Home Loan

A Home Loan is a secured loan product where the lender provides finances for the purchase or construction of a residential/commercial property. One can also avail a housing loan to buy a plot of land and construct on it. Home Loans are also issued to extend/ repair/ renovate/ alter a new or second-hand property. The Home Loan is taken by a borrower against the property/security to be bought. This is done by giving the banker a conditional ownership over the property i.e. if the borrower fails to pay back the loan, the banker can retrieve the lent money by selling the property.

Most lenders get the property valued independently and provide loans based on their estimated value. It is important to remember, however, that frequently their valuation is significantly lower than the actual cost and hence the requirement of the borrowers goes up. Home loans in Indian Banks are provided up to maximum of 80% (90% for loan amount below INR 20 lakhs) of the value of the house. Home loans are repaid using Equated Monthly Installments (EMIs) spread over a fixed tenure.

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Home Loan Eligibility Criteria:

Income – Your income determines the amount of home loan you are eligible for. Banks generally keep the EMI to income ratio at 0.45 to 0.50. Tenure – The longer tenure you opt for, the more is your home loan eligibility and the lesser is your EMI. Age – Your age will determine your home loan tenure and hence your eligibility. Interest Rate offered – Banks offer Fixed and Floating Rates of Interest. If your interest rates are on a lower side, then the loan eligibility will be higher.. CIBIL Score – Your credit report tells the bank about your repayment capacity and hence determines if you’re eligible for a loan.

Home Loan Interest Rates:

Home Loan in India can primarily be classified into two based on interest rates: fixed rate and floating rate of interest.

Home Loan – Fixed Interest Rate:

Fixed interest rate refers to repayment of home loans in fixed equal installments over the entire period of the loan. In this case, the interest rate doesn’t change with market fluctuations.

During the early part of the tenure, the monthly payments are used to service the interest and the principal is served in the later parts of the tenure.Very few lenders in India offer pure fixed rates where the rate of interest remains constant over the entire tenure. Most lenders have a reset clause of 3-5 years. If the borrower is certain that the rate of interest is the lowest in the market, only then should he opt for fixed rates of interest.

Benefits Drawbacks Interest rate remains fixed irrespective of market conditions The major drawback with fixed interest rates is that they are usually 1-2.5 percentage points higher than the floating rate home loan.

A fixed-rate home loan is ideal for those who are good at budgeting and want a fixed monthly repayment schedule. If the interest rate decreases, the fixed rate home loan doesn’t get the benefit of reduced rates.

Home Loan Floating Interest Rate Floating interest rate implies that the rate of interest will vary vary with market conditions. Home loans on floating interest rates are tied to base rate plus a floating element thereof. So, if the base rate varies, the floating interest rate also varies.

The interest rates will depend on the base rate of the bank. As and when the bank changes their base rate, the interest rate changes. The change can either be in terms of the EMI or the tenure. For example, if the bank increases their base rate, the customer could choose to increase his EMI or to increase his tenure. Or if the bank decides to decrease their base rate, the customer can reduce his EMI or his tenure.

Benefits Drawbacks Floating rate home loans are cheaper. If you are getting a floating interest rate of 11.5 per cent while the fixed rate is 14 per cent, you still save money if the floating interest rate rises by up to 2.5 percentage points. The drawback with floating interest rates is the uneven nature of monthly installments.

Even if the floating rate goes over the fixed rate, it will be for a short duration. The interest rates will surely fall over a long period and bring savings. In conclusion, when it comes to choosing the interest rate, a majority of home loan borrowers go for floating rates.

In recent times, some lenders have come up with innovative home loan products like dual rate of interest. This is where the interest rate on loans remains fixed for initial 1-5 years and thereafter switches to a floating rate of interest.

But, it is up to the borrower to decide what suits him best. Before taking a decision, it is advisable to compare home loans from different lenders in detail.

If you are thinking of buying a home and are looking at loan products, look no further. At Star indiaLoans.com, we help you get the best deals on loans. View our EMI Calculator which will help you calculate how much EMI is payable every month.

Your EMI depends upon the interest rate which the bank charges you, the tenure of the loan as well as the loan amount. You can also alter the tenure and the interest rates to see how you can reduce the EMI or the tenure of loan.

Home Loan Application Fees and Charges: Home Loan Lenders levy some fees and charges at the time of loan sanctioning. It is important to make yourself aware of all these charges before you decide you finalize the deal.

Processing Fee: This fee is charged by the bank for processing the home loan and is non-refundable. In case you decide not to take the loan from the bank, then the entire amount is forfeited. The amount generally varies in the range of 0.5 to 1% of the total home loan amount.

Payment of processing fees doesn’t mean that your loan is approved. You may have paid the processing fee but your loan could still not be sanctioned due to various other reasons. Therefore, before paying the processing fee, bargain on the amount and get it confirmed from the bank in writing.

Prepayment Fees : Prepayment fee comes in to play when one wants to prepay the home loan before the end of the tenure. Different banks have different charges so one should take the time out to know them. Few banks offer no prepayment charges in case the prepayment is done from the borrower’s own sources. But in case the person is shifting the loan to a different lender, most of the banks charge a fee in the range of 1% to 2% of the outstanding loan amount.

Also, according to the RBI norms, banks are not allowed to levy foreclosure charges on home loans anymore.

Tip: All the charges should be be taken down in written from the bank and the written document preserved. This is to avoid confusion in case the bank asks you to pay a different amount after sometime.

Applying for a New Home Loan Buying a home is a dream comes true for many of us. Rising interest rates are making it a rather expensive affair. Once you finalize on your property, 80% of the amount can be taken as a loan from a bank depending upon how much loan you are eligible for.

Home loans can be repaid to the bank every month as equated monthly installments over the entire tenure of the loan. A part of this EMI goes towards repaying the principal component of the loan and the other part goes towards paying the interest.

The EMI is calculated on a reducing balance basis. A reducing balance loan means that in the initial days of the loan, the interest component of the EMI is high. But gradually, as you keep on paying more EMIs, the interest component of the EMI goes down and the principal component increases towards the end of the tenure.

Also, while you are going to take a home loan you need to decide, the type of interest rate you want to pay to the bank. The banks will offer you with an option of a fixed rate or a floating rate. Generally the floating interest rates are cheaper compared to the fixed rates.

Here are some factors to consider if you are a new home loan customer:

Buying a home is dream for many and one should be cautious while looking out for a home loan lenders. The foremost thing to be kept in mind is that one should never finalize a lender purely on the basis of interest rates. Most of us believe the cheapest is the best. But actually, in addition to this, there are other things that should be kept in mind while finalizing home loans.

Consider Home Loan Eligibility Factors Banks have their own standards for calculating eligibility. Factors like age, annual income and loan tenures play an important role. You should do some shopping to check which bank is offering you a higher loan eligibility. Adding up your spouse’s income may be a good option to increase your eligibility.

Home Loan Fixed or Floating Interest Rate A fixed interest rate means that you will have to pay same EMI over a period of time (it may be fixed for an entire tenure or it may be reset at fixed intervals). Floating interest rates may change at any given point of time, which may result increase or decrease in either your home loan EMI or your tenure. Consider your finances and repayment abilities before deciding on which interest rate to pick.

Existing Home Loan Customers:

Many existing home loan customers are coughing up high interest rates. If you’re amongst them, you should consider shifting your home loan from your existing lender to a new one. This facility is called a ‘balance transfer option’ and many banks offer this facility nowadays. Doing so will decrease the monthly EMI you are paying towards your loan and will bring in savings.

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You should also consider shifting from the old BPLR system, where the interest rate constantly changes, to the new base rate system. This is more transparent than the previous one and ensures you don’t end up paying more unnecessarily.

Documents Required for Home Loan

Salaried Customers Self Employed Professionals Self Employed Businessman Application form with photograph Application form with photograph Application form with photograph Identity and Residence Proof Identity and Residence Proof Identity and Residence Proof Latest Salary-slip Education Qualifications Certificate and Proof of business existence Education Qualifications Certificate and Proof of business existence Form 16 Last 3 years Income Tax returns (self and business) Business profile Last 6 months bank statements Last 3 years Profit /Loss and Balance Sheet Last 3 years Income Tax returns (self and business) Last 3 years Profit /Loss and Balance Sheet Processing fee cheque Last 6 months bank statements Last 6 months bank statements (self and business) Processing fee cheque Processing fee cheque Home Loan Balance Transfer One of our most popular products among Home owners, a Balance Transfer can help you get a better deal on your Home Loan thus enabling savings. You can also use a balance transfer to take a top up loan from a bank, which allows you to pay off your other loans by taking a consolidated loan from a bank. Star india will help you get the best possible deal on a balance transfer for your loan. We Guarantee Savings!

Types of Home Loans If you thought Home Loans were just available as a standard offering, you’re clearly mistaken. Star india offers different types of Home Loans from banks. It would be wise to take a look at the options available to you rather than searching for information without any previous knowledge.

Home Purchase Loan This type of loan is a simple home loan that allows you to purchase a new residential property. Home Improvement Loan If you ever wanted to renovate your home with a new aesthetic look or just wanted to structurally enhance and strengthen it, this type of home loan is what you’re looking for. It is basically concerned with the costs to renovate or repair your existing home.

Home Construction Loan This type of loan is taken when the borrower wants to construct a new home on a given plot of land. Home Loan Advantage This type of home loan is linked to a current account thereby reducing your interest outflow depending on your idle balance in your bank accounts

Home Loan Tips Before you get into a home loan agreement, be sure to keep a checklist of things to clear out while signing on the necessary documents. Below are some of the things you can keep in mind to make sure you don’t receive a sour deal.

Home loans are available from mainly two types of lenders–commercial banks and housing finance companies. Different lenders may quote you different rates of interest and other terms and conditions, so you should contact several lenders to make sure you’re getting the best value for money. Find out how much of a down payment you are required to pay, and find out all the costs involved in the loan (including processing fees, administrative charges and prepayment charges levied by banks). Knowing just the amount of the EMI or the interest rate is not good enough. Similarly, ask for information on loan amount, loan term, and type of loan (fixed or floating) so that you can compare the information and take an informed decision.

The following are important things to know and remember.

1. i) Interest Rates Ask your lender about its current home loan interest rates and whether the rate is fixed or floating. Remember that when interest rates in the economy go up so does the floating rates and hence the monthly re-payment. If the rate quoted is a floating rate, ask how your rate and loan payment will vary, including the extent to which your loan payment will be reduced when rates go down by a certain percentage. Ask your lender to what index your floating home loan is referenced / linked and the periodicity of updation of that index. Also ask your bank whether the index is internal or external and how and where it is published. Ask about the loan’s annual percentage rates (APR). The APR takes into account not only the interest rate but also fees and certain other charges that you may be required to pay, expressed as a yearly rate. Banks are obliged to reveal the APR if requested for by the customer.

1. ii) Reset Clause Check the reset clause, especially in the case of fixed interest rate loan as the rates will not be fixed throughout the tenure of the loan. 1. iii) Spread/Mark up Check if the margin in the case of the floating rate is fixed or variable. The rate of interest you have to pay will vary accordingly. 1. iv) Fees A home loan often requires payment of various fees, such as loan origination or processing charges, administrative charges, documentation, late payment, changing the loan tenure, switching to different loan package during the loan tenure, restructuring of loan, changing from fixed to floating interest rate loan and vice versa, legal fee, technical inspection fee, recurring annual service fee, document retrieval charges and pre-payment charges, if you want to prepay the loan. Every lender should be able to give you an estimate of its fees. Many of these fees are negotiable / can be waived also.

Ask what each fee includes. Sometimes several components are lumped into one fee. Ask for an explanation of any fee you do not understand. Also, remember that most of these fees are perhaps negotiable! Do negotiate with your bank before agreeing to a particular fee. See how the all inclusive rate compares with the all inclusive rates offered by other banks. While planning your finances, don’t forget to include the costs of stamp duty and registration.

1. v) Down Payments / Margin Some lenders require 20/30 percent of the home’s purchase price as a down payment from you. However, many lenders also offer loans that require less than 20/30 percent down payment, sometimes as little as 5 percent .Ask about the lender’s requirements for a down payment and also negotiate with him to reduce the down payments.

Once you know what each bank has to offer in terms of rates, fees and down payments, negotiate for the best deal. Ask the lender to write down all the costs associated with the loan. Then ask if the bank will waive or reduce one or more of its fees or agree to a lower rate. Do make sure that the bank is not agreeing to lower one fee while raising another or to lower the rate while raising the fees. Ask for clarification in case you do not understand any particular term. All banks are obliged to explain the most important terms and conditions of the home loan in detail. Once you are satisfied with the terms you have negotiated, please do obtain a written offer letter from the lender and keep a copy with you. Read the offer letter carefully before signing.