After demonetization, there are mainly two benefits accrue to new home seekers. Firstly, the prices of new houses have come down significantly. Second, benefit is that due to plenty of deposits with banks, interest rates have been reduced on all type of loans. Home loan Interest rates has also come down in the recent past, which helps in reducing EMI which increases eligibility for amount of home loan . Further home loans are now easily available with minimal paperwork and procedures and many banks and builders have tied up to facilitate the home buyers to avail the Home loan at convenient and special rate of interest for salaried persons on home loans.
So in our view, it is the right time to think about and purchase/construct your own house.
In this post, we will try to cover everything about home loans under these two headings:
- A. Things you keep in mind while availing the Home loan
- B. Tax benefit on Home loan
A. Things you keep in mind while availing Home loan
a) Eligibility criteria for House loan :
Eligibility to avail a loan depends mainly on the ability to repay the loan by the applicant. So eligibility to avail home loan mainly depends on:
1. Net surplus income (Income –Expenses-Compulsory investment and commitments),in case of salaried class, 50 % of the monthly salary is assumed as net surplus income.
2. Flow of your Income- If income is generated on regular intervals like in case of salaried class, the loan eligibility is higher. Therefore, stability and continuity of the applicant’s income is a major factor for loan eligibility.
3. Age- Your age is also a factor for a higher amount of loan eligibility. Young people can avail bigger loans as they can serve them for long periods which mean that the number of EMI can be increased. Minimum age to apply for a loan is 21 and the EMI period can be extended up to the retirement date which can be further extended is in case of a job that is pensionable, especially in the case of center/state Govt sector employees.
4. Other things that also effect the eligibility include locality of house, tie-ups of banks with builders, the builder’s reputation, collateral security, guarantee provided by other person etc.
5.Purpose of Loan :Home loans can be availed to buy a new house or extension /modification/alteration and repair of old house also.
6. Balance Transfer :You can transfer your home loan to other banks, if lesser rate is offered by the other bank .This is called as balance transfer scheme.
7 Joint Loans: To Increase your eligibility to avail higher amount of home loans, you should add a co applicant in your home loan application .You may add your earning spouse , your father ,mother ,brother /sister as a co-applicant with you .The loan amount will be decided after adding net surplus amount of all the co-applicants/joint loan applicants. Generally, banks ask prospective applicants to add at least one co applicant for a home loan application.
b) Maximum amount of loan and Margin money
As a thumb rule, you contribute at least 20 % amount of the total cost of the house from your own resources /savings which is also called as Margin money. The balance amount, i.e 80 per cent can availed through the home loan, subject to fulfillment of other conditions .However,some banks are also providing loans that are more than 80% of cost of the house. Generally, for a smaller loan amount, the percentage of margin money is lesser than the loan of a large house.
Suppose, you are interested in buying a new house of 50 lakh, then you have to contribute 10 lakhs from your own resources and the balance of 40lakh can be funded through home loan.
c) Home loan interest
Presently, home loans are available under two schemes fixed home loan and floating home loan.
1. Fixed home loan: Under such loans, the rate of interest on home loans remains the same throughout the tenure of the home loan period. These types of loans are preferable when there is an expectation of increasing trend in the interest rates in the future. If you prepay fixed home loans, then you have to pay the prepayment penalty which can be around 2-4 % of balance amount. You can change the type of home loan from Fixed to floating during the tenure of home loan by paying one time fees.
2. Floating home loans: Under this scheme the interest rate on home loans changes at periodical intervals, i.e. annually/half yearly according to the prevailing interest rate in market. These types of loans are preferable when there is an expectation of further reduction in the interest rates. Prepayment penalty is not applicable in such loans. You can change the type of home loan from floating to fixed during the tenure of home loan by paying one time fees.
d) Documents required for Home loans
1. Income proof :
- a. Salaried person: Income tax return for last three years, Form 16, latest salary slip, latest bank statement (six months) etc.
- b. Professional/Businessman : Income tax return 2 years ,bank statement for six months ,profit and loss account, balance sheet last 2 years certified by a CA.
2. Identity proofs : PAN card,Aadhaar card,Identity card from employer, Voter id card, Driving license etc
3. Residence proof: Ration card, Passport, latest electricity or Land line bill,Voter ID card, driving license etc.
e) Processing fees:
Banks also charge a one-time processing fees during the purchase of a house loan; this is generally required to be paid upfront for the processing of a loan, however, in a few cases it is debited from the home loan account. The rate of processing fees can be up to 1% .However, some banks run schemes for certain period under which the lesser processing fees is being charged from applicants.
B. Home Loan Tax benefit
a) Tax benefit on repayment of principal amount house loan :
As per Section 80C of the Income Tax Act , you are eligible to claim deduction for the amount of repayment of house loan during a particular year from the income of that year. This deduction is also covered under the overall limit of Rs 150000 in a year under Section 80C along with other eligible payments such as PF,PPF,Life insurance premium ,NSC etc.
b) Tax benefit on Interest on House loan:
Interest of house loan is eligible for deduction up to Rs 200000 per annum. If a house is jointly owned, then a limit of Rs 2 Lakh is available to all the joint holders. The above interest limit is applicable only if the house is constructed or purchased, however Rs 30000 limit is applicable if a home loan is purchased for the purpose of repair, renovation, alteration, addition. To claim the interest deduction, you have to provide the interest certificate from your bank.
I am hopeful the above information will be helpful in fulfilling your dreams to own a house.