Questions

• What is a Home Loan?
• What are the types of home loans available?
• What is the Eligibility criteria?
• What are the Home Loan tax implications?
• What is a Floating vs Fixed interest rate?
• What are the additional costs for a home loan?
• Can I make joint applications for home loans?
• What are: Daily Reducing, Monthly Reducing and Yearly Reducing rates?

What is a Home Loan?

Home loan is a loan provided by a financial institution to finance the purchase/construction/renovation of a residential property. Since buying a house is very expensive, it makes a full payment for a house from the existing savings a very difficult task for most Indians, creating the need for housing loans. The ability to repay the loan over a long time period also makes the entire borrowing affordable for an individual. One can also avail of tax benefits on the principal and interest amounts paid towards a home loan.

What are the types of home loans available?

There are various types of home loans, including;

• Home Purchase Loan- This is the common loan for purchasing a home
• Home Improvement Loan - This loan is given for implementing repair works and renovations to your home
• Home Construction Loan - This loan is available for the construction of a new home
• Home Extension Loan - Home extension loans are given for expanding or extending an existing home
• Home Conversion Loan - 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 additional funds are required
• Land Purchase Loan - For purchase of land, for both home construction or investment purposes
• Bridge Loan - 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
• Balance Transfer Loan - Balance Transfer loans help you pay off an existing home loan with a higher interest rate, and avail of a loan with a lower rate of interest
• Loans to NRIs - This loan is tailored for the requirements of NRIs wishing to build or buy a home in India

What is the Eligibility criteria

• The applicant must be at least 21 years of age
• Resident on Non Resident Indian
• The maximum age to avail a home loan 58 – 65 years, depending on bank to bank
• The applicant should have a stable source of income, subject to minimum levels
• Salaried or Self Employed

What are the Home Loan tax implications?

With effect from 1st April 2005 (i.e. assessment year 2005-07) under section 80C of the Income Tax Act 1965: Principal amount of repayment of loan along with other savings such as PF, PPF, Life Insurance premium etc up to a maximum of Rs 1 lakh will be eligible for deduction from gross income. Not just the principal, but also the interest payments on a home loan have tax benefits. Your interest payments are considered as an expense under the head 'Income from house property' and are deductible up to an amount of Rs 1.5 lakh per annum.

What is a Floating vs Fixed interest rate?

Fixed rate of interest means the rate of interest remains unchanged for the entire duration of the loan. This means you do not benefit, even if rates of interest drop in the market. While a floating rate is the rate of interest that fluctuates according to the market lending rate. This means you stand the risk of paying more than you budgeted for in case the lending rate goes up.

What are the additional costs that usually accompany a home loan?

• Processing Charge: It's a fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount
• Pre-payment Penalties: When a loan is paid back before the end of the agreed duration, a penalty is charged by some banks/companies, which is usually between 1% and 2% of the amount being pre-paid
• Commitment Fees: Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of time after it is processed and sanctioned
• Miscellaneous Costs: It is quite possible that some lenders may levy a documentation or consultant charges
• Registration of mortgage deed

Can I make joint applications for home loans?

Yes. Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount.

What are Daily Reducing, Monthly Reducing and Yearly Reducing rates?

• Yearly reducing: In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal which you have actually paid back to the lender
• Monthly reducing: In this system, the principal, for which you pay interest, reduces every month as you pay your EMI
• Daily Reducing: In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system