Prior to April 1st 2016, banks charged Home Loan interest based on the base rate. It is the minimum rate of interest at which banks offered the Home Loan. Base rate is not dependent on repo rate and banks can revise it each quarter.
There was no uniformity among banks vis-à-vis base rates. There was a lack of transparency in calculating the base rate. To overcome these issues, RBI had mandated that the interest rate be charged on the basis of MCLR (marginal cost of funds based lending rate).
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MCLR is closely linked with the repo rate and the cost of funds of a bank. It is the minimum interest rate that a bank can charge on Home Loans. Banks add a small percentage of spread to the MCLR and the resultant figure is the rate of interest charged on Home Loans.
This change was brought about so that the benefits of repo rate cut by RBI could be transferred to the borrowers. MCLR changes only on reset dates which may be monthly, quarterly, annually and so on. If you choose an MCLR with a quarterly reset date, the floating interest rate will change each quarter.
If there is a change in the repo rate, it will have an impact on the floating interest rate Home Loan. If MCLR is reduced by a bank, then the floating interest rate also comes down. This will not change EMIs, but will impact the loan tenure which decreases.
MCLR can be different across loan tenures. It is associated with floating rate Home Loans and not fixed rate Home Loans.
Following are the bank charges on Home Loans:
1. Application fee: This fee is charged to conduct the verification and due diligence process.
2. Processing fee: This fee is charged to process the loan. It ranges from 0.5% to 2% of the loan amount.
3. Administrative fee: This fee is charged after the loan is sanctioned. This may be charged separately or can be clubbed with processing fees.
4. Legal fee: This is another portion of processing fees charged for scrutinizing the legal documents. This may be charged separately or can be clubbed with processing fees.
5. Technical valuation charges: This is charged to evaluate the property in terms of legality and fair valuation.
6. Franking fee: Franking fee is paid to stamp, property documents. Getting the documents stamped by authorized banks proves that you have paid stamp duty. This can range from 0.1% to 0.2% of the loan amount.
7. Prepayment fee: This is a fee charged when pre-paying the outstanding loan amount, either in full or in part. It is also called pre-closure or fore-closure. Banks charge this fee to make up for loss of interest income, due to premature closure of the loan. Prepayment fee is charged on fixed rate Home Loans not on floating rate Home Loans. It is worth noting that fixed interest rate Home Loans are rare these days.
8. Balance transfer fee: This fee is charged if you decide to transfer your Home Loan from one bank to another.
In addition to the above, banks may charge other fees such as documentation fee, notary fee, additional statement of account fees and so on.
If you think that you cannot borrow from family and friends for acquiring a house property and claim tax deductions for the repayment of the same, you are wrong. Home Loans from relatives and friends are eligible for tax deductions.
1. Deduction on interest repayment: In case of home loans availed from friends and family, you can only claim a deduction under Section 24b on interest repayment. The maximum tax deduction allowed is again Rs 2 Lakhs a year. If you’ve taken a loan for repairs and reconstruction of the house, then the deduction for interest repayment is restricted to Rs 30,000.
2. Deduction on principal repayment: There is no deduction for repayment of principal on Home Loan taken from friends, relatives or any money lender. Only Home Loans taken from Scheduled Banks and employer are eligible for deductions on principal repayment. Also, Rs 50,000 a year under Section 80EE for first time home owners on interest repayment is not available.
If you’re not sure whether or not you can sell a property while the home loan is outstanding, the answer is yes, you can sell. You cannot be stopped from selling your property. You have the following options:
1. Buyer pays from his savings: In this case the process of selling is hassle-free. Get a loan outstanding letter from your lender. Ask the buyer to make the payment directly to your loan account. After the home loan is closed, the lender releases the property documents and then you can transfer the property in their name.
2. Buyer takes loan from your lender: In this case, you’ll have to enter into a tripartite account along with the buyer and the bank. The outstanding loan amount is settled from the loan sanctioned to the buyer.
3. Buyer takes loan from a different lender: In this case, you’ll have to request your lender to provide a loan outstanding letter along with a list of property documents held. Then the buyer approaches their bank with all the documents and pays the required fees. If the buyer is eligible for loan, their lender issues a cheque in favor of your lender. The amount of cheque is equal to the outstanding loan amount.
On the settlement of the loan amount, the lender releases all the property documents held by him and hands them over to the buyer's bank and releases the rest of the amount.
1. Mother deed
2. Sale deed
3. Home loan sanction documents
4. Housing society share certificate (in case of a society)
5. Society NOC
6. Encumbrance certificate
7. Property tax receipts
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