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Home Loan guide to calculate cost, apply, switch and pre-close.
You generally take a home loan for either buying a house/flat or a plot of land for construction of a house, or renovation, extension and repairs to your existing house
How much loan am I eligible for?
Before you start the home loan process, determine your total eligibility, which will mainly depend on your repaying capacity. Your repayment capacity is based on your monthly disposable/surplus income, which, in turn, is based on factors such as total monthly income/surplus less monthly expenses, and other factors like spouse’s income, assets, liabilities, stability of income, etc.
The bank k has to make sure that you’re able to repay the loan on time. The higher the monthly disposable income, the higher will be the loan amount you will be eligible for. Typically, a bank assumes that about 50% of your monthly disposable/surplus income is available for repayment. The tenure and interest rate will also determine the loan amount. Further, the banks generally fix an upper age limit for home loan applicants, which could impact one’s eligibility
What is the maximum amount I can borrow?
Most lenders require 10-20% of the home’s purchase price as a down payment from you. It is also called ‘one’s own contribution’ by some lenders. The rest, which is 80-90% of the property value, is financed by the lender. The total financed amount also includes registration, transfer and stamp duty charges.
Even though the lender calculates a higher eligible amount, it is not necessary to borrow that amount. Even a lesser amount can be borrowed. One should try to arrange the maximum of down payment amount and less of home loan so that the interest cost is kept at minimal.
Is a co-applicant necessary for a home loan?
Yes, it is (mostly) mandatory to have a co-applicant. If someone is the co-owner of the property in question, it is necessary that he/she also be the co-applicant for the home loan. If you are the sole owner of the property, any member of your immediate family can be your co-applicant.
What documents are generally sought for loan approval?
The loan application form gives a checklist of documents to be attached with it, along with a photograph. In addition to all the legal documents related to the purchase of the house, the bank will also ask you to submit your identity and residence proofs, latest salary slip (authenticated by the employer and self-attested by you) and Form 16 or income-tax return (for businessmen/self-employed) and the last 6 months bank statements/balance sheet, as applicable. Some lenders may also require collateral security like the assignment of life insurance policies, pledge of shares, national savings certificates, mutual fund units, bank deposits or other investments.
What is sanctioning and disbursement of loan?
Based on the documentary proof, the bank decides whether or not the loan can be sanctioned or provided to you. The quantum of the loan that can be sanctioned depends on this. The bank will give you a sanction letter stating the loan amount, tenure and the interest rate, among other terms of the home loan. The stated terms will be valid till the date mentioned in that letter.
When the loan is actually handed over to you, it amounts to disbursement of the loan. This happens once the bank is through conducting technical, legal and valuation exercises. One may opt for a lower loan amount during disbursement against what is mentioned in the sanction letter. At the disbursal stage, you need to submit the allotment letter, photocopies of title deed, encumbrance certificate and the agreement to sell papers. The interest rate on the date of disbursement will apply, and not the one as per the sanction letter. In such a case, a new sanction letter gets prepared.
How will the disbursement take place?
The loan can be disbursed in full or in instalments, which usually does not exceed three in number. In case of an under construction property, the disbursement is in instalments based on the progress of construction, as assessed by the lender and not necessarily according to the developer’s agreement. Make sure to enter into an agreement with the developer wherein the payments are linked to the construction work and not pre-defined on a time-based schedule. In case of a fully constructed property, the disbursement is made in full.
What is marginal cost of funds based lending rate (MCLR)?
A new method of bank lending called marginal cost of funds based lending rate (MCLR) was put in place for all loans, including home loans, after April 1, 2016. Earlier, loans were linked to the bank’s base rate. While new borrowers after April 1, 2016, can only take MCLR-linked loans, the borrowers on the base rate have the option to switch to MCLR.
Under the MCLR mode, the banks have to review and declare overnight, one month, three months, six months, one-year, two-year, three-year MCLR rates each month. The actual lending rates are determined by adding the components of spread to the MCLR. So a bank with a 1-year MCLR of 8% may keep a spread of 0.5%, thus the actual lending rate becomes 8.5%.
Banks may specify interest reset dates on their floating rate loans and currently have 12 months reset clause. The periodicity of reset is one year or lower. The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period.
For most MCLR-linked home loan contracts, the banks reset the interest rate after 12 months. So if someone has taken a home loan from a bank, say in May 2016, the next reset date will be in May 2017. Any revisions by the Reserve Bank of India (RBI) or the banks will not impact equated monthly instalments (EMIs) or the loan.
In a falling interest rate scenario, quarterly or half-yearly reset option is better, provided the bank agrees. But when the interest rate cycle turns, the borrower will be at a disadvantage. After moving to the MCLR system, there is always the risk of any upward movement of interest rates before you reach the reset period. If the RBI raises repo rates, MCLR, too, will move up.
What is base rate and what do you do if your home loan is linked to it?
All rupee loans sanctioned and credit limits renewed after July 1, 2010 (but before April 1, 2016) are priced with reference to the base rate. There can be only one base rate for each bank. Under it, banks have the freedom to calculate the cost of funds either on the basis of average cost of funds or on marginal cost of funds.
Post MCLR, the existing loans linked to the base rate may continue till repayment or renewal, as the case may be. Existing borrowers will also have the option to move to the MCLR-linked loan at mutually acceptable terms.
What are the costs involved in taking a home loan?
When you take a home loan, you don’t just pay the EMI on the loan. There are several other charges, though not all apply to every case. There could be a processing fee of about 0.5-1% of the loan amount. At times, the lenders waive it. For some high-value properties, two valuations are done, and the lower of the two is considered for loan sanctioning. The lenders call it technical evaluation feeMost lenders engage firms to scrutinise borrowers’ legal documents. Generally, banks include this cost in the processing fee, but some public sector (PSU) lenders charge it separately.
What is an EMI?
You repay the loan in EMIs, which includes both principal and interest. Repayment by way of EMI starts from the month following the month in which you take the disbursement.
How does one make repayments to lenders?
Generally, the lenders offer various modes for loan repayment. One may issue standing instructions to the banker to pay the instalments through ECS (Electronic Clearing System), opt for direct deduction of monthly instalments by your employer or issue post-dated cheques from your salary account.
How does my loan outstanding change?
The EMI that one pays every month has a principal component, in addition to the interest that is paid. Ideally, when one is paying the principal each month, the loan outstanding should also reduce each month and one ends up paying the interest only on the reduced loan outstanding. Most banks follow the monthly reducing basis approach except SBI which follow daily reducing basis approach.
Can you pre-close your loan ahead of schedule?
One can pre-close the loan ahead of its original tenure.
What is part prepayment of home loan? Does it help to prepay?
Partial prepayment refers to any payment made by the borrower in addition to the regular EMIs. It directly reduces the outstanding principal amount and the interest gets calculated on the reduced principal. Prepayment helps in reducing the total interest outgo as the loan tenure gets reduced. The higher the prepayment amount and the longer the period, the more will be your savings.
What documents should I receive from the bank each year against the EMIs I pay?
Every home loan lender is supposed to furnish you with a statement at the beginning of the year showing how much of total interest and principal is expected to be repaid during the year. This statement helps you to declare the figures to your accounts department as a declaration of investment proof for tax deduction. At the end of the year, the lender is supposed to send a statement again showing the actual amount of interest and principal repaid that would help you to take tax benefits.
Should one take insurance to cover home loan liability?
It is always better to cover your home loan liability and not let it fall on your family in your absence. You may either buy a pure term insurance plan or a mortgage insurance plan for an amount equal to the loan amount for a specific tenure. One is allowed to pay a single premium or regular premiums to buy any such plansIt is, however, not compulsory to buy such an insurance plan while taking home loan from the lender.
I already have a home loan? Would I get a home improvement loan?
A home improvement loan is offered to facilitate improvement of a self-owned property to existing or new customers. This loan may be used for repairs, renovations, improvement, and extension of the house. The loan works like this: The borrower will have to work out a cost estimate of the work intended to be done and give it to the lender, who will take a quotation from the contractor to verify the estimate submitted. The money is released at the rate of the construction work to the contractor to whom it is due.
Some banks also offer a ‘top up loan’ that can be availed time and again for various personal requirement based on the property value. It offers the customer additional funds against the security of the same property. To avail top up loan, the vintage of at least six months is required for the loan availed. The end use of top up loans can be furnishing of home, buying consumer durables, child’s education, family holiday or any other personal requirement
What are the tax benefits on home loans?
Of the total annual EMIs, the principal component gets tax benefit under Section 80C of the Income Tax Act. Even the partial prepayment amount qualifies for the same, but within the overall limit of Rs 1.5 lakh under Section 80C. Further, if it is a self-occupied property, the interest paid is deductible up to Rs 2 lakh in a year.
What all should one consider while taking a home loan?
Choose a lender who offers the lowest EMIs, i.e., you pay substantially less in repayments as compared to others.
The lenders offering the longest tenure of, say, 30 years many not always be a good thing. Opt only if one is sure to repay early without prepayment charges.
See if the lender includes the cost of furnishing the house in the project cost.
Choose lenders offering daily or monthly reducing balance, unlike the annual reducing balance method used by several financiers/banks.
What do you do if you have a grievance?
If you have a complaint against a scheduled bank, you can lodge it with the concerned bank in writing in a specific complaint register provided at the branches. Ask for a receipt of your complaint. The details of the official receiving your complaint may be specifically sought.
if the bank fails to respond within 30 days, you can lodge a complaint with the Banking Ombudsman. Remember that complaints pending in any other judicial forum will not be entertained by the Ombudsman. No fee is levied by the Ombudsman’s office for resolving the customer’s complaint. A unique complaint identification number will be given to you for tracking purpose. The RBI website has a Banking Ombudsmen list, along with the contact details.
Complaints are to be addressed to the Ombudsman within whose jurisdiction the branch or office of the bank complained against is located. Complaints can be lodged simply by writing on a plain paper or online at www.bankingombudsman.rbi.org.in or by sending an email to the Ombudsman. The complaint forms are available at all bank branches also.
The complaint can also be lodged by your authorised representative (other than a lawyer) or by a consumer association/forum acting on your behalf. If you are unhappy with the Ombudsman’s decision, you can appeal to the Appellate Authority in the RBI.