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Home Loan - Things you should know

The main criteria are:

  • EMI Affordability: The main factor that influences home loan from a borrowers point of view is probably the EMI, the monthly outflow that will go towards repaying your loan for the at least the next 10-15 years. Do not over stretch yourself. As a golden rule never let your EMI exceed 40-45 % of your net monthly income
  • Down Payment: Once you know how much EMI you can afford, you need to check how much you can contribute from your own pocket. You will need to contribute at least 20-25% of the property value you choose.
  • Tenure of the loan: This is where you will need to decide between lower EMI at start and higher interest payment or lesser term and higher EMI but lower interest payments.
  • Interest: Home loans typically come with two types of Rate of Interest (ROI) fixed and floating. Fixed ROI means that the interest rate will remain constant for a period of 5-10 years and in some cases throughout the tenure of the loan. Floating ROI means that the interest rate can change anytime depending on the RBI norms and various Government policies and market conditions.

A home loan insurance plan is a scheme under which the insurer will settle the outstanding Home Loan amount with the lender or the bank in case of an unforeseen situation. Some of the comprehensive home loan insurance plans offers cover for the applicant, the house, and all its contents. The premium that is paid towards home loan insurance is applicable for tax benefits.

Advantages of home loan insurance:

  • Safeguard against future problems
  • Provides contingency protection
  • Flexible terms and payment options
  • Easier cancellation

Disadvantages of home loan insurance:

  • Mortgage insurance policies are designed to have a decreasing benefit over time.
  • The premium does not decrease over time even though your coverage decreases over time.
  • Mortgage insurance is not portable. If you switch lenders, you'll need to take out a new policy.

Is it necessary?

It is always better to get the property loan insured.

Home loan interest rates = Benchmark rate (cost of funds) + banks profit marginThe Reserve Bank of India (RBI) is Indias central banking and monetary authority. One of the duties of the RBI is to set the basic interest rate for loans in the country. The Base

Rate System is used for this purpose. The Base Rate includes all those elements of the lending rate that are common across all categories of borrowers. Banks are allowed to determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate. All categories of loans are required to be priced only with reference to the Base Rate. The Base Rate system is applicable for all new loans and for those old loans that come up for renewal. Since the Base Rate is the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Banks are required to review the Base Rate at least once in a quarter.

Banks are thus given the lower interest threshold, below which they cannot go. However, the upper threshold is not really defined by RBI. Because of Indias competitive economy, banks do not cross an invisible market-created line in raising their interest rates too high.

Within this range, you will see different interest rates offered by competing banks. Banks operate on what is called a base rate for the bank. They are allowed to use their own methodology to determine their base rate, but this methodology needs to remain constant and will be scrutinized by the RBI. Generally, banks decide on the base rate every quarter. The interest rate for a home loan is based on the base rate of the bank. The different rates offered by different banks are because of the varying methods that they use.

This is within the overall limit of Rs 1,50,000 of Section 80C. Therefore, as a family, you will be able to take a larger tax benefit against the interest paid on the home loan when the property is jointly owned and your interest outgo is more than Rs 2,00,000 per year.

The pre-EMI interest is the interest charged by the bank in respect to the loan provided by the bank for the period of disbursement of the actual loan to you and the effective starting of the EMI.

Moratorium: A moratorium period is the duration in the loan term when the borrower doesnot have to pay any money i.e. no repayment or EMI. It is the waiting time before the repayment of the EMI begins. This tenure starts with the date of disbursement of loan. However, even though the borrower is not required to pay EMIs, the outstanding balance continues to incur interest. In a common mans language it is the holiday period on the timeline of your repayments. The moratorium period ensures that your repayments on your Home Loan start after you have had some breathing space. Thus, you actually get some grace time.

Capitalization of Interest: It is nothing but compound interest. The interest is added to the borrowed amount and further interest accrues on that amount. This is done every month.

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