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Home Articles Home Loan Buyers Guide: A Complete Step by Step Procedure

Home Loan Buyers Guide: A Complete Step by Step Procedure

IndianMoney.com Research Team | Updated On Tuesday, October 01,2019, 04:59 PM

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Home Loan Buyers Guide: A Complete Step by Step Procedure

 

 

Home Loan Buyers Guide: A Complete Step by Step Procedure

A home loan is a type of loan you avail to meet your financial needs when it comes to buying a house. In this article we'll explain what is a home loan, its types, the stages involved in availing a home loan, documents required and every that point you need to know before applying for a home loan.

What are home loans?

Home loans are availed from banks to buy or repair/renovate a house. Home loans are provided based on the market value, mainly estimation given by banks. Banks do not consider other charges like Stamp Duty, Registration Charges while sanctioning your home loan.

Home loans are repaid through monthly installments (EMI) spread over a tenure of 20 years. Some of the banks provide housing loans for a tenure extending up to 25 - 30 years.

What is a home improvement loan?

These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting.

Stages Involved in taking a loan:

Application: Apply for the loan with all the proper documentation.
Sanction: You get approved for a specific loan amount based on value of the property and repayment capacity.
Disbursement: Your loan amount is transferred to you.

Documents Required for Home Loan:

  • Proof of age
  • Proof of continuity in the job fo ther last two years or Form 16
  • Bank statement for last six months
  • Latest property tax paid receipt
  • Sale agreement and title documents in favor of the seller
  • Sale agreement or construction agreement with builder

Collateral for the home loan:

Security for the home loan is the deposit of the title deeds of the property for which the home loan is sanctioned and is marketable, clear and free from any encumbrances.

Applicants for the home loan:

Co-Applicant of a loan is the second signer of the loan and has as much responsibility to pay back the home loan amounts as the primary applicant. Your spouse can be a Co-Applicant of the Loan.

Should you take a Fixed Rate Or Floating Rate home loan:

Fixed interest home loans allow the repayment in fixed equal monthly installments over the entire period of the loan. The interest rates here are fixed and do not depend on market fluctuations. Here fixed rate is about 1-2.5% more than floating rate.

Floating rates have a certain base rate called index and a floating element called spread. If the base rate varies the floating rate varies .Market fluctuations affect interest rates on the floating rate home loan.

Home Loan Tax benefits:

Principal portion of EMI can be claimed up to a maximum of INR 1.5 Lakh under Section 80C.Interest portion of EMI can be claimed up to INR 2 Lakhs under section 24.

If you buy a house for the first time:

You can avail home loan tax exemptions only if the stamp value doesn't exceed Rs. 45 lakh. Also, first time home buyers are eligible for additional home loan interest tax benefit of Rs. 50,000.

See Also: Home Loan Interest Rates

Prepay your home loans:

RBI has made it mandatory for all banks to stop the practice of charging penalty on pre payment of home loans taken on floating rate.

Down Payment

You need to pay 10-20% of the value of the house as down payment.

Processing Fee of the home loan:

This is 0.5 to 1% of the total home loan amount sanctioned. Banks do not refund the home loan processing fee as it is non refundable for whatever reason. Check the bank’s home loan eligibility criteria before applying for a loan.

See Also: Apply For Home Loan

What is Home loan balance transfer?

Home Loan Balance Transfer is a refinancing option to get the existing home loan in one bank transferred to another bank in order to avail the benefits of a lower interest rate.

When should you opt for a home loan balance transfer?

Your existing home loan is set at a very high interest rate and despite discussions with your bank there is no response.

If your bank has reduced rates for new borrowers and you are an existing borrower with a high credit score. You approach the bank using the home loan balance transfer as a bargaining chip in order to secure a lower rate from the bank.

If you have taken a home loan for a 15 Years tenure and you still have about 10 years of repayment left and the interest rates offered by another bank are 1% lower than the rates charged by your bank on the home loan then you use the balance Transfer Option where you shift the outstanding loan amounts from your bank to the other bank.

Home loan for a second house:

You can also take a home loan to purchase a second house as a long term investment. The interest you pay on the home loan is fully tax-deductible if you give the second house on rent. You can also use the rent you collect to repay the home loan on this house.

How to Avail Home Loan?

"Be Grateful For The Home You Have Knowing That At This Moment, All You Have Is All You Need". This is a famous saying explaining the importance a home plays in our family lives. Each of us wants to have that elusive roof over our head. Which of us would like to leave the fate of our families to chance? We all have heard the saying …Home Is Where The Heart Belongs. However the price of real estate is skyrocketing these days..How do we afford it.? A Home Loan is the obvious answer.

Documents Required For a Home Loan and Eligibility criteria

Here for a salaried employee we require the Application form with photograph, Proof of Age, Identity and Residence proof, Latest Salary Slip, Form 16, Last 6 month’s bank statements, Loan processing fee cheque. For a self employed person he would require to show his Educational qualifications, Business profile and the last 3 years profit and loss account and the balance sheet.

Steps Involved in taking a Home loan:

Application: Submit a completely filled in application with all the necessary documents.

Sanction: You get approved for a specific loan amount based on value of the property and repayment capacity.

Disbursement: Transfer of loan amount.

see Also: Home Loan Interest Rate

Check your home loan eligibility:

Here I would like to explain how banks calculate your net income when loans are sanctioned for your homes. Mr  Verma wants a home loan sanctioned by the bank for an amount of INR 35 Lakhs. He doesn’t have any other car or personal loans. Bank rules generally have eligibility criteria to get home loan which ranges to about 60 times monthly net income. Here Mr. Verma had a word with the bank executive over the phone and stated that his monthly income was around INR 60000. Since the rule of thumb is about 60 times the monthly net income the bank agent stated that his 35 Lakh would be sanctioned. An elated Mr Verma was filled with relief. Here things changed drastically once he submitted the necessary documents, salary slips, and paid loan processing fees. The salary slips still showed a net monthly income of INR 60000. 

Problems Faced By Home Loan Takers:

  • Rejection At First Stage: Here many times loans are rejected at the first stage itself due to ineligible age criteria, income criteria, proper documents not been submitted, Not passing the necessary bank field investigations. The best way to solve this problem would be to check the criteria of the lending bank and apply only to that bank which matches our profile.
  • Processing Fee Not Refunded:  Here the banks do not refund the loan processing fee as it is non-refundable for whatever reason. Here it is very necessary to check the bank’s loan eligibility criteria before applying for a loan.
  • Desired Loan Amounts Not Sanctioned: Here this depends on the repayment capacity of the borrower.
  • Fixed Rate Or Floating Rate Dilemma:  Here fixed interest home loans allow the repayment in fixed equal monthly installments over the entire period of the loan. The interest rates here are fixed and do not depend on market fluctuations. Here fixed rate is about 1-2.5% more than the floating rate. Floating rates have a certain base rate called index and a floating element called spread. Here if the base rate varies the floating rate varies. However it has a drawback of uncertain monthly installments. Here spread cost covers risk costs, profits and bank charges.
  • Difference in Property Valuations: Here the bank has its own legal, financial and technical appraisal teams to evaluate the necessary property. The property value derived may be significantly lower than the price we quote for the property. Here the borrower needs to evaluate the property before applying for the home loan.
  • Down Payment:  Here the borrower needs to fund at least 10-20% of the entire loan amount as down payments. For an amount of 10 Lakhs, this can be approximately 2 Lakhs which unless payed the bank will not sanction the requisite amounts. Here loans are paid based on the EMI which includes Principal, Interest, and Tenure of loan.
  • Method of Computation which includes Monthly Reducing Balance in which the principal on which you pay interest reduces every month. Annual Reducing Balance is one in which the principal is reduced at the end of the year.

Prepayment Of Home Loans:

  • Here the most obvious benefit out of prepayment is that the interest payout reduces. Prepayment of home loans results in an immediate reduction of the outstanding principal of home loan which results in less interest being accrued on the loan account. Here you can reduce the number of Home Loan installments or keep the number of installments the same but reduce the EMI.
  • Here the RBI has made it mandatory for all banks to stop the practice of charging a penalty on prepayment of loans taken on a floating rate. All major banks have waived off the prepayment penalty and are prohibited from levying foreclosure charges.
  • Here many banks have abolished the prepayment charges on both fixed and floating rate home loans. This would give total freedom to the home loan holders to switch banks if they perceive that they are getting a better deal from some other lender.
  • Here the loan holder has to decide if prepayment is a better option or if he has an investment option which gives him good returns should he consider this option.

See Also: Tips For Home Loan EMI Repayment

Collateral For Home Loan

Security for the loan is the exclusive charge of the property to be financed by way of the deposit of the title deeds which should be marketable, clear and free from any encumbrances.

Co-Applicants For the Loan:

Co-Applicant of a loan is the second signer of the loan. The Co-Applicant has as much responsibility to pay back the loan amounts as the primary applicant. Here the spouse can be a Co-Applicant of the Loan. Here we have blood relations to be Co-Applicants but not the sister of the primary applicant.                                                                                

Frequently Asked Questions Regarding Taxation Of Home Loans

Home Loan Taken and Possession Received But I Stay Out Of Town

Here a person is eligible to purchase a home on loan take possession and stay out of town on work. Here you can leave the house vacant or give it on rent. The rent is an earning and must be added to taxable income.

Can I take Advantage of tax benefits from a home loan as well as claim House Rent Allowance?

Here a person can take a loan for a house and take possession of the ready house. He can then rent it out. He stays on rent and pays rental amounts. He gets HRA Benefits as well as deductions under section 80C and section 24.

What happens If  I sell my house and buy a new house?

Here if the house is held for more than 3 years it is applicable for Long Term Capital Gains. Here a person can buy a residential property and there is no tax liability from such a sale under section 54EC.He can also invest the proceeds in REC or NHAI Bonds as stated under section 54EC. 

What is Special If the RBI Cuts Repo Rate?

If the repo rate is cut by the RBI, banks can borrow money from the RBI, at a lower interest rate. Banks can collect money paying a lower rate of interest. (Banks get money at a lower cost). Banks then lend this money to you and other borrowers, who avail loans. If banks can collect money at a lower rate, they would be happy to lend to you at a lower rate. Repo rate cut is done with the hope, that banks will pass on the benefit of lower costs to you (the borrower). Banks would cut the lending rates on your loan and you would be able to pay back your loan faster.

How Do You Benefit From a Repo Rate Cut?

Banks would cut the interest rates on your loan…Hopefully immediately. Simple…Banks could keep your EMI same and reduce the tenure of your loan. This helps you to pay back your loan, a few months or even a few years earlier.  

Banks might reduce your EMI’s and increase the tenure of your loan. You get the benefit of paying back your loan with a lower EMI. You will not struggle to make your EMI payments in time, if you are paying lower EMI’s.

Either way…You’re a winner.

See Also: Business Loan Interest Rates, Calculations And Eligibility

Why Banks Can Reduce Your Loan Rates?

Banks used to lend at a base rate. The lowest rate banks can lend is called the base rate. (Banks do not lend below the base rate). The base rate of most banks is between 9.3% to 9.7%.

Many banks have stopped following the base rate, to calculate interest rate on loans. Now banks have shifted to MCLR (marginal cost of funds based lending rate), to calculate interest rate on loans. Banks would fix the lending rates, based on the interest rate they pay their depositors. Most banks have also cut interest rates they pay you on fixed deposits. (Interest rates on FDs have been slashed). Most banks pay you interest on fixed deposits at 7.25% to 7.5% a year. This was much higher in earlier years.

The Government has also reduced interest rates on small saving schemes like PPFNSC, Postal Saving Schemes, SCSS, and Sukanya Samriddhi Yojana. A cut in interest rates of small saving schemes by the Government, gives banks the chance to cut interest they pay you (depositor) on fixed deposits you invest with the bank. If banks cut fixed deposit rates they pay you (depositors), they can also cut loan rates if you avail a loan from them. In past times if banks cut deposit rates on FD’s, you could flee to post office deposits. Now you have no place to run.

See Also: Repo Rate Cut: Home Loan Rates to Fall?

Home loans cheaper with rate cut?

The RBI has cut repo rates by 50 basis points. A number of public and private sector banks have cut base rates. You dare to dream. Finally your dream home is in sight. But does a cut in the base rates by banks mean, the interest rates on your home loan is coming down?

How do banks calculate the interest on your home loan?

Banks fix the interest on your home loan based on their base rate. Base rate is the minimum lending rate of the bank. Banks do not lend below the base rate. Each bank fixes its own base rate. Banks are free to decide the base rate based on their cost of funds. (The interest banks pay on the savings/current/fixed deposits invested with them).

Banks have administrative and other expenses. They also need to earn a profit on the home loan they give you. Spread takes into account the expenses and profits of the bank, when it has to lend you a home loan.

Your home loan lending rate is calculated based on:

Base rate + Spread.

Does a cut in the base rates by banks mean the interest rates on your home loan is coming down?

Many banks have cut base rates but have also increased the spread. A spread is a rate charged over and above the base rate. This means that if the bank has reduced the base rate, it will add a spread to this rate. If you are a new borrower, you could avail a home loan at an interest rate, which is much lesser than what it was last year. This should encourage you to avail a home loan. You must also note the processing fee, documentation, and stamp duty fees while availing a home loan.

What if you are an existing borrower with the bank?

If you are an existing home loan borrower with the bank and the bank has cut base rates, the interest rates on your home loan will reduce. The bank will not touch the spread and it remains the same. You pay a lower rate of interest on your home loan due to the cut in base rates. If you had availed a home loan from the bank when interest rates were high, the bank would have reduced the spread. This was done to encourage you to avail a home loan, when interest rates were high. Now when base rates are cut, your spread remains the same, but you get the home loan at a lower interest rate.

If a new customer avails a home loan he will get the loan at the reduced base rate (same as the existing borrower) but at a higher spread. This means some existing borrowers of home loans with banks, are charged a lower interest rate than new customers. You are an existing borrower of a home loan with a bank. The bank has reduced the base rate.

Does this mean a cut in your EMI’s?

No, the EMI you pay on your home loan remains constant. The bank however reduces the tenure of your home loan. This means your home loan gets repaid faster.

Should you switch your home loan when banks reduce the base rates?

You want to switch your home loan to a new lender. Must a lower interest rate be the only thing you consider? No, you must also take into account the remaining tenure (time period), left behind on your home loan.

You must also consider the foreclosure charges of the bank where you have availed the home loan, as well as the prepayment charges of the new bank, where you plan to switch the loan. You would also have to pay charges for the bank to check your property, documentation, and stamp duty fees.

You have just started paying the EMI’s on your home loan and have a long tenure remaining on it. Another bank charges a much lower interest rate on their home loans. If the savings in interest, after accounting for the cost of switching the home loan is high, then you must switch your home loan. However, if the end of the tenure of your home loan is fast approaching, then you must not switch your home loan.

The festive season is here. Be smart and choose a bank that offers a home loan with low-interest rates.

Checklist before applying for a Home Loan

  • Check your eligibility criteria and the interest rate charged on the home loan
  • Maintain a good credit score with CIBIL in order to get the home loan sanctioned as well as a lower interest rate
  • There is no prepayment penalty on the floating rate home loan
  • Banks do not levy foreclosure charges on floating rate loans
  • Banks charge around 0.5% -1% of the total home loan amount applied for as a processing fee. This is a non-refundable amount and is not returned in case the home loan is not sanctioned.
  • The bank charges a prepayment penalty which is basically 1-2% of the outstanding loan amount if the fixed interest rate home loan is prepaid
  • If your bank has reduced rates for new borrowers and you an existing borrower with a high credit score are charged a higher rate you can approach the bank using the balance transfer as a bargaining chip in order to secure a lower rate from the bank.
  • Banks conduct a legal check on your documents namely the title deed, the sale deed as well as the encumbrance certificate to validate their authenticity and make sure the home/land does not have any pending dues associated with it.
  • Have your home/apartment constructed by a reputed builder/developer as they are well versed with the banks legal and due diligence processes which makes a home loan easier to avail.

How can a home loan help one save on his taxes?

A home is considered a once in a lifetime investment. True financial planning involves not only planning for the purchase of the house but also availing of the tax deductions in order to speed up the process of loan repayments. Housing is a sector which the Government maintains a prime focus on. Low-cost housing and providing all citizens of India a roof over their head is one of the main agenda’s of the Government. If one is purchasing a house, repairing his house or renovating the house a tax benefit can be availed. So how can one avail of tax benefits in order to save on the home loan?

  • Home loan is financed by banks to buy or repair/renovate a house. Home loans are provided based on the market value, mainly estimation given by banks or the registration value of the property. Banks do not consider other charges like Stamp Duty, Registration Charges while considering the home loan
  • Home loans are repaid through monthly installments (EMI) spread over 20 years. Some of the banks provide housing loans for a tenure extending up to 25 - 30 years

Why does one take a home loan?

One can avail a loan for the construction of his house. Loan is available for the construction of a new home on a said property. The documents that are required in such a case are slightly different from the ones submitted for a normal Housing Loan. If one has purchased this plot within a period of one year before starting construction of the house, most HFCs will include the land cost as a Component, to value the total cost of the property. In cases where the period from the date of purchase of land to the date of application has exceeded a year, the land cost will not be included in the total cost of property while calculating eligibility.

What is a home improvement loan?

These loans are given for implementing repair works and renovations in a home that has already been purchased, for external works like structural repairs, waterproofing or internal work like tiling and flooring, plumbing, electrical work, painting, etc. One can avail of such a loan facility, after obtaining the requisite approvals from the relevant building authority.

What are the taxation aspects for a home loan?

  • Home loan Equated monthly installments have two components Principle and interest. These two are treated separately for the purpose of taxation
  • The repayment of the principle amount of the loan up to INR 1 Lakh per annum is eligible for a tax deduction under Section 80 C. One is eligible for a deduction under this section irrespective if one stays on the property or gives it out for rent.
  • The amount one pays as stamp duty when a house is bought and the amount one pays for the registration of the documents of the house can be claimed as deductions under section 80C up to INR 1 Lakh.
  • Under Section 24 one gets a tax deduction on the interest portions up to an amount of INR 1.5 Lakhs .If the property is self-occupied then this is the maximum deduction one can avail .If ones property is let out or deemed to be let out then the entire interest portion one pays on the home loan can be claimed as a deduction against the rental value or the deemed rental value .If one lets out his property then the actual amount paid as interest is eligible for a deduction. There is no maximum limit. This translates to be very useful when one stays in a self occupied house and gives the other house on rent.
  • If one takes a loan for the purpose of reconstruction, renovation or the repair of one’s property then under Section 24 (b) the amount of deduction is restricted to INR 30000.One can claim this deduction irrespective of whether one is residing in the house or has given it on rent

See Also: Types of Taxes in India

Let us consider the following example in order to understand tax savings on a home loan. Mr Ramesh earns a salary of INR 7 Lakhs per annum. He takes a loan of INR 35 Lakhs for a tenure of 20 years. The rate of interest charged on the home loan is 10.25%.The EMI is INR 34,358 per month or a yearly value of INR 4,12,290

Gross salary

INR 7 Lakhs

Loan amount

INR 35 Lakhs

Tenure

20 years

Rate of interest

10.25%

EMI (Yearly)

INR

4,12,290

Principal (Yearly)

INR 56,129

Interest (Yearly)

INR 3,56,162

Table showing the yearly loan breakup

Year

EMI (Year)

Principal (Year)

Interest (Year)

O/S Balance

1

4,12,290

56,129

3,56,162

34,43,871

2

4,12,290

62,160

3,50,130

33,81,712

3

4,12,290

68,839

3,43,451

33,12,872

4

4,12,290

76,236

3,36,054

32,36,636

5

4,12,290

84,428

3,27,862

31,52,208

6

4,12,290

93,501

3,18,790

30,58,707

7

4,12,290

1,03,548

3,08,743

29,55,160

8

4,12,290

1,14,674

2,97,616

28,40,485

9

4,12,290

1,26,997

2,85,293

27,13,488

10

4,12,290

1,40,643

2,71,647

25,72,845

11

4,12,290

1,55,756

2,56,534

24,17,089

12

4,12,290

1,72,493

2,39,797

22,44,596

13

4,12,290

1,91,028

2,21,262

20,53,568

14

4,12,290

2,11,555

2,00,735

18,42,013

15

4,12,290

2,34,288

1,78,003

16,07,726

16

4,12,290

2,59,463

1,52,827

13,48,262

17

4,12,290

2,87,344

1,24,946

10,60,919

18

4,12,290

3,18,220

94,070

7,42,698

19

4,12,290

3,52,415

59,875

3,90,284

20

4,12,290

3,90,284

22,007

0

Things To Complete when You Close Home Loan

Which is the happiest day of your life? It has to be the day you pay the last EMI on your home loan, or prepay the full outstanding balance on your home loan. Now you feel, you truly own your home. No one can take your home from you. You feel a great burden has been lifted from your shoulders.  A sense of relief. You have paid back the last home loan EMI and closed your home loan! Is the game over? In the excitement of closing the home loan, do not miss these points.

Collect Your Original Documents From The Bank

When you avail a home loan, you have to submit certain original documents, to get your home loan sanctioned. You must collect your original documents, when you close your home loan. Some of these documents are:

  • Sale Deed
  • Conveyance Deed
  • Possession Letter
  • Power of Attorney
  • Payment Receipt
  • Cancelled Cheque

You need your original documents, if you want to sell your house or avail a loan against property. When you avail a loan from a bank or a lender, the bank maintains a list of the original documents, they have taken from you. They give you a copy of the list. Your bank is now accountable for the original documents it has taken from you. Do not wait for your bank to courier your original documents. You must collect the original documents yourself, from the bank.

Collect The No Due Certificate

When you repay your loan in full and there is no outstanding loan left, your bank (lender) gives you a certificate, called the No Due Certificate. The No Due Certificate has the seal of the bank. The bank is supposed to give you the No Due Certificate, when you close your home loan. If the bank has not given you the No Due Certificate, you better ask for it.

Remove The Lien From The Registrar Office

What is the meaning of the word “Lien”?  Lien means the bank reserves the right to possess and sell your property, if you default on your home loan. Nowadays banks do a due diligence check (thorough background check on your property), before sanctioning your home loan. Nowadays it is quite rare for a bank, to put lien on your property. If the bank has a slight suspicion (worry), or in case of certain backgrounds, they will put lien on your property.

You better check, if the bank has put lien on your property. If the bank has put lien on your property, ask them to help remove the lien on your property. If you do not remove the lien on your property you will not be able to sell it. You can check if the bank has removed lien on your property, by applying for a new encumbrance certificate. If your encumbrance certificate mentions there is no encumbrance on your property, then you have the legal right to sell the property.

SEE ALSO: Should You Include Your Parents In Employer's Health Insurance?

Your Cibil Report Needs To Be Updated

After you close your home loan, your bank needs to update Cibil, that your home loan has been closed. Cibil makes an entry “DATE CLOSED” on your credit information report, with the date of the closure of the home loan. You need to make sure that your bank has updated cibil, with your home loan closure details.

You must apply for your cibil score and check if there is an entry “DATE CLOSED” , with the date of closure of your home loan.

No point in boring you with these details on such a joyous day. However it would be wise to follow these tips, when you close your home loan.

Refinancing of Home Loan - Home Loan Balance Transfer

Many of us are in a hurry to take that home loan. As long as we can repay the home loan All Is Well. What happens when we cannot pay back the home loan? What happens if I lose my job oQr if I am faced with a sudden illness and I am unable to pay back the EMI? Is this the end of the road for me? If any of you have had such as experience what would be your response. Would you have panicked?

It would be good to remember that this is not a rare situation. Here banks have customers who do default on their loans as well. Here it is in the best interests of the bank to restructure your loan, as if it fails to do so it would increase the bank’s non-performing assets. Which bank would want to see an increase in its NPA? Remember every cloud has a silver lining.

How To Refinance Your Home Loan?

So what should you do under such circumstances? Let us consider that you are temporarily not able to settle your EMI due to a sudden illness. You should then approach the bank in order to restructure your loans. Let us say that you are paying an EMI of INR 8000 for 10 years, then the bank may restructure it for INR 7500 for say a slightly longer tenure. Here the bank would not lose money as you would repay the amounts over a longer period of time. You are able to get that highly needed breathing space maybe at a slightly higher cost. Everyone is a winner in this case. If you are stuck in such a situation negotiation with your banker is the best approach. However it is best to follow the prevention is better than cure approach by setting aside say 6 months of EMI installments in a highly liquid fund for sudden emergencies.

Here Home Loan Balance Transfer is a refinancing option to get the existing home loan in one bank transferred to another bank in order to avail the benefits of a lower interest rate.

Why Should You Opt For A Balance Transfer?

  • Here the existing home loan is set at a very high rate and despite discussions with the existing lender or bank there is no response. Here banks may not want to consider the negotiation options available to them and under these circumstances we might need to act in order to protect our interests.
  • Here at the time the loan was first taken the options were limited. Now there are vast number of options available to us. We can avail of these options by using the home loan balance transfer option. Here the banking sector has undergone vast changes and we can tap into these benefits in order to avail loans at cheaper rates.
  • In many foreign countries after 3-5 years it is very common to refinance ones home loans in order to tap into the benefits of obtaining loans at very competitive interest rates due to prevailing market conditions. This also helps to pay off home loans faster.

See Also: Composite Loan and Home Loan Balance Transfer

Balance Transfer Option As A Bargaining Chip

  • Let us consider the case in which the bank has reduced rates for new borrowers. You are an existing borrower with a high credit score. Here you can approach the bank using the switch your home loan option as a bargaining chip in order to secure a lower rate from the bank.
  • Let us consider the case in which we have taken a loan of 15 Years tenure. We still have about 10 years of repayment left. Here the new interest rates offered are 1% lower than the rates offered by our bank. Here we have the Balance Transfer Option where we shift the outstanding loan from our lender to the cheaper lender. Here the new lender will check our repayment history and it is necessary to keep the EMI statements handy.
  • Here as per the RBI circular all banks have waived prepayment penalty on floating rate home loans .Some of the banks have also waived prepayment charges on fixed rate home loans. Another important factor we need to note is the Foreclosure charge. These charges apply when a borrower wants to switch his loan from the existing bank to another bank offering lower floating rate of interest or if the person wants to shift to a lesser rate within the same bank. Here the RBI has directed banks not to levy charges for foreclosure of home loans taken on floating interest rate basis. As per the Damodaran Committee report the various banks did not pass on the benefits of lower interest rates to existing borrowers when the rates fell. Such rates were offered only to new borrower’s .Such a practice combined with foreclosure charges prevented existing borrowers from enjoying lower rates with the same bank or switching to a lower rate in another bank.
  • Banks charge around 0.5% -1% of the total home loan amount applied for as a processing fee. It is possible with hard bargaining with the new lender to bring this down or in some cases even waive off these home loan processing fees. Here it is right to remember the phrase ‘Strike When The Iron Is Hot

See Also: Home Loan Repayment Tips

Floating rate

  • Here it is good to drive a hard bargain by talking to the existing bank. Here we can meet the bank and state the reason for the switching of the loan. Here we state that the current floating rate is too high and I would like to lock- in a lower floating rate due to my urgent financial commitments and I would like to retain the loan at the same bank rather than shift to another lender. Then settle for a round of discussion and negotiations.
  • Here if we get a better rate in another bank we would like to shift our loan to this bank. We would require a letter of consent from the existing bank to give the go-ahead to shift to a new lender. Here you need to make sure that you get the necessary foreclosure statements, account statements and the list of property documents from your existing bank.
  • Here when opportunity strikes we need to seize the moment. It is prudent to look around and lock-in the best possible interest rates using the Balance Transfer option. Here a change in the interest rates by even say 0.5% is quite significant over a vast sum such as INR 50 Lakhs. Here Mathematics might not be the favorite subject for many of us, but a little homework here can save us thousands of rupees.
  • Here we need to be aware of the lock-in period of the home loans. Here banks have a loan disbursement date when they release the payments. For completed buildings, this may not be an issue. For an under-construction building the bank will disburse the loan in stages. It might take 2 years for the house to get constructed. Here we need to check when the disbursement dates are drawn. Is it drawn when disbursement commences, as disbursement is in stages or when the bank has fully completed the disbursement of the loan. This is very important to avoid the loan penalty when refinancing the home loan.
  • Do not seek additional sources of credit when your loan is being refinanced. If you require a new car put it on hold until your home loan has been refinanced. Here we need to set priorities in life. There have been cases in which refinancing of home loans has been scuttled because of poor credit scores. This is like jumping into a river with weights tied around your neck.
  • Never Change Horses Midstream: Changing of jobs while refinancing of your home loan is like changing horses in the middle of a stream which might result in your drowning. Here we might get a lesser paying job which might scuttle the whole balance transfer process. Here if the pay increases then we might have missed a better home loan balance transfer opportunity or at the very least the whole tedious process might have to be repeated as you might have to resubmit income statements.

See Also: Processing Fee For Home Loan

Here I would like to end this article with the saying ‘Anyone can do something when they want to do it. Really successful people do things when they don’t want to do it’. Here in order to refinance our loans we have to take effort. It doesn’t come easy However if we do succeed in refinancing the loans the lesser interest rates are the fruits of our labor we enjoy.

What is a Home Loan Insurance Policy?

One of the main priorities in life is a roof over one’s head. Buying that dream home is a must even if one has to avail a home loan to do so. Paying back the EMI on the home loan may take up most of one’s salary. Yet one somehow maintains the balance between his needs in these inflationary times and paying back those EMI’s. However a frightening thought comes to mind. What if one is not around to pay back the EMI’s on the home loan? What would happen if instead of transferring wealth one transfer’s a home loan liability to his spouse? Would that dream home be repossessed by the bank? These thoughts must be running through one’s mind.

One of the main problems one faces in life is the rising interest rates on that home loan. But is this the only worry one has to face on that home loan? No definitely not. If one is not around to pay back those EMI’s in these rising inflationary times then the home loan liability is transferred to his spouse. A home loan insurance may be the solution. When one avails a home loan he pays a premium and obtains a home loan protection policy. This policy may be bundled mainly added along with the home loan and comes as a complete package. This also provides the insurance Company an assurance that the home loan would be paid back.

See Also: Repo Linked Home Loans: Your Home Loan Rate Will Go Down

What are the Shortfalls of a Home Loan Insurance Policy?

One needs to realize that a home loan insurance policy has a few pitfalls and he may have to analyze whether this product meets his needs.

  • One needs to realize that as he pays his EMI’s the home loan outstanding balance steadily comes down. If the home loan availed was INR 35 Lakhs for a 15 year tenure after a period of 10 years the home loan liability would be greatly reduced. The premium for the home loan insurance policy is high as it is paid for INR 35 Lakhs even though the home loan liability reduces with time. This basically means that one’s insurance cover or the sum assured depends directly on the home loan liability which decreases with time and yet a higher premium is paid. If one dies when the home loan amounts are almost paid back his dependents get nothing and only the home loan liability is settled.
  • One has to pay the entire premium in advance in case of a single premium home loan insurance policy. One may be offered a discount on this amount yet this is a loss. Why is this so? One would lose interest on the premium amounts as the entire amount is paid as a lump sum instead of in batches or installments.
  • If one opts for a single premium home loan insurance policy he pays the entire premium in advance. If one were to prepay his home loan and close it up much before time the premium would not be refunded and this would be a loss.
  • If one were to opt for a regular premium home loan insurance policy the premiums would be higher and in some cases easily be double the amount of a single premium home loan insurance policy.
  • One can avail tax deductions only if he pays the premium of the home loan insurance policy in full and the premiums are not paid by the Insurer. If the insurer pays the premium and one repays the premium bundled with the home loan through EMI’s he gets no tax benefits on the premium of the home loan insurance policy.

With so many shortfalls in a home loan insurance policy is there an alternate approach to solving this problem?

Is a Term Life Insurance Policy Better Than a Home loan Insurance Policy?

A term insurance policy provides one a mortality cover or death benefit known as the sum assured in exchange for a premium. This is a policy very essential if one is at the start of his career and has dependents .But does this policy help if one has a home loan liability? Definitely Yes. In the case of a home loan insurance policy one’s insurance cover or the sum assured depends directly on the home loan liability which decreases with time. In contrast the level term life insurance policy provides one a constant sum assured across ones working life. If one were to die before the home loan liability is settled his nominee would get the sum assured and pay back the home loan amounts due to the bank.

Why is a Term Insurance Policy Better Than a Home Loan Insurance Policy?

If one takes up a home loan insurance policy and passes away before the home loan is paid back the insurance Company would settle the dues. However ones dependents would be left with no money in the kitty. Compare this with a level term life insurance plan which provides a fixed protection across one’s lifetime at a premium much lesser than that of a home loan insurance policy. If one has an income of INR 6 lakhs per annum and an outstanding home loan of INR 25 Lakhs he needs to take a term life cover of 85 Lakhs .This is because one needs to insure himself for an amount equal to 10-12 times his annual income as well as add the home loan liability. If one were to die before the home loan liability is settled his spouse would get the sum assured of 85 Lakhs and would repay the home loan amounts due. The amount left behind would be enough for one’s spouse to enjoy life with a measure of comfort. This would help tide over a family crisis. One can also opt for a decreasing cover term life policy where the sum assured is equal to the loan amount. The term insurance policy is renewed with a lesser premium as the home loan liability decreases with time. One can save on the premium amount.

What are the Rider Benefits in a Term Life Plan?

This policy can also be taken with rider benefits such as critical illness rider as well as accidental benefit rider where a lump sum is paid if one suffers a disability due to an accident or an amount provided if one suffers a critical illness such as a heart attack. These benefits are obtained on paying a slightly higher premium.

One knows that the best time to purchase a term insurance policy is right now. This policy not only provides an income for ones dependents but also helps to retire debt mainly a home loan. If one avails a home loan there is no time to hesitate. Pick up a term life insurance policy right away.

See Also: Is It Mandatory to Take Home Loan Insurance?

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