Home Loans Explained

When you think ‘home loan’, we’re sure you think about mountains of paperwork, masked interest charges, and a
bunch of regulations that don’t make sense to you. From repayment periods to rental yields and reducing interest
to subvention clauses, buying a home can be more daunting than exciting when you’re looking to get a home loan.
So we thought we’d decode the nuances of getting a home loan, so you can refer to this Home Loan 101, the next
time you start planning to buy your dream home.

Commonly used terms in Home Loan

Before we get to the types of home loan, let’s first understand the common terms that you can come across when
taking a home loan.

• Down payment: It is the minimum amount you have to pay to purchase a property and get a
  home loan. Usually, the down payment is around 10-20% of the value of the house. The Reserve Bank of India
  (RBI) mandates banks to give 70-90% of the property value as home loans. Hence, the rest has to be funded by
  the buyer in the form of a down payment.
• Tenor: It is the total duration of the home loan. The maximum tenor of a home loan can be
  around 30 years. Borrowers have to pay back the principal and interest during this period.
• Equated Monthly Instalment (EMI): This is the monthly payment you will have to make to the
  bank to repay your home loan. The EMI consists of both the principal and interest and the proportion of the
  principal and interest keeps changing as you progress in your home loan tenor.
• Loan-to-value: The loan-to-value ratio is the proportion of the loan amount to the value of
  the house. Lenders usually give only a portion of the property’s value as a loan. This is determined by your
  credit history, loan amount, and property type.
• Fixed interest rate: When the interest rate of a loan doesn’t change throughout the tenor
  of the loan, then the loan is said to be a fixed-interest home loan.
• Floating interest rate: If the interest rate changes with market conditions, then the loan
  has a floating interest rate regime. The interest of your home loan is pegged to a benchmark rate such as
  the repo rate. Hence, whenever the repo rate changes, the loan interest rate also changes.
• Credit score: Credit score is an indicator of your creditworthiness. It is calculated by
  taking various factors into account, such as your credit history, credit utilization, length of credit, and
  types of credit accounts. The credit score keeps changing over the tenure of your loan based on how
  efficiently you repay your loans. Banks check your credit score to decide the loan amount and interest rate
  they can offer you. A high credit score can get you a low-interest rate.
• Sanction letter: It is a letter that your bank issues stating your eligibility for the
  loan. It contains all the details such as the loan amount, interest rate, EMI, and tenor of the loan.
• Collateral: Collateral is a security against which a bank gives a loan. In the case of a
  home loan, the property that you are investing in is a collateral against which the banks offer you a loan.
• Disbursement: When the banks credit the loan amount to your bank account, it is called
  disbursement. The disbursements can either happen in one go or in partial instalments as per your agreement
  with the bank and the builder.
• Amortization schedule: A table including details of the principal and interest component in
  an EMI for the entire tenure of the loan is an amortization schedule.
• Default: When you fail to pay an EMI, it is considered as default. Banks usually charge a
  certain penalty on unpaid EMIs.
• Prepayment: Paying a part of your home loan in advance to reduce the interest obligations
  is known as prepayment. The money you prepay goes towards the principal and hence reduces the total interest
  obligation. However, it is important to check with the bank for any prepayment penalties.
• Foreclosure: When you pay your entire loan balance in full in one go before the tenor of
  your loan is complete, then it is called foreclosure. RBI mandates banks not to change any fee or penalty
  for foreclosure of home loan accounts.

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Types of Home Loans in India based on the use cases

There are various types of home loans in India based on how the loan amount is used. Below are the common types
of home loans.

• Home Loan: A home loan is an amount you borrow to buy an apartment, villa, or an individual
  house for the purpose of staying in it or renting it out. The home can be a ready-to-move-in or an
  under-construction property. This is the most common type of home loan and has a fixed or floating interest
  rate regime. Banks usually lend 70-90% of the value of the house as a loan. To get this loan, you must meet
  the bank’s eligibility criteria and provide all the required documents. Once verified, the bank will
  disburse the loan into your savings account through which you can pay the builder.
• Home Construction Loan: If you own a piece of land and want to build your own house instead
  of moving into a pre-constructed home, you can take a home construction loan. This loan is given on the
  basis of a rough estimate of the construction costs. The process to take this loan is slightly different
  from a regular home loan. Banks will have a different set of eligibility criteria, and you must first check
  whether you are eligible to get such a loan or not. Once you get the loan, the bank will either disburse the
  loan amount in full or in instalments as per your wish.
• Home Extension: If you already have a home and want to add another floor or additional
  rooms to it, you can take a home extension loan. Not many banks offer such loans, but when they do, they
  have a rigid eligibility criterion. Hence, check with your bank and compare it with other banks offering
  similar loans and choose the one which is most convenient to you, both in terms of the conditions and
  interest rate.
• Home Improvement Loan: All homes have some kind of repairs time and again. Or you may want
  to beautify your existing home by changing its interiors or painting it. To fund the repairs such as
  waterproofing, plumbing, electrical lines, or even painting, you can take a loan from banks. This loan is
  called a home improvement loan. Although not all banks give such loans, there are many banks that do. All
  you have to do is find the right bank for you.
• Home Loan Balance Transfer: If you are not satisfied with your current bank, you can move
  your home loan to a new bank. This is called home loan balance transfer. Here, your entire remaining loan
  balance is transferred, and you can even get better terms, such as lower interest rates, low processing
  fees, and flexible tenure, which will help reduce your EMI.
• Composite Home Loan: A composite home loan is a comprehensive loan solution for individuals
  looking to buy a plot and construct a house on it. The loan covers both the plot and construction cost of
  the house. These loans suit people who want to start construction on the land immediately after purchasing
  the property instead of waiting for a few years. The banks give a fixed time period within which the
  construction of the house must begin. If the construction doesn’t begin, then the interest rate could
  increase.
• Plot Loan: A plot loan is for people who want to buy a plot of land with the intention of
  constructing a house in the future. The loan can also be taken if you want to purchase a plot of land for
  the purpose of resale.
• Home loan top-up: A top-up loan is an additional loan on top of your existing loan. The
  amount of loan you can get varies across lenders. In most cases, banks give such loans to customers with
  long-standing relationships, good credit scores, and repayment ability.

Types of Home Loans in India based on the interest rate

Based on the interest rate, there are three types of home loans, namely fixed interest, floating interest, and
hybrid home loans.

• Fixed interest rate home loan: A fixed interest rate home loan is a type of loan where the
  interest rate remains the same throughout the tenure of the home loan. This loan is preferred by people who
  wish to avoid fluctuations in the interest rate due to inflation. The interest rate, in this case, is
  slightly higher than that of floating interest rate home loans. However, when the RBI decides to spike repo
  rates, the interest rate on these loans will remain the same. This is best if you want to take a home loan
  for a tenure of three to 10 years. It is important to note that these kinds of loans have a prepayment
  penalty.
• Flexible interest rate home loan: A flexible interest rate home loan is a type of loan
  where the interest rate keeps fluctuating throughout the tenure of the loan. This is because flexible
  interest rate home loans are tied to a benchmark interest rate, which is changed at RBI’s discretion to
  control the inflation and money supply in the country. With changing interest rates, banks usually change
  the tenure of the loan. An increase in interest rate increases the tenure. However, RBI recently gave a
  circular mandating banks to let the borrowers decide whether they want to change their EMI or tenure or both
  when the interest rate changes.
  The interest rate of this loan is slightly lower than a fixed interest
  home loan and is best for a tenure of 20-30 years. They also do not have a prepayment penalty, unlike
  fixed-interest home loans. However, financial planning and budgeting, in this case, can be very tricky and
  challenging.
• Hybrid home loan: A hybrid home loan is one where the interest rate remains fixed for a
  certain tenure, after which it changes to a floating interest rate. This type of home loan is suitable for
  borrowers who prefer stability of interest rate for a certain period of time before switching to a floating
  interest rate regime.

Benefits of taking a Home Loan

• Makes it easy and affordable to buy a home: Taking a home loan can help in buying a home.
  With real estate prices skyrocketing, buying a home with savings is becoming a farfetched dream. A home loan
  will help you buy your dream home with affordable instalments.
• Helps build an asset: When you buy a home, you are building an asset. This asset will be
  appreciated over a period of time, increasing the value of your home.
• Saves you from paying rent: Rent is a major expense for any individual. With rent
  increasing year-on-year, it is becoming more affordable to buy a home and pay an EMI instead of the rent.
• Due diligence of property: When you take a loan, the bank will assess the property
  thoroughly. It verifies all the documents provided by the builder to ensure the builder is genuine and there
  are no frauds. Hence, taking a home loan will save you from being scammed by the builder.
• Tax benefits: Home loan offers several tax benefits. The principal and interest payments
  are eligible for tax deduction under sections 80C and 24B of the Income Tax Act, 1961. You can claim tax
  benefits on principal repayment of up to Rs 1.5 lakhs per annum and interest of Rs 2 lakhs per annum. In
  case the loan is for a second house, then you can claim a tax deduction for the entire interest paid for the
  loan under Section 24B. However, it is important to note that the deductions are only available for fully
  constructed properties and not for under-construction properties.
• No prepayment charges: Banks don’t charge prepayment charges for most home loans, unlike
  other loans. So, when you have excess funds, you can prepay a part of your loan to reduce the interest
  burden. It is important to check with your bank for any prepayment charges before you take this step.
• Balance transfer facility: Sometimes, other banks give you a lower interest rate for your
  existing home loan. In such a case, you can transfer your home loan from your bank to another bank. However,
  you will have to go through the entire loan procedure again with the new bank. This includes submitting all
  the documents and paying a processing fee.
• Long repayment tenure: Home loans have a long repayment tenure when compared to other types
  of loans. This reduces the monthly EMI burden on your pocket and also makes it affordable to buy a home.

How can I get a home loan?

Beginning your home loan journey can feel overwhelming with multiple banks offering different schemes. Depending
on whether you’re salaried or not, banks offer a wide range of interest rates along with some complementary
benefits like top-up loans or insurance plans. So first evaluate which plan suits you best based on your current
needs and stage of life. Whatever you choose, Aditya recommends getting a floating interest plan instead of a
fixed one, as those are usually lower.

The next thing you’ll need to do is check your home loan eligibility based on your credit score. Having a good
credit score naturally indicates that you are a responsible borrower and you pay your EMIs back in time. If you
think your lack of credit history might be a problem, we suggest getting a credit card and building your credit
score with timely payments.

Things to consider before taking a home loan

Whether you’re getting an asset-backed home loan that you can sell to recover your EMIs or you’re just getting a
loan because you don’t want to self-fund it with your entire corpus but still wish to make an early purchase for
a better life, here few things to keep in mind about how you structure and approach your loan:

• Ideally, you’d have to fund 20% of the home cost with your corpus upfront, while the rest is paid by the
  bank. Most builders take 10% of the amount while the house is being built and another 10% nearing
  possession.
• Try and structure your down payment in a way that helps you build your corpus- You can pay 5% at the start
  and the pending 15% closer to possession during which your corpus increases.
• For ready-to-move-in properties, the entire amount gets disbursed in one go. For houses that are
  under-construction, only 20-30% gets disbursed in the first year, so the EMI’s are smaller and income is
  slightly higher until you get possession.
• Remember that if you’re in a subvention with your bank and builder, you probably can’t switch later, so you
  need to take note of the interest rate post-subvention. (For the uninitiated, subvention is when the home
  buyer, banker, and the developer enter into a tripartite agreement where the buyer pays 5-20 percent of the
  money upfront. The rest is paid by the bank.)
• There are two approaches to taking a home loan. The first is where you maximize the size of the loan in the
  beginning and then switch to a low-cost lender. The second is to start with a low-cost lender like a PSU so
  that you can minimize interest.
• If you get an overdraft loan then it adjusts the principal and interest and you can deposit excess cash as
  well as withdraw it when you need it.
• You’re going to have to pay a registration fee of 5% based on which city you’re buying a home in.
• Remember- every builder would want to sell their inventory and every bank will look to increase their
  business, so you need to make decisions that are well-thought-out and trust your gut if you sense trouble.

Eligibility & Documents Required for a Home Loan

The eligibility criteria to get a loan varies across banks, but the following is a broad criterion for most
banks.

• A decent credit score (usually above 750 is preferred)
• Minimum annual salary
• Collateral security
• Residency status
• Stability and continuity of occupation

Following are the documents required to avail of a home loan in India

• Loan application form
• Passport size photographs
• Identity proof such as a Pan Card, Aadhar Card, Passport,
• Address Proof such as Aadhar Card, Passport, and Utility bills
• Last six months’ bank statements
• A cheque for processing fee
• Latest salary slips, proof of business, or any other documents with proof that you are earning income from a
  source
• Last three years’ income tax returns
• Form 16
• Profit and loss statements of business (if any)
• Statement of loans availed in the last two years (if any)

How to understand my home loan interest and EMIs?

When you apply for a home loan, chances are that your lender will also apply several additional fees such as
foreclosure charges, prepayment charges, EMI bounce penalties, processing fees, etc. So before you go ahead with
the loan, you’d have to thoroughly go through the agreement to understand everything you’re being charged for.
In terms of the interest rate, here’s a quick video on how you can reduce interest on your home loan.

We hope this blog acts as a guide if you’re buying a home for the first time. If you have more questions, shoot
them to community@jupiter.money and we’ll try and answer your doubts.

Frequently Asked Questions

Can we take the full amount of the house as a home loan from the bank?

As per RBI regulations, banks are only allowed to give a maximum loan of 90% of the property value. So, you
cannot avail of the full amount as a home loan.

Can I stop home loan EMI for a few months?

Most banks allow a wavier of EMI for a period of three to six months if you are suffering from loss of income.
You can repay and continue paying the EMI once you are back on your feet. However, to avail of this, you must
talk to your bank and request for the same.

What happens if I stop paying EMI on a home loan?

If you fail to pay your EMI for more than 90 days, the banks will consider your loan as a non-performing asset
(NPA) and auction your home to recover the money.