as mentioned below –

Principal in both cases (Self Occupied & Let Out) can avail tax benefits u/s 80C, which has an overall limit of Rs 1 Lakh alongside other investments like PF/PPF, NSC, Infra Bonds, Insurance, ULIP, ELSS etc., The interest part can be claimed u/s 24 but depending on whether it is a self-occupied or let out property the benefit would correspondingly change.

Required Documents to avail a home loan
Although there is no exhaustive list of what every bank would ask, there are some common papers which you need to hold appropriately, the same would be required irrespective of which HFC (housing finance corporation) he approaches for loan.
> Personal details (photographs, passport and visa copies, authority letter or power of attorney, driving license etc.,)
> Financial details (appointment letter, salary slip, bank statement, balance sheet etc.,) ? Normally for past 3 Yrs
> Property documents (latest sale deed with previous chain link, allotment letter, payment plan and receipts for under construction properties etc.,)

For security, most banks insist that the first mortgage of the property should be in their name. If the property is under construction then adequate additional security is required such as guarantee of third party.

Fixed Rate of Floating Rate: The eternal dilemma!
At the outset, we need to figure out what are the dogmas related to fixed and floating rate – this will guide us in choosing the right type of interest rate on the long term liability that you would assume.

Fixed Rate of Interest
No surprises. No changes. Although this is what one would perceive, often a fixed rate home loan has the liberty to review its home loan rates once in 3 or 5 Yrs. They may not be troubled by short term interest rate jitters, but they may not be purely fixed.

Pros – The benefit of such loans is that because the interest rate is fixed, even if the market pressures push the interest rates to high levels, the borrower pays a fixed EMI. A fixed rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule, which is easy to budget and doesn`t fluctuate. Thus, fixed rate home loan brings a sense of certainty and security.

Cons – The major drawback with fixed rate is that it is usually 1% – 2.5% higher than the floating rate home loan. Secondly, if for any reason the interest rate decreases, the fixed rate home loan doesn`t get the benefit of reduced rates and the borrower has to repay the same amount every time. And of course, one cannot overlook the fact that the interest rates could be reviewed at intervals of 3-5 Yrs.

Floating Rate of Interest
A floating rate loan is also referred to as adjustable, variable or flexible interest rate loan. The interest rate on home loan will go up or come down depending on how the interest rates are moving. This, in turn, will impact the EMI. The HFC will decide upon a base rate — known as the floating reference rate. This is generally based on their internal base rate called the retail prime lending rate (PLR). The interest rate on your loan will be benchmarked against this PLR. The changes in interest rates are based on the periodicity as mentioned in the documentation by the home loan company. Eg the interest rates for many banks are reset on a quarterly or half yearly basis.

Pros – The biggest benefit with floating rate home loans is that they are at least 1%-2% cheaper than fixed interest rates. So, if one is getting a floating interest rate of 11.5% while, the fixed loan is being offered at 14%, one will still save money if the floating interest rate rises by up to 3% assuming that there was an equal period before and after the loan rates are exactly equal. Even if the floating rate goes over the fixed rate, it will be for some period of the loan not for the entire tenure. If interest rates fall over a long period; floating interest rate brings a lot of savings.

Cons – The drawback with floating interest rate is the uneven nature of monthly installments. This makes it difficult to budget with floating interest rate home loans. As seen in recent times due to the hike in floating home loan interest rates, EMI“s went up substantially, throwing the entire budget out of order.

Your choice should be purely based on the outlook towards interest rates, currently interest rates are on the verge of bottoming out, and they will head northwards from here onwards. One needs to keep this in mind and the tenure for which one is availing the loan and accordingly avail an appropriate option.

Types of Loans
We are all familiar with the Fixed and Floating Rate Home loans, however, the evolution in home loans has translated into offering consumers a host of options to choose from.
Home Purchase / Construction Loans: This loan is available for the purchase/construction of a new home (on a said land for construction). If one is availing the loan for purchase of land, on which one subsequently intends to construct a house, then it is termed as a composite loan.

Home Improvement / Extension Loans: These loans are given for implementing repair works and renovations/extensions in a home that has already been purchased. If you were planning a refurbishing of your house for a long time, but have not been finding the finances to start the same, then the home improvement loan/extension loan is a definite option.

Home Conversion Loans: This is available for those who have financed the present home with a home loan and wish to purchase and move to another home for which some extra funds are required. Through a home conversion loan, the existing loan is transferred to the new home including the extra amount required, eliminating the need for pre-payment of the previous loan.

Balance-Transfer / Re-finance Loans: Balance Transfer is the transfer of the balance of an existing home loan that you availed at a higher rate of interest (ROI) to either the same HFC or another HFC at the current ROI a lower rate of interest. Re-finance loans are the ones which are availed to close the existing loan which is at a higher ROI by availing a loan from a different HFC at a lower ROI. This swap may however come at a cost and hence one is required to look into minute aspects while deciding on the same. This has recently caught the fancy of many home loan borrowers who intended to swap their existing loans (which necessarily had a higher rate of interest) with the popular SBI loan which was being offered at 8%.

Bridge Loans: Bridge Loans are designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance the new home, until a buyer is found for the old home.

Realty investment as such is an elaborate subject with multiple complications, one may need to spend adequate time and effort to ensure that one is inducing funds into the right projects and availing the home loans at most competent rates!

A few tips:
– Evaluate the affordability of the house and the loan. Choose the duration to match your cash flow
– Carefully compare home loans from different companies before choosing one and look at conditions like conversion from fixed to floating rate loan after a period.
– Most home loan companies have corporate offers. Ask for corporate discount if you are working with a leading corporate.
– Many banks allow you to park your surplus funds into a linked current/savings account and interest is calculated on outstanding reduced by the balance in the account.


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