Purchase Loan - Overview
Home loans are secured loans provided by banks and housing finance institutions. Loans are provided for Resident and Non Resident Indians for
- Individuals:
Salaried, self employed (like traders, distributors, suppliers…etc) and professionals (like doctors, chartered and cost accountants, consultants…etc).
- Non Individual Entities:
Partnership, Private ltd and closely held public ltd companies
Home loans are available in different forms for different purposes: –
Home Loans are provided for
- Purchase Loan: For purchase of Land(Plots), independent houses, villas and apartments (ready to occupy and under construction projects)
- Construction Loan : For construction of residential property.
- Home Improvement/ Extension Loan : For improvement or extension of existing property
- Balance Transfer Loan : To transfer / restructure an existing loan under different terms / with different bank or financial institution
- Composite Loans: For purchase of site or plots of land and construction thereafter.
- Top Up Loan : Provided over and above the existing loan based on the value of the property
Top up loans are given over and above the existing home loan for personal or business use. The end use of top up loans is generally not monitored and can therefore be used for any legal activity such as marriage, higher education, vacation, buying artefacts, home furnishing, closure of other loans, etc
Two of the major criteria for availing a home loan are income eligibility and property eligibility. The others being loan terms, conditions, and other criteria.
- Income eligibility - based on your income, hence your repayment capacity
- Property eligibility- The percentage/amount of funding permitted on the selected property.
Home loan is sanctioned / disbursed on the lower limit of comparing the income loan eligibility and property loan eligibility.
Income Eligibility Criteria
The home loan eligibility on income depends on factors like your occupation (salaried/ self-employed) and continuity in the same, age, your monthly or annual income, the interest rate charged by the bank, Existing liabilities or serviced loans/EMI s, Credit history and the tenure of the loan.
| CRITERIA/PROFILE | Salaried | Self Employed/ Professional/Consultants | |
| Age | Min | 18 Years | 18 Years |
| Max | 60 Years or retirement age whichever is earlier at the time of loan maturity. | 65 Years at the time of loan maturity. *Deviation up to 70/75 yrs on profile basis. | |
| Minimum Work Experience / Existence in Business | 2 Years In Continuous Or In Part. | 3 Years in same line of business. | |
| Minimum Income Required | 2 Lakhs Per Annum | 1.5 lakhs Of Income filed (Net Profit) Annually | |
Property Eligibility Criteria:
Loans are provided for all residential properties like Independent Houses, Villas, Bungalows, Apartments, Row Houses ...ETC. The selected property submitted for loan must be:
- Approved by the financing institution’s legal and technical advisory Department or panel.
- Within the approved geographical limits of the bank or financial institution; the property must not be situated in any negative/sensitive (like buffer Zones) area.
Co –Applicant - Mandatory with most of them, but can be optional as well and depends from bank to bank or financial institution.
- Preferably direct blood relative or spouse if married.
- All co-owners of property necessarily are to be co-applicants.
- In case of company as borrowers all directors to be either co applicants or guarantors on individual capacity
- Guarantors - Generally Not Applicable. Insisted depending on case to case.
*Current Home Loan Interest rates -TAB /Coloumn depicting the same + Brief EMI Chart*
Applicable rate of Interest on home loans depends on the quantum and tenure of the loan. It also depends on the applicant’s credit profile and the property selected. Interest rate also varies based on the type of loan taken and the financier.
Banks and financial institutions offer Generally two types of interest rates
- Floating / Adjustable / Variable Rate: Varies during the tenure of the loan based on market fluctuations and as per the upward downward movement of the bench mark lending rate (Repo Rate) by a fixed margin.
- Fixed Rate (Two Types)
- Resettable Fixed Rate: Fixed for a specified tenure (of about 3-4 years) and reset for the next period (of 3-4 years) based on changes to benchmark lending rate (Repo Rate).
- Whole Tenure Fixed Rate: Fixed for the entire tenure of the loan.
Generally not affected by the fluctuation in benchmark rates till the fixed period.
Applicable interest rate is calculated as
[ Benchmarked lending rate + / - (margin or spread)] = Applicable (Fixed or Floating) Interest Rate.
While the benchmark lending rate is subject to change or fluctuate, as per the market conditions, economic policies and regulatory scenarios, the margin / spread must remain unchanged for the entire tenure of the loan, unless changed by the bank on request.
EMI
Any loan availed needs to be repaid and that too with interest. Like any other loan, Home loan is repaid in Equated Monthly Instalments (EMI), typically EMI includes principal and interest built into one single payment
The interest is calculated generally on a monthly (or quarterly) reducing balance mechanism; meaning the interest is only charged for the principal outstanding as on each month or quarter and not for the entire loan sanction amount. Nowadays Calculation of interest on yearly reducing balance mechanism is very rarely followed.
The interest component in the EMI would be larger in the initial months and gradually decreases with advancing tenure whereas the principal payment will be lower initially and increases as the tenure advances.
PRE-EMI
Pre-EMI - where only the interest component for the disbursed amount is payable - is normally applicable for loans on properties under construction where the amount in disbursed in parts.
(EMI/ Pre EMI can be paid through electronic/online standard instructions. This mode is set before disbursement.
Things to remember
- Banks and financial institutions apply interest rate as on date of disbursement of loan; this may be different from the rate mentioned in sanction letter.
- Fixed interest rates may be more expensive than floating rates for a similar tenure.
- When interest rate on home loans increases, banks generally tend to increase the tenure of the loan while keeping the EMI same. In this scenario, the principal portion repaid from the EMI reduces as the interest outflow is more.
- Consider taking a floating rate of interest when the rates peak and fixed rates at times of lower interest rate.
- Consider the fees or charges applicable for change from floating to fixed and fixed to floating
- Loans to companies for purchase, construction or improvement of properties are not treated as home loans but as commercial loans; therefore commercial terms and conditions are applicable.
FEES & CHARGES
- Processing fee
- Mortgage charges
- EMI Bounce charges
Processiu
Banks do not allow closure of home loans unless the top up loan is cleared first.
- Interest is charged on the loan amount from the day or date of disbursement.
- Disbursements of part or full is subject to valuation and technical dept approval
- Written consent from the applicant is mandatory for all loan disbursements including each part disbursement.
- All conditions mentioned in the sanction letter must be fulfilled before disbursement of loan.
- Home loans are disbursed by way of pay orders (or demand drafts / bankers cheques) favouring the seller / beneficiary, clearly specifying the following:
-
- Name of the beneficiary (person / company) as per the bank Account
- Name of the bank
- Account number PAN no of the person/entity
- Bank Branch name (and optionally, address)
- Account type - Savings / Current / NRE / NRI / Loan (in case of transfer / refinance loans)
- IFSC Code
- Address and phone number of the account holder
| Loan Type | Beneficiary/Favouring |
| Top up loan | Loan applicant |
| Purchase Loan | Seller/Builder of the property |
| Land Purchase Loan | Seller/builder/developer of the property |
| Construction Loan | Loan applicant |
| Home Improvement/ Extension Loan | Loan applicant |
| Balance Transfer Loan | Bank / institution that has provided the existing home loan; balance if any, to the loan applicant |
| Refinance of purchase/construction Loan | Loan applicant |
The property for which the loan is provided is retained by the bank or financial institution as security against the home loan. Certain times additional security may be insisted for reasons assessed by the lender/institution.
Note. The original documents of the property are not to be laminated, mutilated, or lost. If so the same needs to be informed to the bank in advance (at the time of login to the system or prior verification) if not the proposal will be rejected
Banks/financial institutions hold and create security of the provided property in two different methods.
- Equitable Mortgage: This is the generally followed method of holding security in home loans where loans are disbursed by way of equitable mortgage, wherein the borrowers submit all the prescribed original property documents with the lending institution through a memorandum of deposit of title deeds signed who in turn returns them along with a No Objection Certificate or closure letter on complete closure of the loan.
- Another, less popular method, of securing a loan is a Registered Mortgage wherein the property/finance facility is registered in the name of the lender (through a memorandum of equity registered with the jurisdictional sub registrar) till the financial obligations are fulfilled. This mode of security creation will incur charges (depending on the type of document executed) and needs to be borne by the applicants. Once the loan is fully closed, the original title documents of the property, along with a release mortgage deed, are handed over to the applicant with a no objection certificate or closure certificate. This mode of transfer is rarely used for home loans unless specified by the bank and is more applicable or generally in practice with reference to mortgage, commercial and secured business loans.
Acknowledgement for the deposit or submission of all the original property documents will be provided by the bank/Financial Institution.
Apart from building up an asset-base, investment in properties through home loans helps reduce tax outgo through tax benefits. The government offers tax benefits to salaried and self-employed individuals for home loans availed in India. NRIs can also claim these benefits provided they have taxable income generated in India through salaries, business, interest income, consultation fees or rentals.
The govt of India allows deduction of income for Tax advantages through two sections of the income tax act.
1. Deduction under Section 80C – For principal repayment
- A maximum of Rs.1, 00,000/- (One lakh) per year is deductible from total income towards repayment of the principal component of a home loan.
- Stamp duty paid for registration can also be claimed under this section irrespective of the type of home loan taken.
- Deduction can be claimed only for purchase / construction of new home; this is not applicable for loans taken for improvement, extension or renovation loans.
All benefits under this section will be reversed if the property is sold within 5 years from date of possession.
2. Deduction under Section 24(B) - For interest repayment
- A maximum of Rs.1,50,000/- (one lakh fifty thousand) per year is deductible from total income towards repayment of interest on a home loan.
- Allowed for all types of home loans except top up loans; Interest payments to a maximum of Rs.30,000 taken into consideration in case of improvement, extension and renovation loans.
- A maximum of Rs. 30,000 is only deductible in case of any loans taken prior to 01 Mar 1999.
- Interest paid on home loan prior to completion of construction cannot be claimed as a deduction in the year in which it is paid. This will instead be deductible from the assessee’s income in five equal annual instalments in the commencing years in which construction is completed.
Apart from the applicant, co-applicants can equally claim income tax deduction under section of 80(C) and 24 (B) if proof of contribution (like the interest certificate from the financer reflecting name) for the EMI’s is duly submitted.
In case of salaried employees, tax deduction can be claimed along with HRA (house rent allowance) benefits if the property on which the housing loan is availed is in a different city or if commuting to work from own property is difficult.
*Please consult your chartered accountant or financial accountant for more information on tax implications with reference to your income.
Given the risks and uncertainties our lives are fraught with, it is always recommended to obtain an insurance cover for the borrower as well as for the constructed building / home. Although banks and financial institutions do insist on insurance of the applicant and the property, it is highly recommended even though not mandatory. While a life insurance cover will ensure that the burden of debt does not fall on the surviving members of the family by enabling repayment of outstanding loan liability, the property or home insurance will cover damages caused to the physical property and enable compensation of financial loss incurred.
Both life,Health and home insurance cover or policies are available as part of the home loan package. The premium can be added back to the loan amount and can be financed if the policy is taken as a package with the home loan.
These can also be availed as stand-alone policies for a predetermined premium. If required Standalone insurance policies from third party insurers can even be assigned to the loan. Some loan providers even offer a free accident policy along with the home loan.
Banks or financial institutions offer three types of Insurance options.
1) Life : Health Insurance: life insurance as single premium term polices are offered for the applicants against any eventuality of his or her Life because he being the breadwinner for the family. In the event of eventuality to the life of the applicant this policy will work as a shield against the burden of the loan by enabling repayment of outstanding loan liability and makes sure that the assets can still be enjoyed by the surviving members of the family as before.
The premium paid for the life insurance with the home loan is deductible under the section of income tax act 80(c) act..
2) Property Insurance or Home Insurance* is available against any damages caused for the building and its contents* against any natural or man made hazards or calamites. Any completed standard construction property can be insured for a value not exceeding its reconstruction value. In case of damage to the property, only the reinstatement value – or the cost of reconstruction - is reimbursed to the applicant subject to the maximum insured amount; cost of land is nor insured nor reimbursed at the time of claim. Insurance cannot be done for market value as market value of any property includes land and other factors which determine the same.
3) Home Content Insurance is available against any damages caused for the contents and valuables against any natural or man made hazards or calamites including theft or burglary. This policy can be taken to insure the contents of a home such as furniture, household appliances, jewellery and other valuables
The home insurance and the home content insurance does not have any direct tax benefit for the premium paid under the income tax acts.
*Home insurance and home content insurance are two different types’ of policies and need to be taken separately as the one will not cover the other.
The availability of property and life insurance depends from location to location depending on banks/Financial institution. Certain banks and financial institutions may provide both life insurance and property insurance at certain locations and may only provide either one of them at certain other locations.
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