WEIGH YOUR
HOME LOAN OPTIONS
Acquiring a home loan is a crucial part of the home buying
process. Therefore, prior knowledge of home loans so that
you choose the one best suited to you is a must. The following
points we believe will help you to get a better insight
into the dynamics of home loan selection process.
What are the major parameters
of home loan selection ?
What is the
minimum and maximum tenure for Home Loan ?
Which is the best tenure to opt for ?
What
is Fixed Interest Rate and Floating Interest Rate ?
Does
the option of opting for Fixed or Floating Interest rate
dependent on marketing dynamics ?
What
are the various types of fees charged by the banks ?
How
much housing loan can one get ?
What
are the tax benefits that are available if one avails of
housing loan ?
What
is a Home Extension Loan ?
What
is Home Improvement Loan ?
What
are the major parameters of home loan selection?
Home loans vary from each other in three major ways and
these differences have crucial financial implications for
you. First, they differ on the length of their tenures.
Second, they vary on the way their interest rates are calculated.
The third difference is the various processing fees that
are charged. These three parameters should be used to evaluate
the cost-effectiveness of various options.
What
is the minimum and maximum tenure for Home Loan ? Which
is the best tenure to opt for ?
Loan tenures range from 5-20 years, and you need to choose
your depending on factors like number of working years left,
repayment ability and cash flow needs. The longer your tenure,
the greater your total interest costs.
The Longer, the Costlier
Interest cost goes up with the length of the home loan tenure.
Computed here are EMIs for a Rs 10 lakh loan at 7.5% per
annum for 10, 15 and 20 year periods
| |
10
years |
15
years |
20
years |
| EMI
(Rs.) |
11,870 |
9,270 |
8,056 |
| Total
interest outflow |
4,24,421 |
6,68,622 |
8,52,102 |
| |
|
|
|
Of course, a longer tenure does help in reducing
the equated monthly instalments (EMIs). Experts advise borrowers
to aim at fully repaying the loan before they stop working
so that the retirement income is not dented by repayment
obligations. Therefore, the lesser number of years you have
to retire, the shorter should be your loan tenure.
What
is Fixed Interest Rate and Floating Interest Rate?
While fixed rate loans are those whose rates are
fixed for the tenure of the loan, in case of floating rate
loans, the rate is benchmarked to a retail lending rate
of the lending institution and moves in tandem with it.
This means in case of floating rate loans, the total interest
you pay out during the tenure is dependent on the way interest
rates move during it. The rate is reviewed periodically
every six months and refixed in relation to prevailing market
conditions.
Currently, fixed rate loan schemes carry interest rates
that are higher by 0.5 to 0.75 percentage point6s compared
to the floating rate loans. At this point, we need to point
out that many home loans being marketed as fixed rate products
have provisions in the loan agreement that allow the lender
to revise the rate after a certain period of time in the
tenure. This effectively renders such loans as floating
rate loans.
Does
the option of opting for Fixed or Floating Interest rate
dependent on marketing dynamics ?
You should opt for a fixed rate loan only if interest
rates bin the economy are either rising or have stabilized.
They are also useful in the tenure is small, such as five
years.
Conversely, if interest rates are falling either because
of economic downturn or governmental intervention, and are
likely to stabilize at a lower level by the end of your
tenure, then opt for floating rate. Given the huge interest
rate differential in India and the developed world, one
expect that with reforms in the interest rte regime-making
it more market determined-and with freer inflows of international
capital, in the long term, interest rates in India would
be lower than what they are today. If you share this perspective,
you should opt for a floating rate loan for longer tenures.
What
are the various types of fees charged by the banks ?
The fees charged by a lending institution for processing
loans have one or more components. However, the components
to be charged are at the discretion of the banks and varies
from time to time. We are providing the list of components
that generally falls under the preview of lending fee -
Processing and administrative charges: They range
between 0.25-0.5 per cent of the home loan amount sought
from the home loan provider.
Mortgage fee. The charge is usually 0.5-1 per cent per annum
of the property value and is in the form of stamp duties
and mortgage charges for the property value that is being
offered as collateral to the lender.
Commitment charge : This charge is generally 1
per cent of the loan amount and is recovered by the bank
if a borrower has not completed the loan withdrawal within
the stipulated period.
Prepayment charge : This is usually 2 per cent
of the outstanding loan amount and also depends on terms
in the home loan agreement. This is recovered from the borrower
if he pre-pays the loan amount in excess of the stipulated
limit.
Loan swap charges :To discourage the practice of
borrowers shifting to another Lender offering lower rates,
banks are now charging a loan swap charge of 2 per cent
on the loan outstanding on the date of he full premature
repayment of the home loan.
Technical and legal fee : In addition to the above
charges, some banks also charge for securing an independent
legal opinion on issues like the owner's title to the property
and an independent property valuation report. There could
also be charges for examining technical aspects of a property
like adherence to sanctioned plans.
How
much housing loan can one get ?
Housing loan will be sanctioned depending upon your repayment
capacity and according to your income. Your spouse's income
can be included, if you want to increase the amount of your
loan. The maximum loan that can be sanctioned varies with
housing finance companies and ranges from Rs. 10 lakh to
Rs. 1 crore.
What
are the tax benefits that are available if one avails of
housing loan ?
Tax benefits are available on both the principal and interest
components of the loan as per the Income Tax Act. The upper
limit of the amount of deduction of interest repayment allowed
from your gross total income is now Rs. 1,50,000 p.a. 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. 20,000.
What
is a Home Extension Loan ?
A Home Extension Loan is a loan which helps you to meet
the expenses of any alteration like extension / expansion
or modification of your home. You can avail of a Home Extension
Loan, after obtaining the requisite approvals from the Municipal
Corporation.
What
is Home Improvement Loan ?
A Home Improvement Loan is one that is made available for
you to do certain external work like structural repairs,
waterproofing or internal work like tiling and flooring,
plumbing, electrical work, painting etc.,
|
