On popular demand here comes the much awaited article on Home Loan. I plan to cover some of the do’s and don’ts while opting to avail a loan to own that dream home of life time. This post comes soon after me closing our home loan account, so I sure do qualify to share my learnings. Yes, you read it right, I just closed my home loan account over the last weekend! I can tell you one thing for sure, nothing can match the sigh of a relief one can feel after closing the loan on their first ever dream home 🙂
Planning before deciding on a home loan:
Rule #1 – know your affordability. Decide on your preferences like whether you wish to go for an independent home or an apartment flat. Then choose the location that fits your budget. If you are looking at a considerably high budget home which might be just a little too pricey, think of having your spouse or parents as co applicants. That will help you avail higher loan amount since the combined affordability ensures the bank about a safe payment of EMIs. By having a co-applicant, you have an option of sharing the EMI payment on a percentage share basis. Accordingly, both the applicants will be able to avail tax benefits. Given that there exists a cap on the interest paid towards home loan is subjected to a max of 1.5 lacs per individual, sharing the EMI between individuals make a better utilization of the tax benefit provision. This is advisable only for those where in both the applicants are working and paying tax out of their incomes.
Few banks do impose rules like the co-applicant must be the co-owner of the property which you are planning to purchase. So make sure you have thought of all these things in the initial phase itself. Also ensure you have all the required documents even if you are going for a construction loan on an existing property. Once you have all the documents, it is easy to avail the loan and to strike the best deal among the lot in minimal time.
Choosing the loan:
While you are in the initial phase itself start researching about the various home loan products by at least 5 different banks belonging to both private and public sector. This gives you a very good competitive edge to evaluate the best product that suits your needs as well as a good learning of the industry. When I was in this phase precisely 5 years back, I got to know about all the conventional terminologies like ‘Fixed’, ‘Floating’ interest etc., Also, came across a product by ABN Amro bank which offered a mix of both! Since I was new to borrowing business by then, opted to go with a plan called ‘All Smiles Home’ which had a combination of both fixed and floating rates. I zeroed on a deal by ABN that was pegged at a fixed rate of 7.25% pa for first 3 years, 7.5% pa for 4th year, 7.75% for 5th year and floating rates there after for rest of the payment term! Usually fixed interest products are a bit high compared to floating ones. Though I could have opted for floating rate which was anywhere between 6.75 to 7% at that time. I chose the said plan as I was not willing to risk myself to variable rates every 6 months or a year. This also helped me to plan my finance better since there were a number of things in the pipeline. I think this is a smart move for any individual who is planning for a home loan and has started the career a couple of years back.
Few more things to keep in mind while choosing a home loan include various options like prepayment facility, charges on prepayment or foreclosure, periodicity of rate change etc., Some of the banks don’t allow prepayment while others allow up to 25% of the outstanding amount at the beginning of a financial year and few other banks don’t levy any penalty at all! I chose a loan that gave me an option to prepay 25% of the outstanding amount every year without any charges and provided an option to close my loan completely after 5 years without any extra charges. Some banks do provide home loan insurance at a nominal cost. If you don’t have enough risk cover on the applicant/s, opt for this insurance so that the loan burden is protected incase of unfortunate events. You may want to go through related articles on life insurance here.
During the loan tenure:
After availing the loan and while you are on EMIs, plan your investments with utmost care. Your aim should be to close the home loan account as earlier as possible. Since the interest component of your EMI would be very high compared to principal amount, most of the money paid towards the loan would be towards interest component and principal stays very much at the borrowed level unless you plan for some prepayment during the initial years. Prepayment can bring in a lot of benefit since it reduces the principal directly and there by interest component % gets reduced on the EMI.Whenever you make a prepayment, always opt to reduce the tenure of the loan period than to reduce the EMI. This way you will be able to close the loan account in a lesser period compared the actual tenure for which you availed the loan.
If you continue to pay EMI’s without any prepayment, usually you end up paying ~1.8 to 2x times the borrowed money! So, tax saved from your income is actually paid to make the banks profitable! Of course, the relief is that you have a own home as an asset at the end of the loan period. Based on your affordability plan to close the home loan account anytime around 6-8th year, backed up by intermediate prepayments on a yearly basis. This will save you lot of money! Now your question might be on the lines of ‘What about tax benefit?’ if the loan is closed. Well, the answer is actually there is no benefit after few years as the principal component in your EMI increases while the interest component gets reduces drastically. Now that the home loan principal component is a part of section 80C (max 1 lac), and most of it gets easily filled with your insurance and pf contributions. Similarly interest component may be much lesser than 1.5 lacs. Upon closing the loan account and by paying the tax to government there after, our infrastructure gets better and we get to feel the benefits. But if you continue to hold the loan, you are just making the bank more profitable by paying heavenly interests! Now I don’t want to get in to numbers to prove that, you folks are smart enough to calculate after reading so many articles related to finance on this blog I suppose.
If you have any questions, feel free to post them under comments section. I shall answer them to my best to help you 🙂
I had taking a housing loan on a flat. And after two months, loan against property on same flat
What are the available remedies, pls let me know
I availed home loan when i was unmarried and subsequently got married. I’m the sole owner of the property. My wife is working. Can i add my wife as co-applicant so that she too get the tax benefits of home loan?
A Sahai says
taken a home loan from HDFC 2.5 years back and wants to preclose the loan how much money to be paid for preclosing.
I have an outstanding loan around 22.5lacs @10.5%(fixed for first 3yrs & remaining floating)frm lichfl for 20yrs tenure.. I’ve completed 2.5 yrs of tenure. I have 2 options..
1)preclose loan of 18lacs
2)switch to other bank which offers 10.5% fixed rate for entire 20yrs..& invest 18lacs in some plot..
Suggest a beneficial option..
Kumar – it depends on your priorities. Before making a decision, please consider the loan processing fee with new bank, pre-closure fee and any such other charges you may have not considered. If you don’t pre-close, think of the tax benefit vs Interest and similarly growth prospectus of plot (appreciation) etc.,
Rajandran R says
Is there any way we can avoid paying pre-emi while taking a home loan? Does any bank offers such facility?
Rajendran – it depends from bank to bank. Some of the private banks won’t enforce you to pay pre-EMI until the entire amount is disbursed. However, some nationalized banks do!
I am the sole owner of my house and i took loan from IDBI home finance which is now merged with IDBI bank. My co-applicant was my elder brother. I have been paying the EMIs from my income and the sale agreement is also only in my name.Now i want to close the loan balance amount from my own earnings. The bank says I have to get the co-aplicant’s signature for closing the account. However am not in talking terms with my elder brother and he has refused to sign on any papers now. What should I do so that I can pay off the entire amount and get my original documents?
Hi Sandeep, I suggest you get in touch with a lawyer who has expertise in this area for exploring the options.
can i continue to claim the available tax exemptions? if i have an existing home loan on the same property against which i have taken a LAP.
I want to ask that I have taken a hb loan from LIC(HF) where the loan is sanctioned in my name & my wife. The registry of the home is in the name of my wife & me & my wife is a house wife & she has no income. please write me can i claim full tax benefits
I have some doubts regarding Home Loans.
I am a fresh man and i wanted to avail the loan.
I am stating in bangalore and working in a tech firm, my parents reside in my home town and i am planning to buy a flat for them.
I have being doing a study about interest rates from different banks, their processing fees their prepayment policies and pre clousure charges.
Now after all these days of studies i am not very much sure what to choose and how to go for this loans.
I spoke to builder, possessions will be given next year in the month of Feb, as you said earlier repayment starts once the borrower move in. The question is i am not going to move in to that house, i might give it for rent, if i have to do prepayments and close the loan within 5 years what should be the best options.
Axis bank offers interest rates of 10.50% per annum with floating interest rates, and doesn’t charge any fee of pre-payments and pre closure only for floating interest rates.
If there any blocking period for starting the pre-payments or is there any amount limitation which we can pay at max as part-payment for per a year.
Can you guide me what will be the best option to go for?
nishant kashyap says
I have bought a flat which will be delivered to me in 2 / 3 years time and I am applying for Home Loan.
I request your help in understanding the tax benefit provision on joint home loan.
My wife is a Phd student and gets scholarship / stipened which can not be considered as a salary. She does not file IT Return as her earning is less than the taxable slab and its merely stipened.
Though my own salary is sufficient to meet the EMI but I think if I can add my wife in the Bank Loan as a Co-borrower then after a year or so when she starts earning salary, then she will also be able to avail Tax Benefit.
My queries to you are as following:
1. Can my wife be allowed as a Co-borrower in the Home Loan application by Banks when she is merely getting Stipened / Scholarship as on date?
2. If my wife can not be added as a Co-borrower as on date then can I take the loan only in my name now and later get her included in the same. Will the bank agree to add a co-borrower at a later date, how complicated will be the procedure and what legalities will be involved.
3. I understand that the said flat shall be in joint names which we will get included in the Agreement with the Builder and the Tax Benefit can be availed in the same proportion as the share in the flat. I wish to keep the Share Ratio as 60:40 thus do I need to mention this Share Ratio in the Sale Agreement with the Builder or do I need to prepare a separate agreement.
i am very happy to see such a wonderful human being doing a nice service for the public…you are great…sir i have a question for you…i have taken Housing loan from LIC for an amount of 22 lakhs in 2009..Till now i haven’t paid any part payments against my principal amount…Is it the right time to pay the part payment? What way it will benefit me in terms of monthly EMI…Shall i get reduced EMI for the amount i pay towards Principal? what way i will be benefited for my part payments…please explain me sir..Thanks
narendra adkine says
i have taken 20lak loan from union bank for plot purchase 11lak and construction 9lak but due to money problem i want to cancel construction loan of 9lak is it possible to cancel the construction loan of 9lak..please guide
I have query about home loan,
i have just booked a property and i’m going for home loan, but i have already taken a loan for downpayment and i could not pay any EMI for next 7-8 month. can i apply now for home loan and repayment of homeloan start after 7-8 month.
please guide me or suggest any other option.
Home loan repayment starts only after you officially move into the property for the purpose of residing. Until that you would be asked to pay just the interest component for the amount you borrowed from a bank.
I took a SBI Home loan in 2009 witch 3 years back. amt 20laks for 10-years pried.
the agreement is 1st year interest rate is 8% and 2nd year to 5-year is 9.25 is fixed rate as for agreement.
But last 3 months the banker charges 12.5%. i called banker they told me the bank interest is now changed.!!!
But how the fixed interest rate is changing without any reason?
Please help on this….
umesh derebail says
No bank would like to suffer a loss on account of fluctation in interest rates, i believe there must be a clause in the agreement, other things remaining equal interest rate might change under volatile interest regime at the discretion of the banker. However the hike of interest rate to market determined rate can be questioned and you may get a rebate of 1.5 to 2%. You can seek the managers advice on the same for revision of interest, since it is a policy decision, he might guide you. Otherwise you have to seek intervention of the Banks Ombudsmen
Rahul Upadhyay says
If I have availed loan from HDFC on plot at approved site and wish to get home loan from the other bank or from the same without completing the first, should I be liable to get the same or otherwise.
Recently i had taken Home Loan from LICHFL & my wife is co-applicant but entire loan was taken byme & in registration also my wife name is added. Please suggest me whether bot me &my wife are elgiable for Tax bemnefits / Both can share the tax benefits.
waiting for your suggestion.
Satyawan Khedekar says
I had purchase a flat in a under construction apartment and i have applied for a home loan to bank. Is it required or compulsory to start EMI after loan gets sanctioned by bank.
or i can extend the EMI for some time.
Please guide me as soon as possible.
Dear Mohan ,
I have taken a loan against property from HFL 2 years back of rs 9 lac . Now i want to pay 5 lac cash in this loan as prepay to save my interest on monthly basis.
I want to ask you that will i have to pay 2% interest on prepay of my loan as i have been asked from HFL employees , if no then from where i can get this information so that i can show them.
Sir, u r doing a good service. My daughter is an army officer in nagaland & cannot come on leave/sanction for the loan has been sanction has been obtained from the SBI . how long can we delay the disbersment what is the procedure
T. Damodaram says
I will be retiring in the next five months. After availing Home loan I purchased a Flat. The balance outsatnding loan is around 7.5 lakhs. I can continue another 81 months to clear the loan by paying EMIs per month Rs.15000. Is it worth to pre-close the loan account or continue and avail interest exemption ude 80C
ranjan sahoo says
I have been seeing your blog, it is very helpful for all home lone borrower . I have one query regarding the prepayment. recently i have taken loan of Rs 22 lacs from HDFC ltd. As you know all banks have waived off the prepaayment charges. But one thing, whether i can make part prepayment within the the first month of disbursement? will it reduce my prinicipal amount.
Hi Ranjan – thanks for being a frequent reader here. Well, I suggest you call up your bank and let them know about your intentions of part prepayment, they will guide you the charges and also if it is allowed. It depends from bank to bank and also on kind of loan plan to another.
Certainly part prepayment reduces the principal amount 🙂
Can one have a home loan in his name and registration in another name/common?
i am Amit from delhi ,and buying a plot in jaipur.I am a coaplicant for the loan which my father and me are taking. Problem is that i will not be available in delhi when the agreement for loan is to be signed by my father and me. I will be in gujrat that time and due to constrains i cannot come to delhi to sign. Please is there a method that this can be solved.
Hi Amit, it depends on the banks. There are few banks who strictly look for the co-applicant to be a co-owner of the property for loan purpose. But it is not same with all the banks. However, all co-owners should be co-applicants while availing the loan.
Hi, I have a query. I and my husband bought a flat in 2008 and got its possession in March,2009 in our joint names by taking a home loan of Rs. 43 lacs jointly. We were under the impression that maximum tax benefit available was Rs.1.5 lacs for both of us (whereas it is available to the co-lenders individually). my problem is that due to this wrong impression, only my husband enjoyed this tax benefit for all these years and i never. Can i now claim this? I am working with a PSU and have paid around Rs.1 lac as tax in these years.
I would be very grateful.
I need some explanation on the following.
1. My husband and I have taken a joint loan of 20 lakhs in Aug 2011, we both along with his father is the co owner of the flat. Will Me and my husband can get tax benefit or can only 1 avail of it.
2. Secondly we are paying an high interest rate on 20 lakhs, if we pay 5 lakhs to the bank as prepayment how it work? will it help me in anyways to pay the amts in bits. Total amt that gets deducted every month is 26K out of which 22K goes in Intrest and 4 towards principal
3. Please explain the prepayment procedure or table of home loan. I have to pay prepayment charges o f 2 % to my bank if I prepay the home loan.
Please assist me what can I do??