SYNOPSIS

Availing a Home Loan for your home purchase is an attractive proposition

A home loan is preferable to other loans because of –

lower interest rates
added assurance on property documentation
it helps in maintaining liquidity for interiors work etc.
tax benefits

Still apprehensive?

take insurance to cover the outstanding loan
take a joint home loan

A house is the most coveted possession for all. Easy availability of home loans has made this dream become a reality for several people. However, as Indians, we have a tendency to be debt averse Therefore, before taking a loan, we tap into our savings. It’s not uncommon for people to liquidate investments, withdraw provident fund savings or even sell jewellery to purchase their house – in an attempt to maintain borrowings at the lowest possible level.

The aversion to debt can perhaps be attributed to times when the financial sector in India was underdeveloped. All of us would have heard tales of unscrupulous moneylenders who charged arbitrary interest rates (as high as 20 percent per annum) and exploited borrowers. Given the situation in those times, it was, without doubt, risky to depend on borrowed funds. However, over time, the scenario has changed for the better. We now have a robust and well-regulated financial sector which gives us easy access to affordable finance. Customers can get a variety of loans at competitive rates of interest. Moreover, there are insurance policies which protect them against loss in case of unforeseen events. With all this, availing a loan is no longer an unappealing proposition. It is now a comfortable exercise which can be customized to suit one’s requirements.

Home Loans – the most customer-friendly loans

There are several types of home loans available to suit the differing needs of customers. Unlike most other loans, home loans carry a lower rate of interest. The repayment terms are friendly and customers enjoy the flexibility to prepay or foreclose the loans.

How much loan can you avail of?

Your ability to avail of a home loan is directly linked to your earnings and credit profile. If you’ve been regular in repaying your dues (including credit card bills, utility bills and instalments of other loans), then the lender will be more comfortable. Additionally, your income level, expenses and savings will also have a bearing on the loan amount which you can avail of.

Given the requisite income, you can get a home loan of up to 90 percent of the value of the property. For example, if you want to purchase a house costing Rs. 50 lakh, then depending on your credit profile, the lender may sanction a loan of as high as Rs. 40 lakh. In banking parlance, the proportion of loan relative to the value of the property is known as the ‘loan to value’ (LTV) ratio. Instalment to income ratio (IIR) is the other parameter considered by lenders. IIR indicates the percentage of instalments to your total monthly income. Usually, lenders believe customers can comfortably pay an instalment which accounts for up to 40 percent of the monthly income. Lenders also consider the fixed obligation to income ratio (FOIR) which indicates the percentage of instalments of all loans to the monthly income.

Reasons why you should prefer a housing loan

1. Attractive interest rates:

The recent fall in interest rates, supported by expectations of further decline, has made housing loans very attractive. Therefore, instead of using your savings, which are meant for your children’s education, your retirement corpus, etc., you can easily purchase a house by taking a housing loan.

2. Added assurance on property title:

Before advancing a loan, the lender will check the property titles and records in an attempt to ensure that there are no claims or disputes. You can thus get the much-needed assurance on the credentials of your property.

3. Saving funds for interior work:

Before putting your savings in the down payment, you need to assess the cost of the interior work. You may require a substantial amount of money for the interiors – especially if you have bought a semi-furnished or an old apartment. Therefore, instead of availing high-cost personal loans, you can use your own funds for the interior work.

4. Tax benefits on housing loans:

You can enjoy several tax benefits on housing loans. These benefits are applicable on both interest payments and principal repayment. For a self-occupied house property, the tax benefits available on a housing loan are as under:

Provisions under Income Tax Act, 1961	Applicable component	Benefit*
Section 24	Interest payment	Taxable income deductible up to Rs.2,00,000
Section 80C	Principal repayment	Taxable income deductible up to Rs.1,50,000
Section 80EE	Interest payment (for first time home buyers)	Additional deduction up to Rs.50,000

*Subject to terms and conditions, which include time within which the property is constructed, acquired and resold.

Therefore, by taking a housing loan, a first-time home buyer is eligible to get deduction of up to Rs.4 lakh p.a. from the total taxable income, while subsequent home buyers can get deduction of up to Rs.3.5 lakh p.a.

Managing apprehensions related to housing loans

A housing loan is perhaps the largest of all loans which you may avail of. However, the amount shouldn’t make you averse to the idea of borrowing. There are various customer-friendly terms and mechanisms built into the structure of a housing loan. Moreover, the tax benefits make availing a home loan an attractive proposition. Therefore, your focus should be on managing the loan in the best possible manner. Based on your financial profile, most lenders will design flexible repayment plans which are easy on your pocket. Apart from that, you can also consider the following options:

1. Home loan insurance:

Home loan insurance plans offer protection against the risk of default in repayment in case of death of the primary applicant. By getting home loan insurance, you can be assured that your dependents will continue to have their rightful claim on the house without bearing the obligation of repaying the housing loan in case you were to meet with any eventuality.

2. Joint home loan:

If there are two earning members in your family, you can apply for a joint home loan. By doing so, you can not only avail of a higher loan but also repay the loan faster. Moreover, with a joint home loan, each co-applicant can separately claim the available tax benefits in proportion to their contribution in repayment of principal and interest – which translates into greater combined savings on tax.

upshot

The decision to buy a house is, as always, a wise one. What comes next is deciding the loan amount. It’s not uncommon to find customers who, despite getting a approval for a higher loan amount, exhaust most or all of their savings by making a bigger down payment in an attempt to minimize debt. However, before making such decisions, one needs to make an objective evaluation – taking into consideration the various terms, mechanisms and provisions available for the convenience and benefit of customers. Making a bigger down payment now will seem relieving as you will have to borrow less. However, ensure that you have sufficient funds available for your other requirements. Once your earnings and savings increase, you can always choose to reduce debt by prepaying your housing loan at some point in the future. However, the choice should be based on careful evaluation.

Also Read - Home Loans for Self-Employed People