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Home loans provide 80-85% of the property’s value you intend to purchase
They are offered by banks, NBFCs and housing finance companies
Home loans are long-term commitments with a tenor ranging from 10-15 years
They provide tax benefits under various sections of the Income Tax Act, 1961
A boost to affordable housing coupled with the rising number of housing finance companies has propelled the demand for home loans in the country. A majority of buyers are availing home loans to buy their dream home. If you too are intending to address this essential financial goal with a home loan, but aren’t sure how to go about it, this article is your one-stop destination for all home loan queries.
A home loan is a secured mode of finance where financial institutions give you funds equivalent to 80-85% of the property’s value, based on your eligibility, as loan. This needs to be repaid in EMIs over a tenor that can range from 10-15 years and even more. You can procure a home loan either on fixed interest rates or floating rates. When availed on a fixed rate, the interest remains same throughout the loan tenor. On the other hand, in a floating rate, the interest varies as per the market dynamics.
Applying for a home loan is an easy process if you get the basics right. Today, these loans are disbursed by banks, non-banking finance companies (NBFCs) and housing finance companies. You can approach any of these lending institutions for a loan. You need to fill up an application form for the loan and submit the required documents. Though the list of documents varies across lenders, some of the essential documents you need to submit with your application are:
- KYC documents
- Address proof
- Identity proof
- Salary slips
- Bank account statement of the past 3-6 months
Based on these documents, the underwriting team of the lender gauges your home loan eligibility. Also, note that since home loans are a secured mode of finance, you need to provide collateral as security. The collateral can be a property, jewellery or even your life insurance policy (endowment and money-back policies only). In case of a default, the lender has the right to seize the collateral and recover the dues.
Prior to making an application, it’s essential to check your credit score, a three-score digit from 300-900, and find out whether you meet your prospective lender’s eligibility criteria or not. Most lenders define the eligibility norms on their websites.
You can check your credit score from the four leading credit information companies in India - TransUnion CIBIL, HighMark, Equifax and Experian - for free once in a year. Make sure to check your score from each of these companies as your lender might use the score of a different company than the one checked by you. A credit score of more than 750 enhances your loan eligibility.
It’s essential to be prudent with your application and ensure you don’t apply for a loan that forces you to stretch your finances and impinges on other crucial life goals. Also, experts advise procuring home loans on floating interest rates as there are no pre-payment/foreclosure charges on loans procured on floating rates.
Home loans also offer tax benefits that help you save taxes. Tax soaps are offered on both principal and interest component of the EMI, subject to certain terms and conditions. The interest portion of the EMI can be claimed as deduction, up to Rs.2 lakh, under Section 24 of the Income Tax Act, 1961. The principal component of the EMI can be claimed as deduction, up to maximum Rs.1.5 lakh, under section 80C of the Income Tax Act.
Under section 80C, you can also claim a deduction on charges incurred on stamp duty and registration. However, note that these can be claimed in the year only when the expenses are incurred.
If you are first time home buyer, you can claim an additional deduction of Rs.50,000 under section 80EE. In order to claim this deduction, the loan amount should be Rs.35 lakh or more and the value of the property shouldn’t be more than Rs.50 lakh.
If you have taken a home loan jointly, then each of you can claim a deduction of Rs.2 lakh each on interest and Rs.1.5 lakh on principal. However, for this both of you must be the co-owner of the property.
Recently, with the RBI hiking repo rate, home loan interest rates are expected to surge. This will push up the EMIs. To counter this, you can either:
- Increase the tenor to bring down the EMI amount
- Prepay the loan to lower the principal amount and thus the EMIs
This is another concept of home loans whereby you can transfer your existing home loan from one lender to another to avail benefits of a lower interest rate. However, if your home loan is almost at the end of the tenor, it’s better to stick with your existing lender. If you are in the early years of your loan tenor and the difference in rates is even 50bps, switching lenders would help you make great savings.
You can foreclose a loan if you want to. Foreclosing a loan is a simple process where you need to write to your lender expressing your desire to foreclose the loan. Once the outstanding amount is paid via cheque or online transfer, the loan is foreclosed. Make sure to collect the no dues certificate from your lender once the loan is foreclosed and inform credit bureaus about foreclosure, asking them to update it in their records.
A home loan helps you realise one of your biggest financial dreams. Make sure to pay EMIs on time to prevent default and legal hassles. A default would also hit your credit score, reducing your creditworthiness.
Pre-approved offers from Bajaj Finserv on home loans and others such as personal loan, business loan, etc., make it easy to avail finance. Know your pre-approved offer by sharing a few basic details.
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