A Home Loan is a secured loan product where the lender provides finances for the purchase or construction of a residential/commercial property. One can also avail a housing loan to buy a plot of land and construct on it. Home Loans are also issued to extend/ repair/ renovate/ alter a new or second-hand property. The Home Loan is taken by a borrower against the property/security to be bought. This is done by giving the banker a conditional ownership over the property i.e. if the borrower fails to pay back the loan, the banker can retrieve the lent money by selling the property. Most lenders get the property valued independently and provide loans based on their estimated value. It is important to remember, however, that frequently their valuation is significantly lower than the actual cost and hence the requirement of the borrowers goes up. Home loans in Indian Banks are provided up to maximum of 80% (90% for loan amount below INR 20 lakhs) of the value of the house. Home loans are repaid using Equated Monthly Installments (EMIs) spread over a fixed tenure.
Home Loan eligibility depends upon various factors. A few of them are listed here –
Fixed interest rate refers to repayment of home loans in fixed equal installments over the entire period of the loan. In this case, the interest rate doesn’t change with market fluctuations.
During the early part of the tenure, the monthly payments are used to service the interest and the principal is served in the later parts of the tenure.Very few lenders in India offer pure fixed rates where the rate of interest remains constant over the entire tenure. Most lenders have a reset clause of 3-5 years. If the borrower is certain that the rate of interest is the lowest in the market, only then should he opt for fixed rates of interest.
Floating interest rate implies that the rate of interest will vary with market conditions. Home loans on floating interest rates are tied to a base rate plus a floating element thereof. So, if the base rate varies, the floating interest rate also varies.
The interest rates will depend on the base rate of the bank. As and when the bank changes their base rate, the interest rate changes. The change can either be in terms of the EMI or the tenure. For example, if the bank increases their base rate, the customer could choose to increase his EMI or to increase his tenure. Or if the bank decides to decrease their base rate, the customer can reduce his EMI or his tenure.
Home Loan Lenders levy some fees and charges at the time of loan sanctioning. It is important to make yourself aware of all these charges before you decide you finalize the deal.
Processing Fee: This fee is charged by the bank for processing the home loan and is non-refundable. In case you decide not to take the loan from the bank, then the entire amount is forfeited. The amount generally varies in the range of 0.5 to 1% of the total home loan amount.
Payment of processing fees doesn’t mean that your loan is approved. You may have paid the processing fee but your loan could still not be sanctioned due to various other reasons. Therefore, before paying the processing fee, bargain on the amount and get it confirmed from the bank in writing.
Prepayment Fees: Prepayment fee comes in to play when one wants to prepay the home loan before the end of the tenure. Different banks have different charges so one should take the time out to know them. Few banks offer no prepayment charges in case the prepayment is done from the borrower’s own sources. But in case the person is shifting the loan to a different lender, most of the banks charge a fee in the range of 1% to 2% of the outstanding loan amount.
Buying a home is a dream come true for many of us. Rising interest rates are making it a rather expensive affair. Once you finalize on your property, 80% of the amount can be taken as a loan from a bank depending upon how much loan you are eligible for.
Home loans can be repaid to the bank every month as equated monthly installments over the entire tenure of the loan. A part of this EMI goes towards repaying the principal component of the loan and the other part goes towards paying the interest.
The EMI is calculated on a reducing balance basis. A reducing balance loan means that in the initial days of the loan, the interest component of the EMI is high. But gradually, as you keep on paying more EMIs, the interest component of the EMI goes down and the principal component increases towards the end of the tenure.
Also, while you are going to take a home loan you need to decide, the type of interest rate you want to pay to the bank. The banks will offer you with an option of a fixed rate or a floating rate. Generally the floating interest rates are cheaper compared to the fixed rates.
