Principles and Performance
WEIGH YOUR HOME LOAN OPTIONS
Acquiring a home loan is a crucial part of the home buying process. Therefore, prior knowledge of home loans so that you choose the one best suited to you is a must. The following points we believe will help you to get a better insight into the dynamics of home loan selection process.
What are the major parameters of home loan selection?
Home loans vary from each other in three major ways and these differences have crucial financial implications for you. First, they differ on the length of their tenures. Second, they vary on the way their interest rates are calculated. The third difference is the various processing fees that are charged. These three parameters should be used to evaluate the cost-effectiveness of various options.
What is the minimum and maximum tenure for Home Loan ? Which is the best tenure to opt for?
Loan tenures range from 5-20 years, and you need to choose your depending on factors like number of working years left, repayment ability and cash flow needs. The longer your tenure, the greater your total interest costs.
The Longer, the Costlier
Interest cost goes up with the length of the home loan tenure. Computed here are EMIs for a Rs 10 lakh loan at 7.5% per annum for 10, 15 and 20 year periods
Total interest outflow
Of course, a longer tenure does help in reducing the equated monthly instalments (EMIs). Experts advise borrowers to aim at fully repaying the loan before they stop working so that the retirement income is not dented by repayment obligations. Therefore, the lesser number of years you have to retire, the shorter should be your loan tenure.
What is Fixed Interest Rate and Floating Interest Rate?
While fixed rate loans are those whose rates are fixed for the tenure of the loan, in case of floating rate loans, the rate is benchmarked to a retail lending rate of the lending institution and moves in tandem with it. This means in case of floating rate loans, the total interest you pay out during the tenure is dependent on the way interest rates move during it. The rate is reviewed periodically every six months and refixed in relation to prevailing market conditions.
Currently, fixed rate loan schemes carry interest rates that are higher by 0.5 to 0.75 percentage points compared to the floating rate loans. At this point, we need to point out that many home loans being marketed as fixed rate products have provisions in the loan agreement that allow the lender to revise the rate after a certain period of time in the tenure. This effectively renders such loans as floating rate loans.
Does the option of opting for Fixed or Floating Interest rate dependent on marketing dynamics?
You should opt for a fixed rate loan only if interest rates in the economy are either rising or have stabilized. They are also useful in the tenure is small, such as five years.
Conversely, if interest rates are falling either because of economic downturn or governmental intervention, and are likely to stabilize at a lower level by the end of your tenure, then opt for floating rate. Given the huge interest rate differential in India and the developed world, one expect that with reforms in the interest rate regime-making it more market determined-and with free inflows of international capital, in the long term, interest rates in India would be lower than what they are today. If you share this perspective, you should opt for a floating rate loan for longer tenures.
What are the various types of fees charged by the banks?
The fees charged by a lending institution for processing loans have one or more components. However, the components to be charged are at the discretion of the banks and varies from time to time. We are providing the list of components that generally falls under the preview of lending fee - Processing and administrative charges: They range between 0.25-0.5 per cent of the home loan amount sought from the home loan provider.
Mortgage fee. The charge is usually 0.5-1 per cent per annum of the property value and is in the form of stamp duties and mortgage charges for the property value that is being offered as collateral to the lender.
Commitment charge : This charge is generally 1 per cent of the loan amount and is recovered by the bank if a borrower has not completed the loan withdrawal within the stipulated period.
Prepayment charge : This is usually 2 per cent of the outstanding loan amount and also depends on terms in the home loan agreement. This is recovered from the borrower if he pre-pays the loan amount in excess of the stipulated limit.
Loan swap charges :To discourage the practice of borrowers shifting to another Lender offering lower rates, banks are now charging a loan swap charge of 2 per cent on the loan outstanding on the date of the full premature repayment of the home loan.
Technical and legal fee : In addition to the above charges, some banks also charge for securing an independent legal opinion on issues like the owner's title to the property and an independent property valuation report. There could also be charges for examining technical aspects of a property like adherence to sanctioned plans.
How much housing loan can one get?
Housing loan will be sanctioned depending upon your repayment capacity and according to your income. Your spouse's income can be included, if you want to increase the amount of your loan. The maximum loan that can be sanctioned varies with housing finance companies and ranges from Rs. 10 lakh to Rs. 1 crore.
What are the tax benefits that are available if one avails of housing loan?
Tax benefits are available on both the principal and interest components of the loan as per the Income Tax Act. The upper limit of the amount of deduction of interest repayment allowed from your gross total income is now Rs. 1,50,000 p.a. Besides, Sec. 88 offers you tax benefits for principal repayments.
What is a Home Extension Loan?
Home Extension Loan is a loan which helps you to meet the expenses of any alteration like extension / expansion or modification of your home. You can avail of a Home Extension Loan, after obtaining the requisite approvals from the Municipal Corporation.
What is Home Improvement Loan?
A Home Improvement Loan is one that is made available for you to do certain external work like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting etc.,