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What is Home Loan?

Updated on: 14 Dec 2021 // 7 min read // Home Loans
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What is Home Loan?

For most, home loans are the sole means to fulfil their dream of owning a home owing to the involvement of big-ticket amounts. However, the initial obstacle towards approval of a home loan application is to meet certain eligibility criteria such as credit score, job profile, monthly income, employer's profile, EMI affordability, the title of the property, etc. Meeting such parameters can help enhance your home loan eligibility prospect.

Here in this article, we will discuss, what are home loans, what are the different types of home loans available in India, the benefits of availing of a home loan, and other crucial aspects of home loans. 

What are Home Loans?

What are home loans, home loan meaning, what is home loan etc. are the general searched queries by the applicants looking for availing a home loan. Here, we have explained in detail - what is home loan?

A home loan is a credit option used by borrowers to fund their dream home. It is through home loans that individual borrowers can borrow a big-ticket amount from the financial institution at a specific rate of interest to be repaid in the form of EMIs for longer tenures extending up to 30 years. One can avail of financing through a home loan of up to 75-90% of the property's value basis of the loan amount. Note that a home loan is a secured loan wherein the home you purchase through loan is taken as security by the financial institution. In events of constant EMI defaults, lenders have the right to recover the loan amount through the sale of a house. 

Types of Home Loans Available in India

Plot loan: Plot loans assist one to buy a plot of land for the construction of own residential home. However, the LTV ratio and the loan repayment tenures offered by few banks and the HFCs on plot loans are slightly lower as compared to their regular home loans. 

Construction home loan: Construction home loan is provided to the ones who already hold a plot and need funds for funding the construction of their residential home property on the land. Though the LTV ratio, rate of interest and loan tenures for them are generally the same as regular home loans, few lenders might provide lower loan repayment tenures for construction home loans. 

Rural housing loans: Such loans are looked at as specialized offerings that get extended to the home loan applicants from rural regions to mitigate their unique requirements. 

Affordable housing loans: Affordable home loans are specifically aimed at the ones hailing from lower-income groups of society. 

Home renovation/improvement loan: A home renovation/improvement loan is provided to the ones looking to either renovate or make some repairs to their existing homes. Most of the lenders offer such loans for shorter repayment tenures than regular home loans. 

Bridge home loan: Bridge home loan is basically aimed at those home loan owners aspiring to enhance from their existing houses into new bigger sized houses at better locations. As such loan applicants might witness a short term liquidity crisis on account of the time lag between the sale of their existing home and purchase of their new home, bridge home loans are formulated to meet such fund mismatches. The maximum loan repayment tenure for such loans is 2 years for a ready property. However, for those properties under construction, maximum repayment tenure can go as high as 5 years. 

NRI home loan: NRI home loans are offered to the NRIs, PIOs, OCIs to fund their construction/purchase of housing property in India. 

Special loans for the government employees: Many of the lenders provide separate categories of home loans to their PSU and government employees at concessional rates and other better terms & conditions. 

Benefits of Home Loan

Tax benefits

One of the important benefits of availing of a home loan is an income tax deduction that you can claim on principal and interest repayments. One can claim up to Rs 1.5 lakh on the principal repayments under section 80 C and up to Rs 2 lakh on the interest repayments under section 24 B. 

Lower interest rate

Home loans owing to their secured nature, come at lower interest rates, with rates starting at just 6.65% p.a. onwards. Financial institutions offering lower home loan rates of 6.85% p.a are Punjab & Sind Bank, Kotak Mahindra Bank, LIC Housing, Bank of Baroda, ICICI Bank, Union Bank of India and Punjab National Bank. 

Long repayment tenure 

Unlike other loans, home loans being a big-ticket loan, come with higher repayment tenure extending up to 30 years. Owing to their longer tenure availability, one has the freedom to opt for the loan tenure basis their repayment capacity. 

Zero prepayment penalty

As RBI has disallowed lenders from charging prepayment/foreclosure charges on loans floating interest rates, home loans availed at floating rates do not attract any prepayment charges. Note that even for fixed-rate home loans, most lenders generally do not charge prepayment charges if loan prepayments are conducted from your own funds.

Availability of top-up home loan

Existing home loan borrowers become eligible to opt for top-up home loans. Note that such loans, similar to personal loans, allow their borrowers to use their loan proceeds for various big-ticket expenses like the home renovation or improvement, car purchase, personal travel, children's higher education, medical expenses etc. Thus, there is no restriction on top-up home loan's fund usage except if used for any speculative reason. The absence of restriction on top-up home loan's fund usage makes them an alternative to loans like personal loans & loans against credit cards. 

Also, note that such loans come at lower interest rates, which are just slightly higher than the underlying home loan interest rate with longer tenures that depend on the underlying home loan's residual tenure. Lower interest rates clubbed with longer tenures make top-up home loans the cheapest options for the existing home loan borrowers as compared to their alternatives like personal loans or loans against credit cards. 

Best Home Loan Interest Rates 2021

Home loan interest rate (%) 
Name of LenderLoan Amount (Rs) 
Up to Rs 30 lakhAbove Rs 30 lakh & up to Rs 75 lakh Above Rs 75 lakh
Public Sector Banks
Punjab & Sind Bank6.65-7.606.65-7.606.65-7.60
State Bank of India6.70-7.506.95-7.657.05-7.75
Bank of Baroda6.75-8.356.75-8.356.75-8.60
Union Bank of India6.80-7.606.90-7.656.90-7.65
Punjab National Bank6.80-7.756.80-7.906.80-8.00
Central Bank of India6.85-7.306.85-7.306.85-7.30
Bank of India6.85-8.356.85-8.356.85-8.35
Canara Bank6.90-8.906.90-8.906.90-8.90
UCO Bank6.90-7.256.90-7.256.90-7.25
Bank of Maharashtra6.90-8.056.90-8.406.90-8.40
IDBI Bank*6.95-10.056.95-10.056.95-10.05
Indian Bank**7.00-7.257.10-7.357.20-7.40
Indian Overseas Bank7.057.157.30
Private Sector Banks
Kotak Mahindra Bank ^6.65-7.306.65-7.306.65-7.30
ICICI Bank ^^6.75-7.306.75-7.457.10-7.55
Axis Bank6.90-11.506.90-11.506.90-8.55
HSBC Bank^^^7.20-7.757.20-7.757.20-7.75
Karur Vysya Bank7.35-9.557.35-9.557.35-9.55
Karnataka Bank7.50-8.757.50-8.757.50-8.85
Federal Bank7.65-7.707.70-7.757.75-7.80
Dhanlaxmi Bank7.85-9.007.85-9.007.85-9.00
South Indian Bank7.95-9.457.95-9.457.95-9.45
Tamilnad Mercantile Bank8.258.258.25

Bandhan Bank

(GRUH Home Loan)

8.50-11.758.50-11.258.75-11.25
RBL Bank10.20-12.8010.20-10.709.50-10.00
Housing Finance Companies (HFCs)
LIC Housing6.66-7.856.66-8.056.90-8.05
HDFC Ltd.***6.75-7.457.00-7.707.10-7.80
Bajaj Finserv6.75-8.506.75-8.506.75-8.50
Tata Capital>=6.90>=6.90>=6.90
PNB Housing7.35-9.357.35-9.557.70-9.55
GIC Housing Finance>=7.45>=7.45>=7.45
Repco Home Finance>=7.75>=7.75>=7.75
Indiabulls Housing>=8.65>=8.65>=8.65
Aditya Birla Capital9.00-12.509.00-12.509.00-12.50
Reliance Home Finance9.75-13.009.75-13.009.75-11.00
*10 bps concession for women borrowers under limited period offer. Conditions apply. 
**Interest rate of 6.85%-7.00% p.a. offered under IND AWAS Scheme 
^ Special HLBT rates starting at 6.65% p.a. for any loan amount. 
^^ HLBT interest rate range of 6.75%-7.55% p.a. for any loan amount, with repayment from ICICI Bank Account 
^^^ HLBT offered at an interest rate of 6.64% p.a. 
***Special interest rates available under limited period offer. Valid for disbursements availed on or before 30th September 2021 
Rates as of 13th July 2021 

Eligibility Criteria

Financial institutions check on various parameters before approving your home loan application. The initial thing that lenders evaluate is one's credit report to understand their past repayment history and know their score. Usually, a credit score equalling 750 and above is preferred by home loan lenders. Other factors that lenders take into consideration are: 

* Age

* Annual income

* Employment type

* Margin requirement

Documents Required

Listed below are the main documents that are required for applying for a home loan: 

* Identity and residential proof

* Past 6 months bank statement

* Processing fee cheque

* Recent salary slip

* Form 16

Home Loan EMI Calculator

Remember, EMIs depend on the loan amount, interest rate and loan tenure. Though higher EMI results in shorter loan tenure & lower interest amount, lower EMI results in longer repayment tenures & higher interest amount. Thus, the home loan applicant must take the help of online home loan calculators for finding the optimum EMI basis for their repayment capacity. Such home loan applicants should even ensure to factor their insurance premiums, unavoidable monthly expenses, etc., to know their optimum home loan EMIs. Filling up the application for a home loan after having knowledge about the optimum EMI will lower one's chances of any EMI default owing to aggressive payment schedules. 

How to Apply for a Best Home Loan Option in India?

Owing to the advancement in technology, most lenders have come up with their own respective online platforms where applicants can easily apply for a home loan with all required documents. Also, those looking to visit their bank branch can even consider visiting the bank to inquire regarding various available home loan options. 

Once you submit your home loan application, the lender begins with their loan processing evaluation, where they first check your credit report, and then your income, employer's profile, job profile, EMI affordability etc., to decide whether to approve or turn down the loan application for home. 

FAQs

What is home loan?

A home loan is a secured loan availed by those looking to buy a home. Through home loans, one can borrow the big-ticket amount from banks/HFCs at a particular interest rate, which is repaid in the form of EMIs for tenures going up to 30 years. 

What is home loan and its types?

A home loan is a credit option availed by individuals to finance their dream home. Various types of home loans are plot loans, construction home loans, rural housing loans, home loan renovation/improvement loans, bridge home loans, NRI home loans, and special loans for government employees. 

What is EMI for a 20 lakh home loan?

For a home loan amount of Rs 20 lakh available at 30 years repayment tenure at an home loan interest rate of 6.75% p.a., the EMI would be Rs 12,972. If the tenure reduces to 20 years with all loan components remaining the same, the EMI would be Rs 15,207. 

What should I consider before applying for a home loan?

Before availing of a home loan, you should consider checking the listed: 

* Ensure your credit score is good, i.e. 750 or above

* Make sure you have accumulated adequate corpus for your home loan down payment

* Ensure your monthly loan repayment obligation, including the new home loan EMI is within 50% of your monthly income

* Make sure to include your expected home loan EMI into your contingency fund.

Can I pre-close my home loan?

Yes, home loan borrowers can prepay whenever they get sufficient surpluses without bearing any prepayment charges in case of floating home loan interest rate. However, note that your home loan prepayment should not be at the cost of your emergency fund or crucial financial goals.