Loans Against Property and Other Home Loans

Can home loans be a type of loans against property? Read on for what you must know before taking a home loan and how Budget 2016 favours borrowers.

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Finance Your Dream Home

First time home buyers are now eligible to get an extra tax deduction of Rs. 50,000 on home loan of up to Rs. 35 lakhs, subject to the fact that the property must not be worth more than Rs. 50 lakhs, according to the Budget 2016 released by Finance Minister Arun Jaitley, according to an article published in Hindustan Times[1] in February 2016. Buying a house of your own is no less than a lifetime achievement for some. While some people invest their lifetime savings, others opt to borrow money and pledge their future earnings. Borrowing money from a bank or NBFC could be an overwhelming procedure, especially if you are a first time buyer. Home loans are generally loans against property. The house to be bought acts as collateral. Banks and NBFCs generally finance up to 80 percent of the property value.

Get to Know Your Eligibility Criteria

In order to get your desired amount sanctioned, you must have a good CIBIL score. A CIBIL score is a credit score given to every individual by Credit Information Bureau (India) Limited on a total of 900. You are judged upon your past credit history. The breakdown of how your credit score is decided as follows: 35 percent of it depends on your repayment history, 30 percent of what you owe to lenders, 15 percent on the time since you have been servicing debt and 10 percent on the amount you have applied for, according to an article published in The Economic Times[2] in August 2014. A score of 750 and above is considered to be an indicator of sound credit health and you may even get attractive interest rates. Also, lenders may not sanction an amount that accounts for more than 40 to 50 percent of your monthly salary as EMI. The increased burden increases the chances of default.

Fixed or Floating

As the name suggests, fixed rate means that the interest rate remains fixed during the entire repayment tenure. Floating, on the other hand, entails a flexible rate, depending upon the market conditions. Generally, fixed rate tends to be higher than the floating rate. The RBI cut the repo rate by 25 basis points to 6.25 percent in its April 2016 monetary policy review. The cut was based on the government’s supply side measures to keep food prices in check and its commitment to fiscal consolidation, as reflected in Budget 2016-17. The rate cut is expected to bring down interest rates for home buyers, according to an article published in The Hindu[3] in April 2016. You can also opt for loans against property, using an existing property as collateral. Being backed by collateral, it attracts lower interest rates.

Know the Fine Print

You should read the loan related documents carefully before signing on the dotted line. Make sure to know the default terms. It may vary from one bank to the other. Also, know about the add-on charges and penalties. The terms for disbursal and repayment vary from one type of home loan to another. For example, the terms and conditions for borrowing money for buying a plot and construction would be different from that for borrowing to buy an already constructed flat. Also, banks may inspect the property and value it accordingly if you are taking a loan against property. You must contact your preferred housing finance company to know more about the same.

Tax Benefits

Similar to the borrowing terms, the tax benefits on the principal and interest amount varies according to the type of home loan you have taken. In general, you are entitled to tax deduction of up to a maximum of Rs.1.5 lakhs on principal amount repayments under section 80 C of the Income Tax Act and up to a maximum of Rs. 2 lakhs on interest payments in case of a “self occupied house.”

[1] http://www.hindustantimes.com/union-budget/live-union-budget-2016-highlights-of-jaitley-s-budget-updates-on-taxes-reforms/story-Mswh4d37kIjA5bo7dHKPDP.html

[2] http://economictimes.indiatimes.com/wealth/borrow/five-factors-that-impact-your-credit-score/articleshow/40990122.cms

[3] http://www.thehindu.com/business/Economy/as-rbi-cuts-repo-rate-home-loans-could-become-cheaper/article8438571.ece

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.