Home Loan 101

A house and an approved home loan paper, symbolizing the successful calculating home loans. Finansh's Home Loan 101 guide provides guidance in understanding home loans and calculating home loan interest rates

Path To Your Dream Home

Close your eyes and picture your dream home. A cozy balcony where you sip your morning tea sitting on a swing, a kitchen that’s a playground for your Home Chef adventures, and a living room where countless family memories take shape. This dream home is more than walls and a roof; it’s where your future takes root. And the key to this dream? A Home Loan.

A Home Loan is not just a financial transaction, It’s a promise. A pact between you and a good lender that says, “I believe in your dream.

In this guide, we’ll help you smoothly navigate the complex twists and turns of your home loan journey.

Savings Secret: A bit of homework can make a big difference. Securing even a 0.5% lower interest rate on a ₹50 Lakh home loan could save you a minimum of ₹6.5 Lakhs (or a Swift Car) over the course of 30 years.

Owning a Home: Why take the Leap?

Imagine living your life in a rented house, always worried about ever-increasing rent and bound by someone else’s rules – no painting the walls, no hammering nails, and no control over who comes and goes. Now contrast this with owning your home, where every nook and corner reflects your personality and freedom.

Owning a home isn’t just about having a roof over your head; it’s about financial freedom, security, and a priceless sense of ownership.

Additionally, as a homeowner, you are far more likely to engage in community activities compared to if you were a tenant. A house is not merely a residence; it’s an investment in community engagement and a sense of belonging.

The Price of Time

Why wait to buy property when you could lock in today’s prices?

With property values in urban India rising by 7-11% annually, delaying your purchase could mean paying a significantly higher price for the same property later. A home loan allows you to secure today’s property prices while offering the double benefit of homeownership and investment in an appreciating asset.

Think about the case of Mr. Rohan. He purchased his first house in Pune for ₹58 lakhs back in 2014, choosing an area with promising growth prospects. Had he delayed his decision until 2023, that same property would have cost him nearly ₹1.13 crore.

Word of the Wise: There’s wisdom in the old saying, “Don’t wait to buy real estate; buy real estate and wait.” The sooner you invest, the more time your asset gets to appreciate.

Eligibility and How to Boost It?

You might be curious, “How do banks decide who qualifies for a loan and the maximum amount they can borrow?” Beyond the basics such as age, income, employment type, location etc., lenders focus on several crucial factors to assess your loan eligibility.

1. Income Stability: It’s not just the size of your income, having a steady income is crucial.

2. Credit Score: This is your financial reputation, and you want it to be high. A good credit score opens doors to better interest rates and more favorable terms. A score above 700 is generally considered good.

3. Loan-to-Income Ratio (EMI/NMI Ratio): This ratio is your financial health check-up. Banks look at how much of your monthly income goes towards payment of EMIs. The EMI/NMI ratio tells if you can comfortably afford a new loan. Although lenders offer Home Loans considering EMI/NMI ratio even upto 80%, a healthy EMI/NMI ratio is ideally upto 60-70% (including the proposed Home Loan) depending on your income bracket.

Expert Advice: Paying off smaller loans before applying for a new loan can significantly improve your Loan-to-Income ratio, and hence your home loan eligibility.

4. Loan-to Value Ratio (LTV Ratio): The Loan-to-Value ratio, which ranges between 75-90% in India, tells how much of the property’s total cost the bank will finance, and how much money you need to bring in as a down payment. A higher down payment, often 20-25% of the property’s value, helps to secure better interest rates.

Curious about your loan eligibility? Use FinBO to get a free, instant check with multiple lenders. [Check My Eligibility]

How to Boost Eligibility

Improving your home loan eligibility isn’t as daunting as it might seem. Simple steps like clearing your overdue EMIs can make a significant difference within a month or two.

Infographic by Finansh illustrating '5 Tips to Boost Your Home Loan Eligibility,' covering topics from clearing overdues to finding the right lender.

Ideal Home Loan Amount and Duration

Imaging packing for a trip. If you overpack, you’ll struggle with the weight; underpack, and you’ll miss some essential stuff. The same goes for your home loan amount and tenure.

Your ideal loan amount should be based on a proper mix of your monthly income, any existing loans, and the property’s cost. Aim to keep your EMIs, including the home loan, within 50-60% of your monthly income for a smooth repayment plan that does not compromise your current lifestyle.

A shorter loan term will have higher EMIs but will free you from the loan sooner. A longer loan term will have smaller EMIs, but you will end up paying more in interest. However, choosing a longer duration boosts your home loan eligibility, helping you to buy a more valuable property.

Quick Insight: On a ₹50 Lakh home loan at 9% interest, a 15-year tenure would lead to total repayments of around ₹91 lakhs, while a 30-year tenure would increase this close to ₹1.4 Crores.

If you are unsure about the home loan tenure to choose, consider choosing a longer term and making extra payments when you can. This strategy allows you to pay off the loan more quickly without the stress of hefty monthly EMIs.

Still not sure about the loan amount that’s right for you? Our Finansh advisors can help by providing personalized advice. [Book a Free Call]

Deciding Down Payment

We understand that rising property prices have made it challenging to afford large down payments. However, In India banks often cover up to 90% of your dream home’s cost, depending on the property’s value.

See the table below to learn how LTV impacts your maximum home loan amount based on your property value.

Property ValueMax. LTVMax. Home Loan
Rs 33.33 Lacs90%Rs 30.00 Lacs
Rs 93.75 Lacs80%Rs 75.00 Lacs
Above Rs 93.75 Lacs75%25% Downpayment

Quick Note: When determining your home loan eligibility, all additional costs, including GST, maintenance charges, and one-time payments (except stamp duty and registration fees), are included in the property’s value. Additionally, you can avail up to 90% bank finance based on the property’s latest evaluated value.

Finansh Alert: Be Careful! Offers promising ‘100% Home Financing’ often come with misleading interest rates, hidden fees and tricky terms.

Understanding Interest Rates

Interest rates are crucial; they are the heartbeat of your home loan. They determine how much you will end up paying back to the bank over time. Home loans in India are primarily of two types: Fixed Rate Home Loan and Floating Rate Home Loan.

Fixed Rates: Your monthly EMI stays the same, offering you some predictability, however at the expense of higher initial interest rates.

Floating Rates: The interest rate can vary based on market conditions. While this may lead to savings, it also introduces an element of uncertainty. For instance, a rate hike by the RBI could increase the interest you pay and vice-versa.

Let’s have a side-by-side comparison of the two:

CriteriaFixed RateFloating Rate
Rate StabilityMediumLow
Initial Interest RateGenerally 0.5-1% HigherLower than Fixed Rates
Affected by Market ConditionsIndirectlyDirectly and Immediately
Prepayment PenaltyCharged by Most BanksNil

Can you predict trends of Interest Rate movements in floating rate loans?

Guessing where interest rates will go is like trying to say if it will definitely rain at 4 PM tomorrow. There are many things to consider, and even then, you can’t be 100% sure. Interest Rate movement is influenced by multiple factors such as global economic conditions, inflation, and government policies. However, being aware of these indicators can offer some foresight.

Contrary to common misconceptions, floating rates have often proved beneficial in the long run, resulting in savings for home buyers.

Also, note that the most suitable interest rate for you may not necessarily be the lowest advertised one.

How do you compare Home Loan Interest Rates?

When you look at home loan interest rates, you’ll see they’re a sum of three main parts. First, there’s a benchmark rate, usually the Repo Rate set by the Reserve Bank of India (RBI). This rate is straightforward, transparent and easy to understand.

Second, there’s the Credit Risk Premium, influenced by your credit score and other factors of your financial profile. Banks only change this rate if your credit score drops.

The third part is where it gets tricky: this is known as Business Strategy Pricing (BSP), which can either be a premium or a discount. Initially, the BSP might make a bank’s home loan offer appear very appealing by allowing for a low initial interest rate.

But here’s the catch: a bank can adjust the BSP at its own discretion, based on its internal policies. This means that a loan that starts off with low interest today could become much more expensive in just a year or two. It’s a crucial detail to keep in mind when comparing home loan options, as it can have a significant impact on the total amount you end up paying.

Pro Tip: Even if you have a home loan with a “fixed” interest rate, the bank can still change it every 2 to 5 years. This is because of something called a ‘reset clause’. So, it’s never fully under your control.

Want to know the best interest rates available to you in real-time? Use FinBO to discover rates tailored to your financial profile. [Find My Rate]”

Understanding EMI: The Magic behind Numbers

The EMI, or Equated Monthly Instalment, represents your monthly financial commitment to your lender.

So, what goes into this critical figure?

Your EMI consists of two components: the principal and the interest. In the early stages of your loan, most of your EMI covers the interest, but as you make more payments, the principal starts to claim a larger share. This is called amortization. Let’s understand Amortization with an example:

Example: Let’s say you’ve borrowed ₹25 lakhs at an interest rate of 8% for 15 years. Your EMI would be approximately ₹23,891. Initially, a large part of this EMI goes towards paying off the interest, but as time progresses, a larger portion starts reducing the principal amount.

"Amortization table detailing the repayment schedule for a 25 Lacs home loan over 15 years at 8% interest, provided by Finansh.

Be aware that when interest rates shift, lenders generally extend the loan duration rather than tweaking your EMI. You do have choices, though: you can opt to alter your EMI, adjust the loan tenure, or simply make up the difference in a lump-sum payment.

Word of the Wise: Small pre-payments to your home loan have a big impact. They directly reduce your principal amount hence saving big on future interest.

The Credit Score: Why It Matters and How to Improve It

Your credit score (CIBIL, CRIF, Experian etc.) is like your financial character certificate. Your Credit Score is the major factor that determines how expensive a loan will be for you. A score above 700 is favourable, but a lower score doesn’t mean the end of the road. You still get a loan but at a higher interest rate.

How to Improve your Credit Score

1. Timely Payments: Don’t miss due dates, be it credit card bills or other loans. If you missed one, make it regular asap.

2. Credit Utilization: Keeping the credit utilization ratio below 60%. If you have a credit card limit of Rs 2 lacs, don’t keep the utilized limit above Rs 1.2 Lac for a long time.

3. Credit Mix: Having a diverse set of credit products like credit cards, car loan, and a home loan helps improve your credit score.

4. Old Accounts: Maintaining old credit cards or loan accounts is important as they add points to your credit history length.

5. New Credit: Don’t take multiple new credit cards or loans in a short period, as it negatively impacts your credit score.

6. Dispute Errors: Check your credit score once a while and raise a dispute for any error you find in your report.

7. Settlements & Write-offs: If you ever opt for loan settlement or have a write-off in your credit card, it damages your credit record permanently.

8. Secured Credit: If you have a negative credit score, try taking a credit card against a FD or a small loan to build one.

Insider’s Tip: Improving your CIBIL score by just 50 points leads to an interest rate reduction of up to 1.0% by big banks. 

Choosing the Right Lender: Banks vs Others

The lender you choose will be your partner for years, maybe even decades. Make sure to choose one that meets your needs and trustworthiness. Don’t rush into a decision with the first lender that comes your way.

While banks are generally strict in their eligibility requirements, they offer better interest rates. Housing Finance Companies (HFCs), on the other hand, provide more flexibility in their criteria but usually at the cost of higher interest rates.

It’s worth noting that most banks link their interest rates to external benchmarks, like the RBI Repo Rate, making their pricing more transparent. HFCs, however, often base their interest rates on internal metrics, which can sometimes complicate understanding of the interest rate they offer.

While some suggest taking a loan from an HFC and later transferring it to a bank, be aware that this strategy has its own set of costs and challenges. It’s wise to compare offerings from various banks and HFCs before making a final decision.

Quick Tip: If you’re leaning towards an HFC for your home loan, make sure you fully understand how market fluctuations will impact their interest rates.

Hidden Costs: Fees, Penalties, and the Tricky Parts

The sticker price of a home is not the final cost. Your home loan agreement might include several charges that are not obvious but can add up:

Processing Fees: These one-time fees cover the cost of processing your loan application. Be sure to negotiate this fee and keep an eye out for special offers.

Late Payment Fees: If you miss an EMI, expect a penalty, typically around 2% of the outstanding amount for each month overdue.

Pre-payment Fees: If you want to settle your loan early, you can always prepay your loan. Luckily, most lenders in India have now waived off pre-payment charges, especially for floating-rate loans.

Also, when budgeting for your home, don’t forget to account for additional expenditures such as mortgage charges, stamp duty, property insurance and property registration fees.

Eye Opener: Processing fees can range from 0.25% to 2% of the loan amount depending on the lender.
On a ₹50 lakh loan, that translates to anywhere from ₹12,500 to ₹1,00,000 – quite a range, right?

Essential Documents

Documentation always feels like a headache, but when it comes to home loans, it’s a headache we can’t escape.

What you do need are essential documents like ID and Address Proof, Income Proof, and Property Papers.
Our comprehensive Checklist of Documents for Home Loan ensures you have all the required paperwork in place.

Quick Fact: You don’t need a pre-existing relationship with a bank to secure a home loan.

The Golden Perks: Tax Benefits

A Home Loan EMI is not just a monthly expense; it is also a special tax-saving tool. Indian Income Tax law allows you to claim substantial deductions on both principal and interest repayments of your home loan. You also get a rebate on the stamp duty you have paid.

Data Point: You can claim up to ₹2 lakhs on interest payments and ₹1.5 lakhs on principal repayments under Sections 24(b) and 80C of the Income Tax Act, respectively.

To grasp the scale of these savings, consider a 20-year home loan of ₹75 Lakhs at 8% interest rate. Here’s how the tax savings could stack up:

Finansh Home Loan Tax Savings chart tabulating the probable savings in income tax for different income slabs in India

Over a 20-year loan duration, the potential for tax savings is significant and depends on your tax bracket and other financial factors. However, here’s what you could approximately save, subject on your financial profile:

1. 5% Tax Bracket: ₹3,76,966
2. 20% Tax Bracket: ₹15,07,863
3. 30% Tax Bracket: ₹22,61,795

In a world where every rupee counts, taking a home loan does more than help you buy your dream house. It also sets you on a path to save a lot of money over the years. So, the next time you consider a home loan, think of it as a smart financial move, not just a debt you have to pay.

Due Diligence: Trust is Good, Verification is Better!

Why is Property and Builder/Seller Due Diligence Crucial?

Would you buy a new phone without going through a few good reviews first? Similarly, before purchasing a home, it is essential to thoroughly verify both the property and the seller or builder. Make sure there are no pending legal issues and that all necessary approvals are in place.

Before signing under the dotted line, ensure the property and its builder meet all legal and quality standards. This is a crucial step that many overlook, leading to legal headaches down the line.

Assessing the Builder’s Financial Health

The financial health of a builder not only influences the quality of the building but also ensures its timely completion.

Always do a background check on the builder by reviewing their previous projects and customer feedback. Reputed builders are less likely to leave projects incomplete.

Legal Checks and Property Verification

Key legal documents to review include land titles, municipal approvals, and environmental clearances. Take help of a legal professional to sort this for you.

The RERA Act: Your Legal Guardian

The Real Estate (Regulation and Development) Act of 2016 has made transparency between you and the builder a legal requirement. The Act ensures that builders are held accountable, mandating them to register their projects before advertising or initiating sales, thus safeguarding the interests of the homebuyers.

Did You Know?: With RERA, builders must register their projects and disclose accurate project details, simplifying your due diligence process.

Quick Tip: Choose a home loan through Finansh, and we’ll take care of checking the property and builder for you, all without any extra charges.

Conclusion: Your Home, Your Story

Buying a home is more than a one-time event; it’s a series of important choices. From picking the right lender to making your monthly EMI payments, each step is crucial. At Finansh, we go beyond offering advice; we act as your dedicated partner, simplifying this complex process for you.

We hope our “Home Loan 101” helps you navigate the tricky yet rewarding world of home loans. If you’re curious, our Home Loan FAQ section is packed with lot more details and our experts are just a call away.

Team Finansh

This 'Home Loan 101' page is authored by Finansh's seasoned team of bankers and reviewed by independent experts. Taxation insights are provided by senior chartered accountants, while legal advice is reviewed by experienced lawyers, ensuring comprehensive and reliable guidance.