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Home loans: Here’s all you must know

Friday, December 30, 2016
By Property Team

Today taking a housing loan is the best way to purchase your dream home. Here are the various options available that you should explore

What is the maximum amount of housing loan available?
You can avail of a maximum of 85 per cent of the cost of the property, including the cost of land, subject to a maximum amount of Rs. one crore.

What is the amount I can borrow and what are the criteria?
Generally, you can borrow up to 2.5 times your gross annual income. But equated monthly instalments (EMIs) usually should not exceed 35% of your gross monthly income. The actual amount of loan will vary across the individual companies. Housing Finance Companies (HFCs) primarily look at your capacity to repay the loan instalments on time. They assess the repayment capacity of you and co-applicants (spouse or parent), if any, based on annual income, assets and liabilities, savings history, financial and occupational stability, age and the number of dependents.

What is the period in which I will have to repay the loan?
The loan will generally have to be repaid in a period of between five to 15 years, but definitely before you retire. A few HFCs also offer a 20-year repayment period, usually at a higher interest rate.

How is the interest calculated on my loan?
Most HFCs follow the yearly reducing-balance method, which accounts for your principal repayments only at the end of their financial year. Thus, you pay interest on the principal that you have already returned to the HFC. The effective interest rate is thus higher than the quoted interest rate by around 0.7%. Banks and some HFCs, in contrast, follow the daily or monthly reducing-balance method, which results in a lower interest burden.

Is it better to opt for a fixed or a floating interest rate?
In the case of falling interest rates, a floating rate loan is a better option but when the interest rates are rising, opt for a fixed rate loan. If you go in for a fixed rate loan, you will know in advance what your EMIs will be. This will help you in your financial budgeting. However, if you opt for a floating rate, you may not be able to budget properly.

Loan amounts could be raised from one of the following sources:
Employer:  In this case the interest on the borrowed amount will be minimal. The loan amount is related to various factors, such as, length of service, salary amount, designation, etc.

Provident fund accumulations: The salaried employees who are members of the provident fund scheme covered under the government Provident Fund Act can avail loan from their Provident Fund account.

There are so many housing finance companies approved by National Housing Bank for securing loans. Today, home loans have been restructured to suit your constantly changing needs, starting with a basic loan to buy a home, to loans required for construction or for repairing your existing home.

Other Loans
Apart from basic loans to buy a home, there are several kinds of loans available. They include:

  • Home extension loan: You could avail of this loan if you want to build a floor or expand it but only after you obtain the requisite approvals from the municipal and town authorities.
     
  • Home improvement loan: External work like structural repairs or waterproofing and internal work like tiling, plumbing, electrical work painting, flooring, etc., remains to be done even after you've bought the house. This is when a home improvement loan comes in handy.
     
  • Home conversion loan: Simply put, this loan enables you to transfer your current loan (which you took to buy your house) to the new house, thereby providing you with additional finances for the incremental cost of the new house. Which means, you can move to your new house without having to pre-pay your existing loan.
     
  • Stamp duty loan: This is extended against the stamp duty amount payable on your purchase of a house. This particular loan could be worth considering, especially in cities like Mumbai where real estate prices are on the high side and the stamp duty payable is substantial.
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