Given the boom in real estate in India, housing/home loan has become the most popular form of loan. This type of loan benefits the middle class the most in their quest of fulfilling their lifetime dream of owning a house. One should look into the details of a housing loan before deciding on going in for any of the numerous offers available.
Floating Rate
The floating rate on housing loans is a pattern where the rate of interest is not stable. The interest rate fluctuates with the change in the rates in the economy. The borrower can gain form this type of interest charge when there is a dip in the rate of interest, bringing down the cost of the loan. This could also take a turn for the worse incase of an increase of the rate that takes the cost to a greater height.
Fixed Rate
Fixed rate loans are the loans that have a stable rate of interest. Here the rate of interest is unaffected with the changing market scenario. This loan is taken by people who prefer to know the exact cost of the loan and are happy to pay a fixed amount or when there is an expectation of a rise in the market value. However, there is a clause attached with the fixed rate pattern that could actually result in floating rate loan. The rate of interest could come up for review after a certain period of time in order to keep in accord with the market condition. This would lead a need for a change in calculation by the borrower with the earlier being thrown out.
Hybrid Structure
This facility is for those who are caught in two minds over the fixed and fluctuating loans. This kind of loans brings both into one option. First there is the fixed rate pattern where the borrower need not worry about the fluctuating rates in the economy. He can make payments based on a fixed rate and be protected for some time. The second stage of repayment is taken through fluctuating rate method. For people hoping for a decline in the later stage of repayment, this is the ideal form of repayment as they might just be able to cash in on a dip in the rate of interest.
Need for a Loan
Housing loans can be availed for various purposes like buying and constructing a house or even renovating an existing property, although many just look for a loan to buy a new one. There are numerous details that are screened before a housing loan is approved. The intention for taking a loan is critical as it bears an impact on the process borrowing and repayment.
The Process of Taking a Home Loan
The process of taking a loan could be quite nerve-racking for someone who is unfamiliar with it. Not many people repeat the process of a housing loan and it is just a one-time deal. Knowing the process of taking a loan will help a great deal in going about the entire issue.
1.
Choosing the Property
The beginning of the process of getting a housing loan is choosing a property that the borrower is interested in.
While choosing the property, one should ensure that he or she is sure about the property and it is to their liking
as it is a long term process that is time consuming and properly regulated.
2.
Transfer in Ownership
The process of transfer in ownership is very essential in seeking a loan. Lending organisations want to be
absolutely sure of the title of ownership while granting a loan.This is to make sure that there is no dispute over
the property in question at a later stage. Only after the details are thoroughly checked will the lender go ahead
with issuing the loan. Sometimes the lenders themselves do these evasive checks.
3.
Derive the Actual Total Loan Amount
There is a limitation on the purposes for issuing a housing loan and a certain percentage of the amount only
can be sanctioned. This means that the loan seeker needs to arrange fo the remaining amount through a
different source. Some of the expenses borne while buying a property are not covered under the loan and
these will need to be financed by the individual. Only after taking all these factors into consideration can one
derive the actual loan amount.
4.
Documentation Process
The documentation process involved in availing a housing loan is absolutely vital. This process involves
looking into various requirements that need to be fulfilled like the loan agreement and security documents.
There is also a proposal form that needs to be filled with additional surety documents surrendered. Only on
completion of this process will the loan process move forward.
5.
Using the Loan for the Right Purpose
Using the loan for the required purpose is essential as the loan amount is sanctioned based on the agreement
that it would be used for a specific purpose. The use of the amount in the right manner is a completion of the
agreement between the lender and borrower on the reason for the loan.
6.
Repayment
The repayment of the loan follows the completion of the borrowing process. The EMI amount is written out for
repayment of the loan and the pre EMI inertest is also mentioned. Repaying the loan is to be done in
accordance with the terms and conditions agreed upon. The floating rate of interest will need to be taken into
consideration for loans that have a provision of foreclosure.
Further Changes
There could be a situation at any stage of the loan process wherein changes would need to be brought in. These changes could be with respect to the process of the loan itself or the repayment or even the calculations made on the loan. These changes could be brought about as and when the requirements for changes arise.
1.
Choose the Right Lender
There a various lenders of housing loans, but to be sure of the best deal and a smooth process flow, one should
choose the right lender. The various lenders and their services should be closely evaluated before deciding on
the right one.
2.
Check the Lender’s Reputation
Housing loans are a long process and finding the right lender could make the process easier. Loan seekers
should check for the reputation of the lenders in order to finalise on the source for borrowing. A lender with a
good reputation is sure to make the loan process a pleasant one.
3.
The Experience of the Lender
Lenders with higher experience can be easily judged with the numerous financial deals gone through. It helps in
analysing the nature of the lender and its functionality. A lender with more experience could help in solving
problems that arise easily.
4.
Features of a Loan
The features of a loan are an important factor in choosing a lender. There are numerous lenders offering various
features on a loan. An individual need to figure out hi or her wants from a loan in order choose the right kind of
loan. The features of a loan that are to sought for are the structure of the loan, interest calculation, provision for
pre-closure and other benefits that arise from a loan.
5.
Rate of Interest
Different financial institutions provide different rates of interest. People always go in for lower rates of interest
that is beneficial. But a proper analysis needs to be made while distinguishing the rates of interest offered by the
various lenders. Incase of a floating interest rate a proper study has to go into the benchmark for the rate of
interest.
6.
Rests in the Rate of Interest
The rate of interest is the factor that determines the cost of a loan. There are annual rests and monthly rests in
the calculation of interest. The annual rest brings about a change in the interest rate on an annual basis. With the
payment for the loan being made on a monthly basis, it will be beneficial for the borrow if the rests are calculated
on a monthly basis as it will bring down the interest on a reducing capital and one can enjoy the immediate
benefits.
7.
Options in Repayment
The repayment option provided by the lender is a crucial factor in clearing off the loan. If there is an option for
pre-closure or premature clearance of the loan, it will benefit the borrower in terms of paying at his or her
convenience. In most cases there is a penalty in the form of pre-closure charges to be paid mostly in the case of fixed rate loans because of the mismatch of asset liability for the lender.
Reduction of Tax
A housing loan brings with it the benefit of reduction in tax due to the repayment of the loan and the cost involved in the form of interest. For loans taken after April 1, 1999 for the purposes of construction, buying, repairing, renewal or reconstruction of property the interest rate up to Rs. 1.5 lakh per annum is allowed as a deduction. The payment of the capital amount qualifies for a deduction under Section 80C of the Income Tax Act where it is part of the overall limit of Rs. 1 lakh present for various instruments. Submitting a certificate from the lender with the amount of capital repaid and the interest charged along with the return of income can be used to claim the benefit of reduction of tax.
Make sure that the home loan availed is within the means in terms of repayment.
Go in for fixed rate loans when the interest in low and there is a possibility of it growing. Choose a floating rate loan if the interest rate is high at the time of availing the loan. Be cautious of the duration of the loan exceeding the working years of the borrower. Closely monitor the impact of the changes in the market, especially in case of a floating rate loan. Claim the benefits of tax reduction for the loan availed by submitted the documents required.
Go in for fixed rate loans when the interest in low and there is a possibility of it growing.