What is the rate of interest? Is it always a fixed rate?

he interest rate is the first and one of the most important factors. This is the rate at which you borrow money to buy the house. It is not always a fixed rate. Though interest rates vary from lender to lender, they usually fall in the range of 12% to 16.5%, depending on the amount of loan taken. Usually, the rate for small loans (below Rs. 5 lac) is lower than that for loans of over Rs. 10 lac. The interest rate on home loans is much lower than that for personal loans like car loans, etc.

What is the 'tenure' of a loan?

The tenure of a loan is the period for which you are taking the loan. Tenures for home loans are longer than those for other personal loans and range from five years to fifteen years. Normally they do not extend beyond your retirement age or your reaching 65 years of age, whichever is earlier.

Why are home loans limited to 15 years?

There are companies that lend for 20 years too. The general industry norm is 15 years mainly because after fifteen years the drop in the monthly instalment for every additional year is negligible.

What is an EMI?

EMI means equated monthly instalment. This is the amount that you will be paying your lender every month till the end of the loan tenure. The EMI consists of part principal and part interest.

What kind of service can you expect from the lender?

Nowadays personalised services are offered by many companies. Loans are sanctioned even before you have identified the property. The speed of approval and processing of paperwork, however, varies with lenders. Some companies offer you even consultation on property and the financial aspects of the loan. Free credit cards, free ATM cards, free accident insurance, discounted consumer loans, etc. are amongst the many freebies on offer. Some companies send a representative to your home to discuss and deliver the loan and also to pick up the EMI cheques.

What are the fees charged?

The fee charged includes processing and administrative charges and is expressed as a percentage of the loan amount. The fees charged by companies and banks are currently in the range of 1% to 2% of the loan amount.

Are there any tax benefits available?

Certainly. As per the Income Tax Act 1961, tax concessions are available on both the principal and interest components of the loan. The latest budget has in fact enhanced these benefits, making a home loan even more attractive. The upper limit of the amount of deduction of interest repayment allowed from your gross total income is now Rs. 75,000 p.a. (up from Rs. 30,000 p.a. last year). At the highest tax slab, this translates into a saving of Rs. 24,750 (Rs. 75,000 x 33%). Besides, Sec. 88 offers you tax benefits for principal repayments. The principal repayment amount included in the overall limit of Rs 60,000 offered by this section is Rs 10,000. Kinds of Home Loans

What are the different kinds of home loans available?

There is much more to home loans than is commonly known. Home loans today are available for a wide variety of uses and are structured to suit various needs, thus providing you with a very broad range of choices.

You can get loans for extensive home-related needs starting with the basic home loan for the purchase of a home, to loans for purchase of land, to loans for construction, for making improvements to your existing house and so on. Let us look at these others.

Land Purchase Loans

If you want to purchase land either as an investment or for your own dream home, as against buying a flat in a co-operative society, you will find that a land purchase loan is one that is structured for this requirement. You can apply separately for a construction loan to build a house on the land you have purchased.

Stamp Duty Loans

A stamp duty loan is one that is extended against the stamp duty amount payable on your purchase of a house. You might find this worthy of consideration particularly in cities like Mumbai and Delhi where the price of real estate is high and therefore the stamp duty payable is substantial.

Loans to NRIs

Not many may be aware of home loans for NRIs. Loans are now available not only to Resident Indians, but also to NRIs if they wish to buy or build a home in India. While most of the procedures remain the same as for resident Indians, there is a difference in the documentation required.

An NRI is required to submit copies of his/her work permit (where applicable), the visa stamped on the passport, employment contract, latest salary slip and overseas bank statement of the past few months. The NRI can repay the loan (the principal and the interest) through the normal banking channels using either a Non Resident (External) or a Non Resident (Ordinary) account.

Home Extension Loans

A home extension loan enables you meet the expenses of extension/expansion of your existing home. If you want to add a floor or expand it, you can avail of a home extension loan, after obtaining the requisite approvals from the municipal and town authorities.

Home Improvement Loans

Often after you have bought your house, there is a lot of work that remains to be done: external work like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. All this could add up to a hefty sum that increases the burden on a budget that is already stretched after your purchase of the house. A home improvement loan is one that is made available for you to fulfil precisely such a need.

>Home Conversion Loans

There are times when you feel the need for more space. However, you might also feel restricted by the current burden of the loan you had taken for your present house and by the knowledge that a new, bigger house costs even more. A home conversion loan could be the answer. When you apply for one, your existing loan is transferred to the new house and you get the money additional finance for the incremental cost of the new house. You are thus able to move house without having to pre-pay your existing loan.

Bridge Loans

Suppose you plan to buy a new house while selling your present one. You have found the new house that you want but are unable to find a buyer for your present house at the same time. You will then find a bridge loan useful. Bridge loans are short-term-finance loans that cover the period till you sell off your old house. You can repay them either in lumpsum or in instalments.

Balance Transfer (Swap)

During the period when you are repaying your home loan, there may come a time when interest rates fall. And thus, having if you have opted for fixed-interest-rate repayment terms for the tenure of your loan, the rate you are paying is higher. In such a case, you can get your existing loan refinanced (usually by another housing finance company). The new lender repays your earlier loan and extends you a new loan at the current, lower, rate of interest. Though there may be a pre-payment penalty on your old loan, it will be worth it if the new EMI (based on the new, lower interest rate) ensures adequate savings.

Refinance Loan

Even if your present home has entailed a borrowing, not from another housing finance company but from private sources (provident fund withdrawals, friends, etc.), you can still replace that debt with a cheaper home loan. You can get the old loan(s) refinanced from a housing finance company. Refinance involves the housing finance company giving you a home loan to enable you to repay the earlier debt. Such loans usually carry a stipulation that the earlier debt be not more than, say, six months old.

Tax Implications

What are the tax implications of home loans?

One of the strongest arguments in favour of your taking a home loan is the tax benefit granted to you by the government. Not only do housing loans carry a lower interest rate than consumer loans but also, the tax benefits reduce the effective cost even further. Let us here look at these tax benefits and see how they make home loans attractive.

What are the tax benefits available on home loans?

There are tax benefits on the principal as well as the interest payments that you make. There is a tax rebate of 20% (under Section 88 of the Income-Tax Act) on the principal repaid, subject to a principal ceiling of Rs. 10,000 per year. This means a maximum tax rebate of Rs.10,000 x 20% i.e. Rs. 2,000.

Does this mean that the tax rebate is only Rs. 2,000 per year? Yes,

but you must understand that this is only against the principal repayments made. Most home loans account for higher interest receipts in the initial years. The EMIs comprise a greater proportion of interest and lesser of principal. The principal portion increases, as the loan grows older. Thus, the true magnitude of the benefit under this section may not be felt immediately, especially on a smaller loan.

What about the tax benefits on interest payments?

There is a deduction available on the interest payment with a ceiling of Rs.75,000, hiked in the current budget from the earlier limit of Rs.30,000. However, this enhanced limit is applicable only for properties bought and self-occupied after April 1, 1999 and before April 1, 2001. If you are in the middle of an existing loan, the old limit remains applicable.

Can you repay an old loan and take a new one to avail of the Rs. 75,000 limit?

The exemption granted under the Income-Tax Act is for the construction or acquisition of a house and has been allowed with the intention of giving a boost to the housing industry. A purely financial transaction like repaying an old loan and taking a new one does not attract this exemption. The new limit will apply only when a new property has been / is being purchased.

What if you buy an under-construction house and the builder delays delivery beyond April 1, 2001?

Then your exemption limit will go back to Rs. 30,000. Hence, you must ensure that the builder delivers before April 1, 2001 for you to be eligible for the Rs.75,000 exemption. The other option is to buy a ready-possession property.

Are the tax benefits really attractive?

Yes, because they reduce your effective cost of the loan. The tax rebate on interest payment works out to Rs. 24,750 at the highest tax slab of 33% (Rs.75,000 x 33%). Moreover, the tax benefits and the effectively lower interest cost also help you in another way, viz. as a result of the higher tax exemption, your net income increases and this makes you eligible for a higher loan.

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