Home Loan

What is a Home Loan or Housing Loan?

The term home loan or house loan simply refers to money borrowed from a financial institution or a bank for the purpose of purchasing a home. There are both adjustable and fixed rates on home loans. The purpose of obtaining a home loan is either to buy a house/flat or plot of land for building a house. Additionally, we can use a home loan for renovation, extension or repairing of an existing house.

Mortgages are loans provided to people who are acquiring or purchasing real estate. So that they could be able to acquire funds to purchase the property. Existing property owners can use it to raise funds. Thus, they place a lien on the property and raise funds. We call this a home loan. Most countries finance the purchase of a home with a mortgage loan. Most people do not have enough savings or liquid funds to purchase a property outright. Mortgage markets have grown strongly in countries with the highest demand for homeownership.

Mortgage Origination:

In order to get a mortgage loan, the property of the borrower serves as a security for the loan. We refer to this process as mortgage origination. When a borrower defaults on a loan or breaches its terms, lenders have the legal right to retake and sell the property. In the Middle Ages, the term mortgage referred to a pledge which expires (dies). Here, the outcome is foreclosure, which results either with the seizure of the property or in fulfilling the obligation. The traditional definition of a mortgage is “a loan for which the borrower provides collateral and receives funds”.

Who is the Lender:

Whether the loan is for a home or commercial property, either an individual or a business can take out a home loan. Depending on the country concerned, a lender will normally be a financial institution. These financial institutions can be banks, credit unions, societies, etc. The lender can arrange the loan either directly or indirectly through intermediaries.

Features of the loan:

The size, term, interest rate, repayment method, and other characteristics of mortgage loans can vary widely. The loan depends mostly on the lender who gives the money and the borrower who borrows the money. The lender determines the loan’s terms and conditions.

Lien rights on the Collateral Security:

The lender has priority over any other creditors of the borrower over the secured property. Thus, if a borrower becomes bankrupt, the mortgage lender is first repaid from the sale of the secured property. Next, the other creditors will receive the money they owe. Thus, the lender keeps the property as a security till the repayment of the loan. This means the original property documents will be with the lender. The lender will act as the owner of the property till the complete repayment of the loan happens.

Funding of Mortgages:

The funding of mortgages can be obtained through the banking sector or through the capital markets through the process of securitization. It is through this that they can convert mortgage pools into fungible bonds. Investors then purchase the bonds, which are issued in small denominations.

Interest Rate:

Depending on the borrower’s needs, interest rates are either fixed or variable. A hybrid rate of interest is thus possible, where a part of the interest rate is either fixed or floating.

History of the Disbursement of the first Home Loan:

Disbursement of the first home loan took place some 44 years ago. HDFC, which was the first organized player in the Indian home loan market, began by lending to Mr. D B Remedios. Remedios took a loan of Rs. 30000 in 1978 with a fixed interest rate of 10.5%. He spent Rs.70,000 on building a house in Mumbai’s Malad neighborhood. This shows that the loan he took was less than half of the total cost of the house. As of today, most borrowers require a minimum loan amount of 65-80 percent of the purchase price. Despite the cap prescribed by the housing finance regulator, National Housing Bank (NHB), and the Reserve Bank of India (RBI), there are still individuals who want more.

Getting a Loan:

Getting a loan has become much easier these days. Nowadays, it is easier to get a Home Loan from the comfort of one’s home as opposed to in the past. It is hardly necessary to go to the bank premises or stand in long queues. The advancement of technology and the internet has made all these things possible.

A home loan is also eligible for certain tax benefits under Section 80EE of the Income Tax Act. However, the income tax deduction is only available to first-time home buyers.

Frequently Asked Questions (FAQ’s) – Home Loan

You can apply for a Home Loan anytime when you have a necessity. Your necessity could be for the redesign of your current house, for development of another house, for acquisition of a house from a developer or an individual, for acquisition of land, etc.
Residents: Minimum entry age is 18 years and Maximum exit age is 70 years. Non-Residents: Entry Level: Between 21 and 50 years Exit Level: Maximum 60 years (can be considered as long as 70 years on case-to-case basis).
(i) Resident Individuals – Salaried / Businessmen / P&SE with minimum period of confirmed service / experience of 3 years;(ii) Pensioners;(iii) Hindu Undivided Family (HUF);(iv) Non-Resident Individuals - beneficially employed abroad (who have put in a minimum period of confirmed service / experience of 2 years – including previous employment / experience and confirmed in the present employment) with a further contract period of service for no less than three additional years to run;
Yes, home loan can be availed in Rural Areas. The self-declared income certificates or affidavit for rural areas may be accepted in case persons involved in agricultural activities/labor are not able to provide Income Tax Returns or IATOs for assessment of their income. SARFAESI compliance is required for the property.
There is no requirement that you have a co-applicant in your home loan. However, if the property to which the loan is being applied for is jointly owned, then all co-owners will have to be sub-applicant in the loan. Co-applicants are generally close family members.
Banks do not permit co-borrowing among friends. Just a relative can be your co-applicant in your home loan application. Indeed, even among family and family members, banks have reservations in giving loans. For example, a married woman would find it difficult to get a home loan with her unmarried kin as a co-applicant. In most of the cases banks agree to sanction the home loan with spouse being a co-applicant.
Yes, your spouse can be a co-applicant in your home loan. If you are planning to keep your spouse as a co-applicant, then you need to add your spouse at the time of home loan application. As a result, the home loan will be in your joint name.
Yes, your spouse's income may be included in the determination of your home loan eligibility. First it depends on the primary applicant’s income. If the primary applicant’s income is enough to meet the monthly EMI requirements as per the lending institution, then it would not be necessary to showcase your spouse’s income else your spouse’s income related documents needs to be submitted to the bank or the lending institution.
Normally, your home-loan repayment tenure might endure between 5 to 30 years. Generally, loans are given to borrowers for a period of 20 years. Contingent upon your age and pay, you can change the repayment tenure. One more way of decreasing the tenure of the loan EMI is by pre-paying some lumpsum amount at regular intervals.
Your age and income are the essential measures for the bank to choose your credit qualification. For example, a bank would be more ready to grant loan to an individual who is having a steady monthly income. Bank stays safe with these kinds of profiles where risk exposure is very low.
A bank that offers you the best interest rate on a home loan would be the optimum choice. It is only after doing multiple calculations that you could determine which bank is most suitable for your specific needs. On the other hand, banks charge substantial amounts as processing and other fees on home loans. This is why even if you are offered slightly cheaper loans, such charges will still increase the cost to you. So, you need to decide which bank apart from low interest rate charges low processing and other fees.
Generally, banks offer loans only for 80 percent of the property's value. Further, the amount you can borrow depends on the value of the property as determined by the bank. If you ask the bank to lend you Rs.30 lakh on an asset that the estimate says is worth only Rs.25 lakh, then it will only lend you Rs.20 lakh. Your income would also be a significant factor in determining your eligibility.
A concessional interest rate of 0.05% p.a. is available if a woman is the main applicant or co-applicant.
A home loan is available for 75% to 90% of the property cost. The own contribution to the property cost will be 10% to 25% depending on the loan amount. In the case of construction, home improvement and home extensions, 75% to 90% of the estimated cost can be funded.
The only way to repay a scheduled bank loan is online or through a cheque. However, there have been instances where scheduled banks have recouped outstanding dues in cash.
EMI is an acronym for 'Equated Monthly Instalment,' which is the amount you are required to pay to the bank or the financial institution from where you obtained the loan on a specific date each month until it is fully paid off. EMIs consist of both principal and interest components. In the first few years, the interest component is larger than the principal component, while towards the end of the loan, the principal component becomes larger.
EMI begins the month following the month in which the loan is disbursed. Normally, EMI's for under-construction properties start after the full loan has been disbursed, but customers may begin paying EMI's as soon as they receive their first disbursement, and EMI's increase proportionally as each new disbursement is made. In resale cases, since the entire loan amount is disbursed at once, EMIs start the month after disbursement.
Upon a bounced or delayed payment, the bank will charge charges on the outstanding dues according to its policy.
You can plan your cash flows much in advance by using an EMI calculator and make your home loan payments with ease whenever you take out a home loan. In other words, an EMI calculator is a useful tool for helping you prepare for the future and manage your household finances.The EMI calculators are very easy to use. You just need three inputs: Loan Amount, Interest Rates, and Loan Tenure. With these three input parameters, the EMI calculator will help you figure out the monthly instalment that needs to be paid to the home loan provider. Additionally, some of the EMI calculators may also provide a detailed breakdown of how much interest and principal you'll be paying over the course of the loan.
Pre-EMI is a monthly payment plan that includes only the interest component of your home loan. With pre-EMI, you won't have to repay anything towards the principal. You will have the option to make pre-EMI payments while your home or apartment is under construction. Pre-EMI is therefore a reduced payment as it does not include the principal component of the home loan. After construction has been completed on your house, the lender will ask that you pay the EMI in full. Pre-EMI is not a part of your home loan tenor.
As a result of the Reserve Bank of India's direction in 2013, lenders will not charge prepayment penalties for loans with floating rates of interest. Banks, however, still impose penalties on home loans that have fixed rates of interest.
Your CIBIL score will not be affected by foreclosure of your loan. The foreclosed loan would be reported as 'Closed' to CIBIL and would have no effect on your credit score.
There is a late payment fee charged by the banks for each instance of late payment. The bank has the right to take possession of a property in case of an unfortunate event, owing to which you are not able to repay the loan.A three-month moratorium on home loans and other loans is currently being offered by banks due to the Coronavirus outbreak. The borrower does not have to pay the EMI during this period. During the moratorium period, he would not be penalized for non-payment. Moreover, the non-payment would not have a negative impact on the borrower's credit history.
You will be charged an interest rate based on the type of loan you choose. Loans can be classified into two types: Adjustable Rate or Floating Rate and Combination Rate. If you have an adjustable or floating rate loan, the interest rate on your loan is linked to the benchmark rate set by your lender. You will see a proportional change in your interest rate when the benchmark rate changes. The interest rates are reset periodically. Resets can be based on the financial calendar, or they can be unique to each customer, depending on the first date of disbursement. Whereas in the case of the combination rate, the loan amount is partly fixed and partly floating. After the fixed rate tenure, the loan switches to an adjustable rate.
While you are re-paying a home loan, you can simultaneously apply for other loans, including car loans and personal loans. However, banks will closely examine your repayment ability before issuing you a new loan. At the end of the day, your income determines whether or not you qualify again for a new loan.
If it will help you reduce your loan burden, you can change your lender multiple times. However, too much shifting is not advisable because it creates a wrong impression. Moreover, it must be remembered that banks charge fees on loan transfers.
Yes. The Income Tax Act of 1961 provides tax benefits on the principal and interest components of your Home Loan.You are eligible for tax benefits on the principal and interest components of your Home Loan under the Income Tax Act, 1961. As the benefits could vary each year depending upon the tax rules, please do check with your bank who sanctioned loan about the tax benefits which you could avail on your loan. Considering the tax regulations could change every year, please check with the bank that sanctioned your loan to verify what tax benefits you can take advantage of.
Market value refers to the estimated amount that a property would sell for based on current market conditions.
As the name implies, an under-construction property is one which is in the construction process and will be handed over to the buyer at a later date.
With the consent of the financing bank, you can sell the property. The process becomes much easier if the buyer goes to the same bank for the loan. This means the bank does not need to release the property documents to another bank before it can receive payment. The buyer can pay directly to the bank if he wants to make an outright payment. The bank will release the property papers only after it has recovered the entire loan amount and other debts.
A standard home insurance policy will cover the structure of the house as well as its contents. In addition to home insurance, many policies offer personal insurance coverage too.
Normally, a property is valued by multiplying its built-up area by the cost per square foot of its construction. Banks typically use this method for appraisals.
A rise in interest rates also means an increase in the interest component of EMIs. In this case, the EMI is fixed and remains constant, resulting in a lower principal component. In the event the rates rise continuously, then there will be a situation where the EMI will exceed the interest component. Hence, the principal component (EMI minus interest component) would be negative. Due to this, instead of being reduced from the principal component of the opening balance, the outstanding balance is increased with the negative principal component. This is often referred to as negative amortization. An amortizing loan never gets repaid since the regular payments aren't enough to cover the interest component. As a result, the unpaid interest adds to the principal amount and makes it grow. However, when interest rates start falling, the process is reversed. If interest rates fall, the customer makes part-prepayments or increases his/her EMI.
If there is a variable interest rate on a home loan, then the interest rate used to calculate the interest component may change. The following changes can be made to a loan when rates change:•The term of the Loan can either be extended (when interest rates rise) or contracted (when interest rates fall).•A new Instalment (EMI) amount is set (increased if rates go up, and reduced if rates go down).•As a practice, the term of the loan is extended since self-employed customers may have given post-dated checks that would be difficult to replace every time the rates change. However, when a property is in the pre-construction stage, the pre-EMI amount is automatically increased.
An encumbrance on property is a claim or charge against the property due to unpaid bills and loans. If you are searching for a home, you must make sure that the property is free of any kind of encumbrance.
Loans are generally secured by interest on the property being financed as well as by collateral and interim security, as determined by the lender.
In order to repay the housing loan within the required tenure of the loan, funds should be received in India via banking channels through inward remittance from elsewhere outside India or held in non-resident bank accounts according to the provisions of the Act, rules, and regulations framed thereunder.
The term 'REPO' refers to repurchase agreements. Commercial financial institutions are lent money from the Reserve Bank of India (RBI) at these terms, which can change based on the current policies. Increased repo rates increase the cost of credit for commercial banks, making their loans more expensive. As a result, they are unable to borrow as much money as they need, and this in turn pushes them to increase interest rates on loans and advances offered to retail borrowers, and the reverse with decreases.
The Government of India launched the Pradhan Mantri Awas Yojana (PMAY) to boost homeownership. A large part of the PMAY scheme is targeted towards Economically Weaker Sections (EWS) / Lower Income Groups (LIG) and Middle-Income Groups (MIG) in India due to the growing urbanization & increasing housing requirements. By providing a subsidy on the interest component of the home loan under PMAY, the Credit Linked Subsidy Scheme (CLSS) makes the home loan affordable for the customer. A customer's subsidy amount depends largely on their income category and the size of the property unit they wish to finance under the scheme. The government subsidy on the purchase of a new home is the main benefit of the PMAY scheme. In order to qualify for the subsidy, you or anyone in your household must not already be a homeowner.There are different types of credit-linked subsidies available by the government based on your income, ranging from EWS to LIG to MIG to MIG 2.
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