What are the purposes for which Home Loans are available?

Home loans are given by Banks / Housing finance companies ( HFC ) for purchase of a Residential dwelling which maybe ready or under construction e.g. an apartment or a built up house. Home loans are also given for constructing a house on a piece of residential plot or for renovation / improvement of an existing home, etc.  

Is there any cap on the amount of loan which can be sanctioned?

Loan amounts are sanctioned based on eligibility depending upon your repayment capacity (which takes into account your age, qualifications, assets, liabilities, stability of occupation, savings history) and according to your income. Generally, the maximum loan amount is 80 to 85% of the cost of your home/ or equivalent to your 5 years Salary, whichever is less.

How do I avail a Home Loan?

Home loans can be applied for by filing an application  (with relevant necessary documents) with an HFC / Bank after you have decided to acquire/construct a property. HFC / Bank would review your loan application and decide on it accordingly. Normally, confirmation on sanction of a loan is received within 15 days of filing of application followed by a disbursement within a week of sanction of the home loan.

What are the documents which are required to be submitted alongwith an application for Home Loan ?

Generally the following documents are required to be submitted with the loan application :

• Salary slips for atleast one year / income proof
• Copies of three years Income Tax returns
• Residence / Identity proof
• Details of existing loans / credit card statements
• Asset and Liabilities position for last three years

Do I need to pay any processing fees and / or incidental charges . Further, when are they payable  ?

Generally, Processing fees at the time of application (@ 0.8% of the loan amount applied for) and administrative fees once loan is sanctioned (@ 1% of the loan amount sanctioned), both payable upfront; are the charges payable to the Housing finance companies for sanctioning of Housing loans. In many cases, these are negotiable charges.

What is a fixed interest rate and a floating interest rate?

In a Fixed interest rate Home loans, the rate charged by the HFC / Banks on the loan amount is constant over the tenure of the loan. While a fixed interest rate insulates the borrower from a rise in home loan rates, on the flip side, he may not benefit if the market rates were to fall. Therefore, it is advisable to go in for a fixed rate if you feel that the rate of interests in the market have bottomed out and the rates can only move northwards.

A Floating interest rate, on the other hand is payable and linked to the market rate e.g. the bank lending rate. Interest rates payable by you under floating interest rate often tend to rise and fall as per the then existing bank lending rates.

How is interest rate calculated?

In India interest on a home loan is usually calculated either on monthly reducing or yearly reducing balance. While in the Annual Reducing system the principal is reduced at the end of the year, thus continuing to pay interest on a certain portion of the principal which you have actually paid back to the lender thus making EMI for the monthly reducing system effectively lesser than the second system of calculating interest, in the Monthly reducing system, the principal on which you pay interest reduces every month as you pay your EMI.

What are Collaterals taken by the Housing Finance Companies?

Collaterals are the additional securities taken by the HFCs/ Banks which could be in the form of deposit of shares and units or other securities , guarantee of one or two persons, assignment of life insurance policies,. These additional securities are taken so that if a loan is not paid back, recourse may be taken to such securities instead of depending upon the mortgage of the property which is the last resort.

Most cases of home loans are sanctioned only on the basis of the mortgaged property for which the loan is being availed without the need for additional collaterals.

What is normal home loan repayment period?

Normally, home loan repayments range from from 5 to 15 years. However, a 20-year repayment period option is also provided by HFC's / Bank’s albeit at a higher interest rate.

What is Pre EMI ?

Pre EMI is the amount of loan paid in simple interest as agreed upon with the HFC / Banks for a property that is yet under construction. The HFC / Bank makes the disbursement in parts as per the stage of construction of the property. Once the property is ready for possession and the possession letter is produced to the HFC / Bank, the final disbursement is effected. You, therefore, start paying your EMI from the month following which the full disbursement is made.

What do you mean by Equated Monthly Instalment or an EMI?

An equated monthly instalment, popularly known as EMI (which comprises of principal and interest component) refers to the fixed sum which you will be paying to the HFC / Bank every month against a loan amount borrowed for a fixed term unless prepaid earlier by you. The amount of the EMI depends on the quantum of loan, interest rate applicable and the term of the loan.

Can one prepay the loan ahead of the term fixed?

Although it is possible to repay a loan ahead of schedule, a form of a penalty termed as a pre-payment penalty is levied by certain HFCs which varies from one HFC to the other.

Is there any tax benefit on taking the loan?

You are eligible for certain tax benefits on principal and interest components of a housing loan under the Income Tax Act, 1961. Moreover, you can get added tax benefits under Sec 88 / Sec 80 C on repayment of principal amount as well that can further reduce your tax liability.

Is insurance of the property on which home loan is taken must?

Yes, do not forget to ensure that the property is duly and properly insured for fire and other appropriate hazards, as required by the HFC /Bank during the period of the loan as you will have to produce evidence each year and/or whenever required by the HFC. The HFC will be the beneficiary of the insurance policy.

Is the agreement for sale to be registered?

Registration of the property is lawfully mandatory in many states in India. it would therefore be prudent to register the Agreement for Sale at the office of the Sub-registrar appointed by the State Government under the Indian Registration Act, 1908.

Can a Non-resident Indian avail a housing loan?

Yes, Non-resident Indians (NRIs) can avail of a housing loan to buy a property in India, although the terms and conditions for loans offered to NRIs by the banks and HFCs are different than Housing finance granted to Residents of India.