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!
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