Published on: Jun 21, 2015 @ 14:09
Buying a house is one of the greatest dreams of a person of today’s world as it gives a sense of security and a sentimental support. It requires huge finances but you can still make the dream possible with the help of a housing loan. Without a housing loan, most of us would not be able to fulfill the dream of acquiring our own house.
Housing loan offers you a chance to buy an asset and simultaneously offers a tax benefit. Once you have got the home loan, you will be paying a periodical interest as well as the principal amount to the lender. The Indian Income Tax law provides you benefits in both instances and you will be eligible to claim both your principal and interest amount, which you repay towards your housing loan during the year. You can take the housing loan for various purposes:
- to buy a new house / flat,
- to improve / extend your home,
- to purchase a resale property,
- to buy a plot of land,
- to build a house on owned land or
- to pay off an existing home loan from another financial institution.
Home loan lenders governed by RBI, are permitted to provide up to 80 per cent of the value of the property as the loan amount, subject to your income. However, some HFCs regulated by National Housing Bank, also take into consideration the stamp duty and registration cost of the property. You can also take a home loan with a co-applicant as his / her income will also be considered which will help to enhance your home loan eligibility.
The housing loan eligibility is calculated on the basis of your income, the number of working years left and previous track record of your repayments of your loans and credit card dues. A 50 years old earning Rs 1 lakh a month could be eligible for a lesser home loan amount than a 30 years old earning the same amount. The latter has 20 more years to repay the loan. As housing loan is 20-25 year long contract, lenders need to be sure of your repayment capability. They do not consider some of your salary slips heads for calculating your net monthly income. They only consider the income heads which can be used to repay your loan. For example, your LTA and medical allowances are deducted from the monthly net salary you receive which you are expected to spend the amount received under these heads for the specific activities they are being provided for.
The housing loan eligibility depends on the credit worthiness of the individual. Banks check your credit score with a credit bureau (CIBIL). It provides a credit score on your previous credit card usage, how you maintained your bank accounts, any check bounces, existing loans, loan repayments, how many times you have applied for a loan or credit card etc. All the home loan lenders approach CIBIL for this score whenever you apply for a housing loan. CIBIL rating, net salary excluding some variable heads and existing loans and EMIs being paid towards existing loans are the important components which decides your home loan eligibility.
The type of interest rate you choose will have an impact on the monthly EMIs you pay. One of the important factors to consider before seeking a home loan is the difference between fixed and floating home loan rates. If you opt for a fixed rate, the EMIs don’t vary over the loan tenure. It is beneficial when the interest rates are expected to rise in the future. In case of a floating rate, the interest rate is determined based on the prevailing base rates. It is beneficial when interest rates are expected to fall in the future.
The EMI is calculated on the basis of the amount of the home loan, home loan interest rate and loan tenure. The monthly EMI is inversely proportional to loan tenure, i.e. the longer the tenure, the lower the EMI, and the shorter the tenure, the higher the EMI. Similarly, the total interest paid is directly proportional to the loan tenure. The higher the tenure, the higher the total interest paid, and vice-versa.
Read the home loan agreement documents carefully before you sign them. Check the documents to ensure that the terms and the different charges applicable such as processing fees, late payment fees etc. are the same as what you have negotiated and agreed upon.
The Reserve Bank Of India has prohibited banks from levying any foreclosure charges if you pay off the loan prior to its tenure.
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.