Home Loan Basics in India

by Manshu on June 22, 2012

in Credit,Suggested Reading

The topic of home loans has appeared a few times in comments now, and in this post I’ll cover some things that I have learned about home loans over the years.

Home loans are disbursed based on the evaluation of property price

When you approach a bank to give you a loan for a house, they have it assessed through their own appraisers and this is an important criteria in how much loan you can get against the property.

While I’m not familiar with the methodology for this, there are some old apartments and houses whose assessed value is a lot lower than the actual market price so it is impossible to get a loan on them that could actually enable a buyer to buy the property.

Property valuation doesn’t include stamp duty or other charges

When you buy a house you need to pay stamp duty and other registration charges and this can be a big sum in its own right.

These charges include stamp duty, VAT, service tax, and registration charges, and can go as high as 10% of the total cost you have to bear.

It used to be that banks could include stamp duty and registration charges in the property value and then disburse the loan based on that but RBI stopped that practice earlier this year in order to discourage down speculation in real estate.

You can take up to 80% of the house value as a loan

If the house you plan to buy is over Rs. 20 lakhs, then the bank can only give you a maximum of 80% of the value as home loan. This limit goes up to 90% if the house is assessed at less than Rs. 20 lakhs, but I don’t think there are many of those around these days.

This is another measure mandated by the RBI to curb speculation in the real estate market.

Home loan can be on a fixed or floating rate

A fixed interest rate doesn’t change throughout the tenure of the loan, while a floating rate changes with market rates.

In general, fixed rates are slightly higher than floating rates, but most of the loans disbursed today are floating rates and not fixed rates.

Floating rates are different from teaser rates that used to be offered by banks till some time ago.

Teaser rates referred to home loans that banks gave at an initial interest rate that was much lower than what they should have actually been charging. So, they would just charge you 8% in the first year, and then that would go to 9% in the second year, and then climb to 11% from the third year onwards that made a big difference on your EMI.

This was something else that was stopped by RBI in order to stop banks from enticing people into taking loans that they couldn’t afford and get into a US style housing problem.

Current Home Loan Interest Rates

Current home loan interest rates are hovering at about 10.75% and you should expect to pay about this much if you are in the market for a home loan today.

No Prepayment Penalty

In the beginning of your home loan payments – you are paying more of interest than the principal itself so in general it is a good idea to bring down the principal by prepayment as far as possible.

What’s good for you as a borrower is not good for the bank as a lender and to discourage prepayment they used to levy a penalty on any such amounts. Now RBI has asked banks to stop charging prepayment penalties as well, and that’s a good thing for borrowers who can now prepay loan principal if they want to.

Tax Benefit of Home Loans

Home loan repayment has two components – principal and interest, and both of these are treated differently for calculating tax benefits.

The principal part is covered under Section 80C and the interest part is covered under Section 24L.

Briefly, the limit for tax benefit on principal repayment is Rs. 1 lakh under Section 80C and is clubbed with other instruments you may have bought for tax benefit under that section and the limit for interest repayment is Rs. 1,50,000 and that’s not clubbed with anything else. You can read these two posts for more details on the tax aspect of this. (Section 24L and Section 80C)

These are the key things that came to my mind while thinking about home loans in India, and if you want to add or point out something then please do leave a comment!

This post is from the Suggest a Topic page.

{ 15 comments… read them below or add one }

Bejoy June 22, 2012 at 8:33 am

Sometime back during my research regarding home loans I read at couple of sites that, for tax benefits the amount remaining after your tax savings of 2.5 Lakhs can be claimed as a Loss in your income which will then be directly subtracted from your taxable income.

For e.g. if the net salary is 12L and home loan Principal is 2L and Interest is 2L yearly i.e. a total of 4L as total home loan then the I can show Principal 1L in Sec 80 with other investments and Interest 1.5L in Sec 24L.

And the remaining 4L – (1L + 1.5L) = 1.5L as a loss on property in my tax calculations.

Is this correct?

Reply

Jitendra P.S.Solanki June 22, 2012 at 9:46 am

Bejoy,

Income from house property is a seperate section in IT returns which you need to claculate.Yes, there can be loss from property income within the prescribed exemption limit. i.e. Principal repayment above Rs1 lakh and Interest Repayment above Rs 1.5 lakh you cannot show in your income r claim exemption.

For e.g.
Income from House property: (Model Calculation)
1. Rent received Rs.10,000 pm x 12months= Rs.1,20,000
2. Less Municipal Tax paid = Rs. 20,000
3. Balance amount (Rs.1,20,000-Rs.20,000) Rs.1,00,000
4. Less:30% deduction U/s 24 for repairs on bal Rs.1 lakh= Rs.30,000 (This deduction is allowed even if you do not spend the amount for repairs)
5. Balance after 30% deduction = 1,00,000-30,000=70,000
6. Less interest paid on Housing loan———–Rs. 1,60,000
7. Balance Amt.= 70,000-160000=Rs. -90,000 (loss from house property). But the interest on housing loan is allowed Max. Rs.1,50,000 only. So the loss from house property will become Rs.80,000 insted of Rs.90,000. This loss Rs.80,000 can be adjusted in other income say salary or business.

I hope this answer yoru query.

Reply

Manshu June 22, 2012 at 5:16 pm

Thanks for the response Jitendra, I aware of the details of this myself so it is quite useful for me as well.

Reply

Umesh June 22, 2012 at 8:38 pm

I am sorry but your calculation is not correct.
Line 7 should be as
7. Balance Amt.= 70,000-160000=Rs. -90,000 (loss from house property). This loss Rs.90,000 can be adjusted in other income say salary or business.

There is no cap on the interest amount, if the property (on which home loan is taken) is let out on RENT. “In fact, if you have rented out the house, ALL interest paid (even if it is more than Rs. 1.5 Lakhs) is deductible from the rent received.”

Reply

Neerav June 22, 2012 at 9:54 am

Hi Manshu, Thanks for the beautiful article again. My question is related to the joint-loan scenario of Home loan. I have house which is on my father’s name. Since our house has gone under re-devlopement, we are planning to take extra space. I wanted to ask whether i can get a home loan when the property is not registered on my name? Can i make my father as co-borrower? If yes, will the tax benefits would be shared between me & my father? I would only do the home loan re-payment as my father is going to retire in sometime.

Reply

Manshu June 22, 2012 at 5:23 pm

Thanks Neerav,

Though I’m not sure about this but I think you won’t get a loan if the house is not in your name.

Jitendra must know more about this, if you could, would you please answer Jitendra?

Reply

Raja June 22, 2012 at 10:03 am

Manshu,

I think we can add few more point here:
1. Home loan, in addition to the assessed property price, also takes into account our income/repayment capability (Form 16?) as one the most important criteria for disbursement.
2. Few Banks in the disguise of fixed interest rate loans, have some built in fine print clauses which says based on some circumstances the interest will be reset after certain years.
3. Home loans are also given for building home’s πŸ˜‰ (for folks from smaller cities, say). And one additional info is, one of the major players in this field with a market cap of roughly 2.5k crore disburses average loan amount of 6-7 lacs per unit :).

Regards
Raja

Reply

Manshu June 22, 2012 at 5:20 pm

Great points Raja – thanks for bringing them up.

Let me ask you a question since you’re here. I’ve often wondered if the real estate prices in smaller cities have risen like the prices in big cities? I have some family in Kerala and I feel that although prices have risen there they are not as ridiculously high as in Delhi, and sometimes I feel that moving to a smaller city for retirement may be a lot better than staying in a big city.

What do you say?

Thoughts from anyone else?

Reply

Raja June 23, 2012 at 8:27 am

I think there is no single answer to that question. In my observation some cities which were hyped (by the IT sector ?) to be the great next big second tier city of India. The property prices rose really fast in past few years to catch up with prices which are very close the the tier 1 city… examples are places like Bhubaneswar,Cochin (not sure), etc..
I think this has caught recent retirees who were thinking of buying property in those cities after retirement on the wrong foot.

Whereas places which were not so hyped the prices continue to remain reasonable.
I completely agree with your point about moving to a smaller city for retirement. It makes much more sense than staying in bigger cities like Delhi,B’lore etc…

For some cities (am sure about Bhubaneswar) it may make even more sense to stay in a village which is not more 30kms far from the city center than to stay in the main town.

Reply

Manikaran Singal June 23, 2012 at 1:28 pm

Manshu, i too agree with you that after retirement it makes sense to be in smaller city. Cost of living is much less there. The reason for rise in property prices is same why infrastructure stocks were over performing in 2006-07.
Property prices are actually rising at the places where people have lot of black income with them (like as in North India) , or where actual commercialisation is taking place and thus more of job opportunities are there. The same can be judged by NHB residex data as below http://www.nhb.org.in/Residex/Data&Graphs.php.
That’s why you will find huge rise in prices in Punjab ,even in the smaller town , but very small or negative increase in Kerela.

Reply

Sahil June 28, 2012 at 2:53 am

which are banks -rbi approved institutions with low interest rate for home loan now?

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gautam jain August 12, 2012 at 12:17 pm

please can some one give me the format of “details of cost” of building a house which one has to submit while applying for house loan (for building house)

Reply

Pramendra Verma November 4, 2012 at 9:08 pm

I want to take a home loan through HDFC Bank.My house rate is Rs.2450000.00.If i sale the property with my profit how much penlty amount should take by Bank to close my home loan.

Reply

dharmendra November 14, 2012 at 5:39 pm

Hi,
we are some friends are planing to buy one plat and built our floors, can in this case each one of us can get home loan.
Please provide us procedure how we can achieve this.

thanks,
dharmendra

Reply

B_T March 18, 2013 at 3:22 pm

Hi,

I am planning to buy my Father’s house. I currently own a house of my own, and I wish to sell my house and buy my Father’s house. I will have to arrange for additional money as my Father’s house is valued at a higher price than mine. I would like to know if it is possible to get a home loan for such transaction? I was told by a friend that Banks do not give home loans for buying Father’s house (property transactions within the family). Is this true? If yes, what other options do I have, apart from asking my father to take a mortgage loan with me as the co-applicant?

Kindly advice.

Thanks,
BT

Reply

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