What Are the Benefits of Taking Out a Home Loans?

Housing, by its very definition, represents not only a fundamental requirement for human survival but also a crucial gauge of a nation’s advancement in terms of human development and well-being. Securing adequate housing often constitutes a significant financial outlay and typically cannot be fully covered by a family’s regular monthly income or savings alone. Prospective homeowners must actively seek out a housing loan of considerable magnitude, one that is thoughtfully structured to allow for gradual repayment over an extended period.

Upon reading this blog post, you will find answers to nearly every question related to home loans, including banking terminology associated with home loans. You will gain a clear understanding of the home loan approval process as offered by various banks and financial institutions. With this knowledge, you will be empowered to make an informed decision on which bank or finance company is the most suitable for your needs. Let’s begin.

Regulatory guidance on housing finance

While formulating their policies, bank have to take into account RBI guidelines, which are being issued from time to time and ensure that bank credit is used for production, construction activities and not for activities connected with speculation in real estate. Bank Finance may be granted to individuals for:-



Acquiring land for construction on a plot, either with the assistance of a bank or through other means, within a timeframe specified by individual banks.

• Financing the purchase and construction of a dwelling unit for each family, as well as covering the costs of repairing damaged dwelling units.
• Financing the purchase or construction of a second house in the same town or another town, intended for self-occupation, for individuals who already own a house in the town where they reside.
• Facilitating the purchase of an old house in which the individual is currently residing as a tenant.
• Providing funding for alterations, additions, or repairs to a house or flat that has already been financed by the bank.
• Offering supplementary financial support, often against paripassu or second mortgage charges on a property already mortgaged in favor of other lenders, from whom funds were raised for construction or property acquisition.
• Banks may also extend housing loans to entities other than individuals for the construction of accommodations aimed at improving living conditions in slum areas. This credit can be extended directly to the slum dwellers, with government guarantees, or indirectly through state governments.

Basic Banking Terminology Related to Home Loans:

Eligibility for the Home Loan:

This refers to the criteria that determine who can qualify for a home loan. Eligible individuals or entities include salaried employees, professionals, self-employed persons, NRIs (Non-Resident Indians), PIOs (Persons of Indian Origin), HUF (Hindu Undivided Families), proprietorship firms, partnership firms, and corporations seeking housing loans for their employees or employee quarters.

Purpose for Taking Home Loan:

This outlines the reasons for which a home loan can be obtained. These purposes typically include:

• Purchase or construction of a house or flat.
• Renovation, extension, or repair of an existing house or flat.
• Purchase of a plot of land for future house construction.
• Acquisition of household articles to furnish the house or flat.

Quantum of Home Loan :

This specifies the maximum amount that can be borrowed for various purposes:

• For the construction or purchase of a house or flat, the loan amount can range from Rs. 3.00 Lacs to Rs. 500 Lakh, depending on the location (major metro cities like Mumbai, Kolkata, New Delhi, and Chennai have higher limits).
• For repairs, renovations, or extensions to a house or flat, the loan amount can go up to Rs. 50.00 Lakh.
• When purchasing a plot of land, borrowers can avail of a loan of up to Rs. 100.00 Lakh.
• For acquiring household articles to furnish the house or flat, a maximum loan amount of Rs. 5.00 Lakh can be obtained, which is typically 15% of the home loan amount.
• Please note that these terms and limits may vary slightly between different banks, but they generally adhere to the standard guidelines set by the Reserve Bank of India (RBI).

The eligibility of a home loan and related terms are calculated based on various factors and criteria, as explained below:

Calculation of Eligible Loan Quantum:

• Salaried Employees: Eligibility is typically calculated as 72 times the gross monthly salary or 6 times the annual income based on income tax returns (IT Returns).
• Self-Employed/Professionals: Eligibility is usually determined as 6 times the gross annual income based on income tax returns (IT Returns).
• HUF/Proprietorship/Partnership Firms/Companies: Eligibility is generally assessed as 6 times the cash accrual (Profit After Tax + Depreciation) as per the balance sheet/P&L Account.
• Debt Service Coverage Ratio (DSCR): In the case of HUF/Proprietorship/Partnership Firms/Companies, a minimum DSCR of 1.5 is required. DSCR stands for Debt Service Coverage Ratio and measures the ability to cover loan repayment from available cash flows.

Margin Requirement:

The margin refers to the percentage of the property’s cost that the borrower must finance themselves. Margin requirements vary based on the loan amount:

Up to Rs. 30 Lakh: 10% margin

Above Rs. 30 Lakh up to Rs. 75 Lakh: 20% margin

Above Rs. 75 Lakh: 25% margin

These margins are subject to the Loan-to-Value (LTV) ratios stipulated by the Reserve Bank of India (RBI).

Interest Rate on Home Loan:

The interest rate on a home loan, also known as the Rate of Interest (ROI), is the rate at which the borrower repays the loan. Interest rates may vary from bank to bank and can be either fixed or floating. Floating interest rates are often linked to the bank’s base rate and calculated at monthly rests.

Processing Charges on Home Loan:

Processing charges are fees levied by banks or financial institutions for processing a home loan application. The specific charges can vary from one bank to another and may even be waived by some banks.

Security in Home Loan:

To secure a home loan, a mortgage or equitable mortgage (first charge) is typically created on the land, flat, or house being financed.

 Disbursement of Home Loan:

Disbursement involves debiting the loan amount from your home loan account to make payments to the builder or contractor. Disbursement can be upfront in the case of ready properties or linked to construction stages for projects under development.

Repayment Period for Home Loan:

The repayment period for a home loan varies on a case-by-case basis. Salaried individuals are generally expected to repay the loan before their retirement date, while others may be required to repay the loan before reaching a specified age, such as 65 years.

Home Loans Insurance:

While home loan insurance is not mandatory, it provides security in case of unforeseen events. Insurance coverage ensures that the remaining home loan amount is paid by the insurance company to the bank if the borrower passes away, preventing the burden from falling on family members. Premiums for home loan insurance are eligible for tax exemption under Section 80C of the Income Tax Act.

Features of Home Loan:

Home loans typically offer features such as interest calculated on a daily reducing balance, no prepayment charges on floating rate loans, flexible repayment terms, including up to age 70 years in select cases, options for step-up/step-down EMIs, inclusion of income from close relatives for enhanced loan eligibility, and interest subvention from the Government of India in the first year, subject to conditions.

These terms and conditions can vary between banks and financial institutions, so it’s essential to carefully review the specific terms of the home loan you are considering before applying.

Documents required for the home loan.

When applying for a home loan, you will typically need to submit a set of documents to the bank or lending institution for verification and assessment. These documents help the lender evaluate your eligibility and the property’s legitimacy. Here is a list of common documents that are often required:

Duly Completed Application Form: This is the formal application for the home loan, provided by the bank or lending institution. You need to fill it out accurately with all the necessary details.

Passport Size Photographs: Recent passport-sized photographs of the applicant(s) are usually required for identification and record-keeping purposes.

Proof of Identity: You may need to provide a government-issued photo ID, such as a Passport, Aadhar card, Voter ID, or Driver’s License, as proof of your identity.

Proof of Residence: Documents like a Voter ID, Aadhar card, Utility bills (electricity, water, gas), or Rent Agreement can be submitted as proof of your residential address.

Sale Deed/Agreement of Sale: These documents are essential for the property being purchased or constructed. They establish your ownership or intent to purchase the property.

Statement of Bank Account/Passbook: You typically need to provide your bank account statements or passbook for the last six months. This demonstrates your financial stability and transaction history.

Letter of Allotment: If applicable, you may need to submit a letter of allotment from the Housing Board, society, or relevant authority. This is necessary when the property is allotted by a government or housing authority.

Copy of Approved Plan: If applicable, a copy of the approved building plan or layout plan may be required. This is relevant for properties that have specific approvals or compliance requirements.

Estimate/Valuation Report: A valuation report from an approved valuer is often necessary for the property to be financed. It helps the bank determine the property’s market value.

Conversion of Agricultural Land: If the property involves the conversion of agricultural land for non-agricultural use, you may need to provide a copy of the relevant conversion order.

Search Report/Non-Encumbrance Certificate: This document confirms that the property is free from any legal disputes, encumbrances, or pending loans. It typically covers a specific period, often 13 years.

Any Other Documents: Depending on the bank or lending institution’s policies and the specifics of your loan application, you may be asked for additional documents. These could include income tax returns, salary slips, employment certificates, or other relevant paperwork.

Keep in mind that the specific requirements may vary from one lender to another and can also depend on the type of property and the loan amount. It’s advisable to check with the bank or lending institution where you plan to apply for a home loan to get a comprehensive list of required documents and any specific guidelines they may have. Additionally, make sure that all the documents you provide are genuine and up to date to facilitate a smooth loan approval process.

HOME LOAN INTEREST RATE DEDCUTION IN INCOME TAX

Owning a home is a common aspiration, and the Government provides tax benefits on home loans to encourage property investment under the Income Tax Act of 1961. These benefits can lead to substantial tax savings. Here’s a summary of the key points:

Tax Deductions on Home Loan:

Section 80C: Tax deduction on principal repayment, up to Rs. 1,50,000 annually.

Section 24B: Tax deduction on interest paid, up to Rs. 2,00,000 annually.

Section 26 (read with Section 24): Tax deduction on a joint home loan for co-borrowers, up to Rs. 2,00,000 each for joint borrowers.

Section 80C – Principal Repayment:

Under Section 80C, you can avail a maximum tax deduction of up to Rs. 1.5 lakh per financial year on the principal repayment portion of the EMI.

This deduction can be claimed after the construction of the residential property is complete.

If you sell the property within 5 years from the end of the financial year in which possession was obtained, this benefit is reversed.

Tax Deduction for Stamp Duty and Registration Charges under Section 80C:

You can claim tax deduction under Section 80C for stamp duty and registration fees within the overall limit of Rs. 1.5 lakh applied to principal repayment.

This benefit is applicable regardless of whether you have taken a home loan or not.

The deduction can be claimed in the year these expenses are incurred.

Section 24B – Interest Paid on Home Loan:

Section 24(b) allows a maximum tax deduction of Rs. 2 lakh annually on the interest paid for a self-occupied house.

To claim this deduction, the construction/acquisition of the house must be completed within 5 years.

If your property is let out on rent, there’s no time limit, and the entire interest amount can be claimed as a tax deduction.

Tax Deduction on Interest for Under-Construction Property:

If you purchase an under-construction property and pay EMIs, you can claim interest deduction once construction is completed.

You can claim interest on pre-construction and post-construction periods.

Interest pertaining to the pre-construction period is allowed as a deduction in five equal annual instalments, starting from the year of acquisition or construction.

These tax benefits are subject to specific conditions and criteria. It’s advisable to consult a tax advisor or financial expert to understand how these deductions apply to your individual circumstances.

In the upcoming blog post on home loans, we will offer the latest reviews of home loan products provided by various banks and financial institutions, including prominent ones like State Bank of India (SBI), HDFC, Punjab National Bank (PNB), Aditya Birla Housing Finance, Tata Capital, and many more. These reviews will encompass the key features, interest rates, eligibility criteria, processing charges, and any unique benefits or offers associated with each lender’s home loan offerings.

This comprehensive review will help prospective homebuyers and borrowers make informed decisions when choosing a home loan provider that aligns with their specific financial needs and preferences. Stay tuned for detailed insights into the home loan landscape, making your home buying journey smoother and more informed.

For further insights into banking terms associated with loans, please refer to the following article:-
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