A Borrower’s Guide: Home Loans Explained in 10 Easy Points

Updated on: 18 Jan 2024 // 5 min read // Home Loans
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A dream of acquiring a home can be made a reality effortlessly with the help of a Home Loan. The rising prices of residential properties have made availing a Home Loan a necessity rather than an option. But the substantial amount and long repayment tenor involved, make Home Loan a significant financial commitment. You must, therefore, understand the major aspects related to a mortgage before availing one.

Here are 10 points to understand the implications of a Home Loan for you:

1. Secured Loan/ Mortgage:

Home Loan is a secured credit wherein the property acquired through the credit must be mortgaged with the lending institution. That is why it is also known as a “Mortgage.”

The financial institution would create a registered first charge over the property. Also, the original copies of the title deed and other documents will stay in your possession. Though, you can continue to live and use the property as per your wishes without any interference from the lender; if you wish to lease the property or use it for any purpose other than residential usage, you will need to intimate the lender regarding the same.

When you have repaid your entire Home Loan amount along with interest, the lender will cancel the mortgage and vacate the charge over the property. Only after the Home Loan repayment, you become the absolute and undisputed owner of the property.

2. LTV Ratio:

The amount you wish to borrow or, in other words, the amount which you need to deposit as the margin money depends on the LTV ratio followed by the lender. The LTV ratio or loan-to-value ratio for a Home Loan varies according to the amount of loan required by you. As per the guidelines specified by the RBI, the maximum LTV ratio for Home Loans cannot exceed 90% under any circumstances. The remaining amount, i.e., the margin money, has to be arranged by the borrower along with other related expenses for registration of the title deed.

3. Interest rate structure:

Different lenders offer different interest rate structures against their Home Loan offerings. Generally, the interest rate structures can be classified as a fixed rate and floating rate. Under the fixed-rate structure, the interest rate will be locked for the entire duration of the Home Loan. Generally, lenders provide the option to borrowers to switch from fixed rate to floating rate structure by paying a fee. Under the floating rate structure, the interest rates are pegged to an external benchmark and change according to the corresponding changes in the interest rates. For instance, Axis Bank Home Loan Interest Rates are available at repo rate linked interest rates for new customers. Previous customers continue to repay at MCLR linked interest rates and base rate linked interest rates.

4. Modes of application:

The financial institutions are trying to make the Home Loan application process easy for their customers. Now, you can apply for a Home Loan using both online (mobile app or website) as well as offline channels (branch office or channel partner). The entire process has been made extremely efficient, and you only need to provide some essential documents to avail a Home Loan at attractive interest rates.

5. Repayment tenor:

While availing a Home Loan, you also need to pay attention to the concept of repayment tenor. It defines the total duration over which you will be repaying the Home Loan. The repayment tenor is directly related to the EMI amount that you will serve and the total interest cost that you will have to bear over the entire tenure of the loan. The maximum repayment tenor for Home Loans can range between 20-30 years, depending on the lending institution. For instance, the maximum repayment tenor for Axis Bank Home Loan is 30 years, while for the Bajaj Finserv home loan, it is 20 years. 

6. EMI:

You also need to calculate your EMI before you sign the loan agreement. The EMI is calculated according to the loan amount, repayment tenor, and interest rate. You can use various online calculators to get an accurate estimate of your EMI liability. Your Home Loan EMI would take a major share of your monthly income for a large part of your work life. So, you need to opt for an EMI amount that you can afford easily.

7. Eligibility and co-applicants:

Financial institutions follow strict eligibility criteria to decide on your Home Loan application. Your CIBIL score, annual income, existing liabilities, repayment track record, alternate sources of income are some of the aspects that are used to determine your Home Loan eligibility. So, you should compare your profile with the eligibility criteria specified by the lender. If required, you can also add co-applicants to your Home Loan application for improving the chances of loan approval.

8. Different types of Home Loans:

You might not know that, but Home Loans are available in different variants. Home Loan for plot purchase, Home Loan for NRI, Home Improvement Loan, Home Extension Loan, Home Construction Loan are some types of Home Loans that you can opt for. So, decide upon the type of loan you require before submitting the application.

9. Annual percentage rate:

In addition to the interest rate, there are various other costs associated with your Home Loan. Therefore, you must compare the annual percentage rate of different Home Loan offers to get a better idea regarding their suitability for your requirements. It will allow you to make an informed decision.

10. Foreclosure and part pre-payment:

As per the guidelines of RBI, financial institutions can not levy foreclosure charges or part pre-payment charges on Home Loans. You can, therefore, foreclose your Home Loan account or make part pre-payment without incurring any additional charge. It will help you pay off the Home Loan quickly and save on the interest costs.

A Home Loan is a significant responsibility that requires financial discipline from your end for an extended period of time. So, clarify all your doubts before availing of a Home Loan and maximize the benefits on offer.

Also Read: Home Loan Process Explained!

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