Purchasing a home is supposed to be a big step in a common man’s life. It combines emotions like frustration, anxiety and a massive sense of accomplishment. Moreover, with rising property rates, it may be tough to purchase a home via your own savings entirely. Most individuals take the route of a home loan to purchase a home.
Given the inclusion of massive loan amounts clubbed with long repayment tenure, the home loan comes across to be a liability for many. However, the availability of various benefits on a home loan is one of the things that work in favour of the home loan borrowers. Below we will highlight the major home loan benefits.
A home loan refers to a credit option taken up by borrowers to finance their dream home. With home loans, an individual can borrow the big-ticket amount from a financial institution at a particular interest rate, which is supposed to be repaid through EMIs for longer repayment tenures going up to 30 years. Note that in home loans, one is allowed to borrow funds of up to 75% - 90% of property’s value based on the loan amount. The remaining amount needs to be financed by the home loan borrower in the form of a down payment amount.
As home loans are secured in nature, the home you buy via a loan is taken up as security by a financial institution. In occasions of repetitive EMI default, the lenders may recover the loan amount via a sale of a home or property.
One of the crucial home loan benefits of taking up a home loan is an income tax deduction that one can claim on their interest or principal repayments. You can claim up to Rs 2 lakh on interest repayments under Section 24 B and up to Rs 1.5 lakh on principal repayment as per section 80 C.
Home loans as secured credit options are available at lower rates with interest rates beginning from just 6.65% p.a onwards. Banks & HFCs are offering lower rates of below 6.75% p.a. are Punjab & Sind Bank, State Bank of India, Kotak Mahindra Bank and LIC Housing Finance.
Unlike various other credit options, home loans being a big-ticket credit option, are available at higher loan tenures that go up to thirty years. Due to the availability of longer tenure, one can choose their loan repayment tenure based on their repayment capacity.
As RBI has strictly disallowed all lenders from charging their borrowers foreclosure/prepayment charges on loan floating rates, those home loans taken up at floating interest rates do not come with any prepayment or foreclosure charges. While many lenders offering fixed-rate home loans may charge prepayment or foreclosure charges, few lenders may not charge any prepayment fees in case the prepayment of loan is made through your own funds.
Only existing home loan borrowers are eligible to take up top-up home loans. Remember that these loans are the same as personal loans wherein borrowers are allowed to utilize their loan proceeds for meeting numerous big-ticket expenses such as car purchase, home improvement or renovation, children’s higher education, personal travel, medical expenses and others. Thus, there is zero restriction on funds’ usage on a top-up home loan, except if the loan proceeds are used for any speculation purpose. The presence of no restriction on funds usage through top home loans makes such credit options an alternative to loan against credit card and personal loans.
Also, remember that these loan options come at lower rates, which may be a little more than the underlying home loan rates with longer repayment tenures, which actually is dependent on the underlying home loan’s remaining tenure. Availability of lower rates and longer repayment tenures makes top-up loans one of the cheapest options that are available to existing home loan borrowers than their alternative credit options, namely loan against the credit card or personal loan.
Home loan is one of the biggest tax-saving credit options owing to the availability of various tax deductions available as per Section 80 C, 24 b, and 80 EEA of the IT Act. Altogether, an eligible borrower of home loan can claim an overall tax deduction of nearly up to Rs 5 lakh wherein Rs 1.5 lakh deduction is allowed on principal repayments as per Section 80 C, Rs 2 lakh is allowed on loan interest component as per Section 24 b and Rs 1.5 lakh deduction is allowed on loan interest component as per Section 80 EEA if one meets the stated eligibility criteria.
Owing to the rising housing and property prices, owning a home by paying the entire amount is near to impossible for many. As an outcome, individuals opt for the home loan option to not just avail their dream home earlier but also make most of the available home loan benefits.
Big-ticket loan amounts clubbed with long repayment tenures available on home loans result in long term repayment commitment for the home loan borrowers. Also, lenders need their home loan borrowers to fund from their own pockets a sizable proportion of overall home buying or construction cost. Moreover, lenders even check home loan applicant’s repayment capacity when evaluating their application for a home loan. All such factors need prospective applicants of home loans to review his/her financial preparedness before submitting the home loan application.
Here, we will discuss the top four tips that a home loan applicant must consider to check his/her financial preparedness:
As the RBI has allowed the lenders to fund 75% to 90% of the cost of the property through a home loan, applicants of home loans require to contribute the remaining cost of the property from their own pocket as margin contribution or down payment. The ratio of home loan amount and home loan borrowers contribution from their own pocket is referred to as the LTV ratio. Though most home loan applicants prefer choosing higher LTV ratios, opting for a higher down payment for them would be more beneficial. They are choosing a lower LTV ratio results in a lower home loan amount, which helps at lowering the overall interest outgo incurred for property purchase or construction. As a lower LTV ratio lowers the lender’s credit risk, choosing the LTV ratio enhances the home loan approval chances at a lower rate of interest. However, one should not make a higher down payment by compromising on their contingency fund, or those investments particularly meant for achieving important financial goals. Doing this may impel one to take up high-cost credit options to mitigate financial goals or meet instant monetary crunch in case of financial exigencies.
A credit score is an important parameter factored in by home loan lenders when assessing the applicants for home loans. Applicants with higher scores of 750 or more have an increased probability of availing of home loan approval. Many lenders of home loans even provide preferential rates to the ones with higher scores. Thus, the ones planning to take up home loans must consider reviewing their credit reports regularly. Doing so would provide adequate time to the ones with lower scores to undertake required measures for ameliorating their scores before submitting the loan application for home.
The ones with lower scores can slowly build their scores by taking up credit cards and making their repayments of card bills on time. As the transactions through credit cards are equivalent to availing loans, such credit card transactions get reported to the credit bureaus, who use the data for setting one’s credit score. The ones who cannot take up regular credit cards owing to unserviceable location, risky job profile, low credit score etc., can take up secured credit cards for building their score.
Just like other credit options, lenders of home loans factor in the home loan applicant’s repayment capacity when assessing their application for a home loan. Lenders generally consider lending the ones with a monthly repayment obligation for a loan, involving the new home loan’s EMI of within 60% of their income. Thus, the ones surpassing this limit must consider foreclosing or prepaying their prevailing loans to lower their EMI obligation. Also, these applicants can choose a lower LTV ratio or select longer repayment tenure to lower their overall EMI obligations.
Applicants of home loans can approach online EMI calculators for knowing their optimum EMI basis for their repayment capacity. Also, they must factor in their fund contributions towards important financial goals when estimating their disposal income. Submitting an application for a home loan once you know your repayment capacity lowers your chances of any EMI default or compromising your monthly investments towards your financial goals.
Uncertainties like job loss, illness, accident, disability etc., can massively affect your repayment capacity for loans. Failure to service home loan EMIs on time incurs heavy penalties and even adversely hampers your credit score. On the contrary, redeeming your investment for repayment of your EMIs for a home loan can morbidly damage your financial health. One of the ideal ways to ensure home loan repayment in such uncertain events is to add in the projected EMI for a home loan of at least six months to your emergency fund.
A major goal of creating an emergency fund is to keep yourself completely prepared to mitigate unavoidable expenditures such as rent, living expenses, child’s education costs, insurance premiums, loan EMIs and others in the situation of unforeseen financial emergencies or income loss.
Home loan benefits include their availability at lower interest rates starting from as low as 6.65% p.a., longer repayment tenures going up to 30 years and involvement of no prepayment fees in case of floating home loans. Other benefits include the availability of tax benefits in home loans and the availability of top-up home loan options to only existing home loan borrowers at lower interest rates than their alternative options like credit card loans or personal loans to meet fund mismatches or to face financial emergencies.
As homes involve big-ticket amounts, accumulating massive funds to finance one’s home dream may be near to impossible for many. Home loan comes across as a rescue for them as lenders allow one to buy their dream home by financing the home’s cost. Also, the interest rate on home loans is lower, with their tenures going as high as 30 years, which allows their applicants to opt for the home loan tenure basis their repayment capacity. The option of making a prepayment on a home loan is always available to their borrowers at zero cost in case of floating home loan rates. Opting for this option helps their borrowers to lower their overall interest cost.
The principal component of EMI paid on a home loan is allowed for a tax deduction as per Section 80 C. The maximum amount, which one can claim under this Section, is up to 1.50 lakh. In the case of the interest component paid on a home loan, a tax deduction of up to ₹ 2 lakh can be claimed as per Section 24 b.
Home loan applicants can avail of a better deal on home loans by widening their search for a home loan and opting for the lender offering the lowest interest rate for the optimal loan tenure as well as the loan amount.
In the case of joint home loan as the home or property may be jointly owned by the husband and wife, both are entitled to claim home loan benefits in reference to tax as per Section 24 b on interest repayment and on principal component repayment of home loan as per Section 80 C.