Home loan queries

All of us are aware that the outbreak of Covid-19 pandemic has played havoc with the economic cycle as millions lost jobs and millions witnessed drastic drop in their incomes. With this disruption in the economy at an unprecedented scale, household incomes have been hit, forcing them either to roll back or halt their future expansion plans and stick to basic essential needs.

The government and the Reserve Bank of India (RBI) have taken several measures to mitigate the effect of the pandemic since the announcement of a nationwide lockdown in March. Besides other measures, the RBI cut the repo rate substantially. The reduction in repo rate has come as a blessing in disguise for those who are looking for bank finance to buy a home. Now the interest rate on home loans by banks stands to its lowest in over a decade.

Notably, owning a home is a basic necessity for the majority of us. This has made home loans most popular as these loans are considerably different from other types of loans like car loans and personal loans, primarily due to its nature of long tenure and low interest rates. On top of it, the pandemic situation has established that owning a house is one of the key factors to deal with the uncertainties.

However, there are various issues keeping potential home loan shoppers away from the facility. Even those who have already taken a home loan are facing various difficulties owing to changing interest rate scenario. I have been receiving many queries regarding home loans. Most of the mailers show their appetite for obtaining a housing/home loan, but lack of proper guidance in accessing a home loan facility. Mostly, potential home buyers pointed out cumbersome loan processing method which discourages them to bank upon a home loan facility. There are many who want clarity on interest rates as they have ‘heard’ stories of dispute over interest rate applied on home loans ‘in contravention’ to the basic loan agreement between the banks and the borrowers. They put a genuine question about the change in their equated monthly installment (EMI) which is driven by change in interest rates during the tenure of the loan. 

What are the things which a borrower needs to keep in mind while applying for a home loan?

As a borrower you need to be very smart. You have to ask questions to the bank while applying for a loan. Precisely, there are certain things which you should consider before shopping a home loan. First of all you have to decide about quantum of finance you require. Do it by considering your monthly income, your age, other debts and financial commitments. You should even take your job stability into account before pursuing for a home loan. Ensure that your loan amount is not going to make your repayment  challenging that may lead to debt trap.

After deciding your loan amount, look at repayment options of the loan. When your loan tenure is for short period, your equated monthly installment (EMI) will be very high. Longer tenure is generally chosen to enhance the loan eligibility of borrower but remember longer the tenure greater is the cost of borrowing. If EMI for short term is not affordable and you want to pay off your loan as soon as possible, consider middle path for the period of 10 to 15 years.

Besides, you need to know the rate of interest to be charged by the bank on home loan. There are two options as far as interest rates are concerned. One, you can obtain loan on fixed rate. In this case, the bank gives you loan on a fixed interest rate for a particular period. Second option is floating rate, which means, the interest rate on your loan will change depending on the interest rate cycle in the market as the loans are now linked to repo rate announced by the RBI from time to time.

Meanwhile, after availing the loan facility, it’s important to go for insurance of your home loan (Home Loan Protection Plan) as well as the property which you have purchased or constructed out of the bank loan.  

What’s this Repo Rate Linked Rate? How it is going to impact home loans?

Let’s first understand the concept of repo rate. It is the rate at which Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. Currently repo rate stands at 4%.

The reduction in the repo rate means that loans will be available at cheaper interest rates  This is likely to result in commodities becoming cheaper due to lower interest costs, ultimately benefitting the end consumer.

Earlier banks used to peg home loan interest rates to MCLR (Marginal Cost-based Lending Rates). In October 2019, the central bank issued a circular asking lender to use new benchmarks for home loans. While the RBI provided several options, most banks opted for the repo rate as the benchmark for home loans, known as the Repo Rate Linked Lending Rate (RLLR). 

The repo rate had an indirect effect on home loan interest rates under the MCLR-based system of lending as the marginal cost of funds includes the cost of borrowing. Under the RLLR model, any change in the repo rate has a direct impact on home loan interest rates. The triple-digit cut in repo rate since February has led to a decline in home loan rates, making homeownership cheaper.

Remarkably, low-interest rates coupled with depressed real estate prices have made the pandemic an ideal time to shop home loans.

What is the difference between Home Loan Protection Plan and the property insurance plan?

Home Loan Protection Plan (HLPP) is an insurance plan where insurance company settles any outstanding amount on the home loan with the bank in the event of death of the borrower. This way, a borrower can ensure that his/her family will not have to pay the outstanding loan amount after demise of the borrower. However, it is not mandatory to purchase home loan protection plans. Under property insurance, you purchase cover against risks to property/home due to earthquake, fire, flood, storm, theft etc.

Do home loans qualify for income tax rebate?

An individual is required to pay tax if his income exceeds taxable income. Government provides tax relief for some business and individuals who invest on which deduction is available under section 80C of the income tax Act, 1961. You can avail tax relief on home loan principal amount and interest paid. However, this relief is available to borrowers who are continuing or making prompt payment.

What is switching of loan? What are the procedures and costs involved if one decides to switch the loan?

If you take a new loan from another lender (bank) to repay your existing loan it is called switching of loan. Today, a segment of customers review their housing loans to see if they can get a better deal by switching, and this is not bad at all. This way you can ask your existing bank for re-pricing options, before checking with other banks.

However, before switching consider if you are better off. Ask your current bank whether you will incur a fee for terminating your existing loan or you can convert the loan to one which is more attractively priced. Check if any fees will be imposed on such conversion. Before switching to the bank whose refinancing package you are considering, check how you will be better off with the refinanced package. One should note that the installment amounts and interest payments will change once there are changes to the loan package. Also, compare the present repayment schedule for your current loan package with that of the new loan package you are considering and check the total amount of interest payable and other charges.

Can home loan be also granted to purchase land?

Yes. Home loan facility can be sanctioned for purchase of land/plot to be used for construction of house. For example, J&K Bank Housing Loan Scheme provides finance for purchase of land/plot as a part of housing loan within the overall entitlement under the scheme. The finance is provided to the extent of maximum Rs. 50.00 Lakh or 60% of the cost of plot of land whichever is less, provided the area of proposed land is not be more than 5440 Sq ft or 1 Kanal. Precisely, the loan amount for purchase of plot has to be within the overall ceiling of housing loan eligibility.