HOME
LOAN
TRUTHS
A
home loan helps you achieve peace of mind by providing you with one of the
basic necessities of life—a roof over your head. But if you don’t borrow right
and are not aware of the financial and tax implications, a home loan can rob
you of that very peace of mind.
If you are applying for a home
loan, than please keep in mind the below mentioned points:-
Before you apply
What decide your borrowing capacity
:
The green
signal for loan is given once a bank is confident of your ability to repay the
sum. “The criteria for deciding the home loan are primarily the cash flow and
expenses of the borrower”.
However, it’s
difficult for lenders to figure out the expenses of each loan applicant because
every individual has a different spending pattern. So, banks typically assume
that up to 40% of your monthly income can go into paying the EMI. If an
individual has a monthly income of Rs. 1 lakh, the maximum EMI he would be able
to pay is Rs. 40,000.00. The loan amount is then calculated on the basis of
tenure and interest. For instance, if the interest rate is 9.5% and the tenure
is 20 years, the individual can take a loan of Rs. 43 lakh. If the interest
rate was higher at 10%, the loan eligibility would have come down to Rs. 41.5
lakh. Similarly, if he had gone for a shorter term of 15 years, the loan
eligibility would have dropped to Rs. 38.5 lakh.
Banks also
take into account other liabilities of the borrower while determining his loan
eligibility. “We try and assess the expenditure and liabilities of the
borrower. The total expenses (including EMIs of other loans taken) should not
be more than 55-60% of the total monthly income”.
Age is also an
important criterion for deciding the tenure of the loan. Most banks want that
you should not be more than 58 years when you pay your last EMI. If you are 45
and due to retire in 15 years, a lender will not give a loan for more than
10-12 years. But if you are 25 years old and have more than 30 years of working
life left, then the home loan tenure can easily extend to 20 years.
Your salary
structure is also a factor. Lenders don’t take into account the allowances you
get as part of the salary even though the amount is a part of your cost to
company package. If the salary is packed with perks and allowances, your loan
eligibility might come down. Other incomes like bonus and performance-linked
pay may also not be considered by the banks if there is no confirmation of
regularity.
Smart move you can make: While there is very little
you can do to increase your income level or change your salary structure, you
can increase your borrowing capacity by roping in a co-borrower. Here too,
lenders are not comfortable if the co-borrower is not your spouse. They feel that
there could be disputes between the siblings over the property ownership and
the repayment liability. It’s much safer if the co-borrower is the life
partner. In fact, some lender go to the extent of sanctioning a loan to would
be couples, though disbursement takes place only after the marriage is
solemnised. “The lender will ask for a copy of the marriage certificate for
disbursing the loan”.
How to get the best
rates:
You will go to
any length to get the vegetable vendor to lower the price of onions or the tv
sales person to offer you a discount. The home loan market is no different. If
you negotiate hard and drive a good bargain, you will be able to get a lower
rate. Don’t get taken in by the teaser interest rates on offer. The low rate
will apply for only a few months before the loan switches to the normal rate.
SO, check the actual interest rate charged by the lender before taking a
decision. “If you cann’t negotiate on the interest rate, do so on the
peripheral charges such as processing gee and future charges such as
pre-payment penalty. But these should be looked at before the home loan
contract is readied”. Also, shop around for the best deal before you lock in.
You may find it cumbersome but a few days ground work can save you thousands of
rupees in interest cost over the term of the loan. “The final decision should
be made only after thorough research and comparative study has been done. Read
the agreement carefully and go through its clauses before signing it. In the
excitement of buying the dream house, this is often given a miss.
Smart move you can make: Keep your eyes pleaded for
refinancing deals.
In some cases,
new customers are charged a lower rate than that being paid by existing
borrowers. If you also want a lower rate, you can get your lender to
recalibrate the housing loan by refinancing it. Some lenders charge a small
refinancing fee of 0.5% of the outstanding loan for this. That’s a small fee to
pay for lowering the interest rate by 1-2%.
Opt for a current account linked home loan:
Self-employed
professionals and businessmen can save a neat sum if they link their home loan
to a current account with the lender. The balance in the current account gets
adjusted against the outstanding loan, thus bringing down your effective loan
and reducing the interest. Here’s how it works. If somebody takes a home loan
of Rs. 50 lakh and maintains a balance of Rs. 10 lakh in the linked current
account for a month, then for that month, he will be charged interest only on
Rs. 40 lakh. But opt for this only if you need to have a current account. Such
loans usually have a higher rate of interest than a normal loan. “People who
have periodic liquidity should opt for such a product as it enables them to
maximize their returns by retaining liquidity as against a conventional term
loan wherein no such flexibility exist and any payment over and above the
instalment cannot be withdrawn.
These loans are offered on a daily reducing basis so one can benefit
even if one has maintained a balance only for a certain period during a month.
“Parking surplus funds, deposits or even crediting salary for a day would
reduce the outstanding loan. Interest is calculated on the daily outstanding
balance every rupee of balance in the Home Saver account each day counts
towards saving on the loan interest.
FEES
AND CHARGES OF A HOME LOAN
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Before disbursal
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After disbursal
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Processing
fee: This is payable with the application and is non-refundable. Charges
are between 0.5% and 1% of the loan amount.
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Prepayment
charge: If you prepay your loan, there is a 1-2.5% penalty. Some lenders
waive this if the prepayment is up to 25% of the outstanding loan in a year.
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Legal and
technical charges: Some banks levy this charge when they disburse the
loan. Charges vary from bank to bank.
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Duplicate
statement charges: Some lenders charge Rs. 100-150 to issue a duplicate
statement.
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Stamp
duty: Many banks also recover the stamp duty paid on the registration of
the loan agreement.
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Late
payment or bounced cheques: If you EMI cheque bounces, you are charged
Rs. 200-500. This is besides the charge levied by your bank. Late payment
charges vary from bank to bank.
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Top-up
charges: If you wish to take an additional loan, there is a 0.5% charge
on that amount.
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Tax benefits
for
borrowers
The tax benefits available for
home loans bring down the effective cost of borrowing. The repayment of
principal for a home loan, for instance, is eligible for a deduction of up to
Rs. 1 lakh a year under Section 80C.This is especially useful for borrowers who
are paying a huge EMI and, therefore, don’t have too much to invest in other
tax-saving option. But the icing on the cake is the deduction on the interest
paid on the loan. Up to Rs. 1.5 lakh a year is deductible from the taxable income
of the borrower under Section 24(b).
Living in another city: The home loan benefits are available if the house is for
self-occupation or if it’s given out on rent. However, a borrower can avail of
the deduction even if he has bought a house in another city without losing out
on the exemption for house rent allowance. So, if you work in Mumbai but have
purchased a home in Nagpur, you can claim a deduction under Section 24(b) as
well as an exemption for the rent allowance received.
Partial disbursement: In some cases, the disbursement of the loan
is linked to the stages of construction of the property. The tax treatment is
different here. This portion of the interest paid prior to the completion of
construction cannot be claimed as a deduction in the year in which it is paid.
However, the borrower can claim deduction for the interest under Section 24(b)
in five equal instalments after the construction is completed. Do note that the
limit on deduction in a year remains Rs. 1.5 lakh.
More than one loan: Benefits under Section 80C and Section 24(b) can be taken for more
than one home if all the properties meet the requirements. Irrespective of the
number of homes, the limit of Rs. 1 lakh under Section 80C and Rs. 1.5 lakh
under Section 24(b) still apply. However, if the house has been given out on
rent, there is no limit on the deduction of the interest paid for that loan.
Joint home loan: Co-borrowers can separately claim tax
deduction if the house is jointly owned by them. The tax benefit can be availed
of in the same proportion as the ownership in the property. If the husband has
paid 60% of the total amount, the tax deduction will be available in the same
proportion. So if principal repaid during a year is Rs. 1 lakh, the husband can
claim deduction of Rs. 60,000, and his wife, for Rs. 40,000.
Loan from relatives
also eligible for tax breaks:
The tax incentives on home loans
are available even you have borrowed from your relatives or informal sources.
“With respect to claiming deduction for interest on a housing loan, there are
no conditions regarding the entity from whom the amount is borrowed. “The
requirement is that the loan should have been taken for the purpose of
construction, purchase, renovation and repair of the property.” However, you
cannot claim deduction under Section 80C for the principal repaid if the loan
has not been taken from a financial institution.
No tax benefits for
buying plots: Home loan tax benefits are
offered only in case of built property. There is no tax deduction if the loan is
taken to buy a plot of land. “A plot of land would not qualify as a ‘house
property’ and , hence, any income derived from it will not be taxable under the
head income from house property. Accordingly, the deductions available for
interest on loan for purchase of the plot will also not be allowed under the
said head.
3 Ending the
Loan
Should you prepay?
This is a perennial dilemma for
home loan customers. And the short answer is yes. The long answer is that if
the interest you are paying on the home is higher than that being earned by
your investments, you are better off foreclosing the loan. Banks charge a prepay penalty of 2-2.5% if
the loan is being refinanced by another lender. However, if you are paying from
your own funds, some banks don’t charge any penalty.
You lose tax benefits
if you sell soon:
If
you sell a property within three years of buying it, any gain will be treated
as short-term capital gains and taxed as your income for that year. In the
highest tax bracket, you could lose a big chunk of your profit to taxes. But
this is not your only loss. Any tax benefit availed of by you on a home loan
for the property will also be reversed. The Income Tax Act states that if the
property is sold within five years from the end of the financial years during
which it was bought, the tax deductions claimed will be added to the income for
that particular year and taxed at the marginal rate of tax. So, keep this in
mind when you strike a deal to sell your house.
