Home Loan Tips And Tricks
Getting a home loan and repaying it is usually a long-drawn affair. Here are some home loan tips, ideas and tricks to ensure a quick sanction and easy repayment.
By Amrita Gracias
We all dream of owning a home. But, for many of us, the only way to buy a house is by availing a home loan to cover a major portion of the cost. Nowadays, home loans are marketed enthusiastically and promises made of disbursement within a few days. But, before we jump at the offer, it’s crucial to understand the nuances of the sanctioning criteria and home loan repayment process, as they aren’t as simple as they seem.
Getting a new home loan or a home renovation loan isn’t always quick or easy. There are certain factors that determine the ease and speed of the loan approval process. Perhaps the most significant one is the applicant’s financial history. This is reflected in the score generated by the Credit Information Bureau (India) Limited, commonly known as the CIBIL score. An individual's CIBIL score reflects his repayment history for loans and credit cards. Apart from this, one’s employment history, annual income, age and financial stability are also major factors that come into play.
When a home loan is approved, it implies a big commitment to ensure that it is repaid. Considering that home loans have a long tenure – going up to 20 or even 30 years – repayment could be hindered by some sudden changes in circumstances. These include factors such as rising interest rates resulting in higher Equated Monthly Instalments (EMIs), a cash crunch owing to loss of income, or some other financial strain. Unfortunately, putting your EMIs on hold is not an option; you have to continue repaying the loan whatever your circumstances might be. In fact, non-payment of EMIs or defaulting on your home loan can have serious consequences. Here are a few possible fallouts :
- Your credit or CIBIL score gets affected, and your profile is labelled as ‘risky’ by banks and other lending institutions. This adversely affects your future borrowing capacity.
- Even if you do manage to acquire a loan in future, it will be at a higher interest rate.
- You are marked as a Non-Performing Asset if you default on repayments for over 90 days. This drastically reduces your chances of getting a loan in future.
- The bank will send preliminary notices when you default on EMIs. If the officials feel you are a wilful defaulter, they will, most likely, file a lawsuit for recovery.
- Legal notices are sent to the collateral (if any) or guarantor as well.
- Penalties are imposed on late payments and defaults, thereby increasing your outstanding payments.
- In certain cases, your home can be seized by the bank / lender who will then sell (auction off) the asset to recover the pending amount.
In genuine cases of difficulty in paying EMIs, such as the applicant dying or meeting with a debilitating accident, banks allow some leeway.
Home loan tips – Getting your loan sanctioned easily
While there are several factors that determine your eligibility to get a home loan approved, you can help speed up the process and cut bottlenecks. Here are some things you can do:
1. Credit score: As your CIBIL score is a prime factor affecting your eligibility, make sure you clear EMIs of pre-existing loans and credit card dues on time. Any default on these payments will immediately bring down your CIBIL score for home loans, making it more difficult for you to get one.
"Maintaining a good credit score is essential to apply for any kind of loan with banks, as regular credit card payment or loan repayment is considered for quicker process of loans. Skipping or delaying payment of monthly loan installments, or taking new loans without repaying the older ones will affect the credit score of an individual. One should ensure that the current loan should never be tagged as SMA (Special Mention Account). With a CIBIL score of more than 750, one has a higher chance of quicker loan processing and disbursal.
If you are looking for getting home loan faster than banks, opting for a loan from a NBFC (Non-Banking Financial Company) would be better, as the process involves less documentation, quick verification and evaluation process. This minimises the overall duration of home loan approval."
— K Satish, Director, Zen Money
2. Financial stability: While your annual income might be another major influencer, it is certainly not the only one. Banks and lenders also check your regular expenses and liabilities, as these determine and help secure your repayment process. Too many liabilities can hamper your eligibility. So, to speed up home loan approvals, make sure you keep these liabilities down.
Remember, assets like life insurance policies and fixed deposits are added securities against a loan.
3. Age: Banks and lenders are less likely to sanction home loans for those in their 40s or 50s. This is because individuals in this age bracket are closer to the retirement age, with no fixed income guaranteed post retirement. This can make home loan repayment difficult. Besides, even if a loan is approved, it is likely to be for a shorter tenure and at a higher interest rate. Therefore, it’s advisable to apply for a home loan in your 20s or 30s.
4. Too many loans: If you already have many loans or high credit card debt, it might work against you. This is because lenders see you at risk of being in high debt. So, if you are looking to get a home loan sanctioned, it is better that you keep repayment liabilities down.
5. Documentation: It is extremely important that you have at hand all the documents of the property for which you require the loan. Any missing papers can hinder the loan process as it puts banks at the risk of not being repaid. Important documents include up-to-date property and water tax receipts, copy of the sale agreement of the property between you and the builder, the approved building plan and the original sale deed between the land owner and builder. Also, if the previous owner had taken a loan against the property, you have to submit proof that the loan has been closed, along with a No Objection Certificate from the lender / bank.
Home loan repayment ideas
Often, home loan EMIs cut into a sizeable portion of your monthly income, leaving less money for regular monthly expenses and to put away as savings. Financial experts say it is prudent to ensure that your EMI is affordable and does not eat into your monthly income too much. Moreover, since home loans tend to have a longer repayment period, higher interest rates are always a possibility. Besides, even when the Reserve Bank of India cuts interest rates, there is only a marginal change in the interest rates that banks offer. Therefore, it is up to customers to come up with ways to lower their EMIs. Here are some home loan tricks that can help.
1. Check current rates of interest: Check the current interest rates that banks offer and compare them with the interest rate on your home loan (which might have been taken previous to the official rate cuts). Older interest rates are often higher than the revised ones. You can then approach your bank to amend your EMIs based on the new interest rates.
2. Compare rates between banks: Often, interest rates vary between banks. Though the difference might be marginal, it can certainly bring down your overall repayment sum. If you find that any bank is charging a lower rate of interest, you can consider transferring your home loan to that bank. However, you must consider additional fees like foreclosure charges with the current bank and processing fees with the new one. This is usually a percentage of the loan amount or a fixed fee. It is advisable to go for loan transfer only if the change in your EMI is more than 1%. Alternatively, you could negotiate with your current bank to revise the interest rate and thereby lower your EMIs. If you are a long-standing customer of the bank, the officials will usually be more open to revising rates.
3. Opt for home loan overdraft facility: An overdraft on your home loan allows you to deposit any extra money that you have into the home loan. This reduces your interest payment and, in turn, your loan tenure. You can also withdraw this ‘deposit’ amount when you are in need of money. However, do note that withdrawing the amount would lead to a rise in the outstanding balance of the loan and therefore an increase in the interest as well. Here are some ways by which you can pool in extra money for prepayment:
- Use existing investments: You can liquidate fixed deposits and pay the money into your loan. This is advisable since the interest you earn on a fixed deposit is considerably lower than the interest you are paying on your loan. If you have other investments that aren’t giving returns as expected, liquidate them as well and use the money to make a prepayment. You could also use income earned from incentives, bonuses or other investments to make prepayments.
- Remember, paying a lump-sum for prepayment is beneficial as during the first few years of the loan, your EMIs are only going towards paying the interest and not the principal. Also, note that there are usually no additional fees charged by the bank for availing of this facility.
- Make a higher down-payment: The interest on a loan is calculated on the principal amount that you borrow. This means the higher the loan amount, the more interest you will pay, and therefore a higher EMI. So, consider making a higher down-payment (the amount you will pay upfront for the purchase of the property). This will lower the amount you need to borrow and, in turn, lower your EMIs.
4. Fix a longer repayment tenure: Your loan tenure and EMIs are inversely proportionate – this means that the longer your tenure, the lower your EMIs. So, by choosing a longer tenure for your loan, you can reduce the amount of your monthly payments. But, this way, you end up paying a bigger amount as interest on the principal loan amount.
5. Find ways to ease the EMI burden: While a home loan can help you realise your dream of owning a home, paying the EMIs year after year can become a huge burden, especially with other recurring expenses. To prevent any chances of default, you need to fine-tune your repayment plan. Here are some home loan repayment tips:
- Use rent to pay EMIs: If you are not living in the property for which you have availed the loan, you can rent it out. Or, you can rent out a part of the house. The income you receive as rent will help you pay your EMIs, thereby lessening your burden.
- Revise EMI amount: If you have received a salary hike, or your income has gone up in some other way, consider increasing the amount of your EMIs. Even though the difference might be marginal, it will make a difference cumulatively.
- Pay an extra EMI: Save some money through the year and pay an extra EMI at the end of the year. This again helps reduce your overall principal amount. Paying an extra EMI every year is beneficial over a longer period (10 years or more).
"Generally, the maximum home loan tenure offered by major lenders is 30 years. Opting for longer tenure might result in smaller EMI amount. However, it increases the interest outgo compared to short tenure loan, as negative compounding works for long term. As a result, the longer the tenure, the higher the compounding interest which we must pay. If your income is high and you can afford higher EMIs, then taking short-term home loans would be better, as the interest rates are lower for such loans. However, if your income is low, it is better to choose long-term loans so that the monthly burden is lower."
— K Satish, Director, Zen Money
Remember, all these repayment tips have the additional benefit of helping you achieve home loan closure faster than the originally-envisaged schedule!
"Those who are considering availing home loans should be aware of the following points:
• The eligibility for availing a home loan is determined based on your income and repayment capacity.
• Various home loan options are available with regard to interest rate and tenure, like fixed or floating rate.
• The maximum eligible amount that can be availed as home loan.
• When you apply for a home loan, a certain amount, that is around 10 to 15 per cent of the total home loan amount,must be paid as down payment. The rest is converted to home loan EMI (equated monthly installment), which you will be required to pay monthly.
• You should decide the home loan tenure before procuring the loan, as the EMIs directly depend on your home loan tenure. Make sure that the EMI amount is affordable and does not exceed 40 per cent of your total income.
• Banks give some time to start EMI of home loan which is called Moratorium Period (it could be anywhere between 12 months and 3 years) to settle your other expenses and get ready for the EMI payment. Check if that option is available in the bank before opting for the loan.
• Check the processing charges and any other hidden charges, to see whether you should pay a one-time charge or monthly payments, and if any pre-payment or foreclosure penalty charges are applicable.
• Always read the terms and conditions carefully before signing the documents.
• To get your home loan approved,you should have a good credit score. This depends on your track record of paying credit card dues and other loans. Your credit score should preferably be above 750 to improve the chances of getting approval for home loan; so, you should clear any pending payments before initiating the loan application process."
— K Satish, Director, Zen Money
Enjoy home loan tax benefits
When repaying a home loan, you enjoy certain home loan tax benefits. In fact, this is often a deciding factor in opting for a home loan. According to the Income Tax Act, you are eligible for the following home loan tax exemptions:
- Under Section 80C, you can claim up to Rs 1,50,000/- against principal repayment of your home loan. This is subject to having used the loan to construct or purchase a property and it should have been in your possession for five years. You can also claim stamp duties and registration fees paid for the property under this section (only in the year in which these expenses were incurred).
- Under Section 24, you can claim benefits of up to Rs 2,00,000/- on payment of interest of the loan throughout its full tenure. This is also subject to completing the construction or purchase of the property within five years from the end of the financial year in which the loan was taken.
- Under Section 80EE, you can claim benefits up to Rs 50,000/- on payment of interest of the loan. However, the loan taken should not exceed Rs 35 lakhs and the value of the property should not exceed Rs 50 lakhs.
- Under Section 80 EEA, first-time home owners can claim tax benefits of up to Rs 50,000/- on payment of interest throughout the loan tenure. This is subject to the loan value being under Rs 35 lakhs and the property value being under Rs 50 lakhs.
- If the loan (for purchase of first property) is taken jointly with spouse or working parents, then each applicant can claim a deduction of up to Rs 2 lakhs against the interest paid and up to Rs 1,50,000/- for the principal paid in their individual tax returns. However, both should also be co-owners of the property against which the loan is taken.
As per the latest budget (2019), an additional deduction under Section 80EEA has been introduced for home buyers – up to a maximum of Rs 1,50,000. To claim this deduction, the stamp value of the property should not exceed Rs 45 lakhs, and the loan should have been sanctioned between 1 April 2019 and 31 March 2020. Additionally, the individual should not own any other house as on the date of sanction of the loan, and he should also not be eligible to claim the deductions under section 80EE.
Home renovation loan
A home renovation loan or home improvement loan is taken for the purpose of renovating a property. This kind of loan generally has a low interest rate when compared to a personal loan and is also available for a longer tenure (up to 15 years). The loan amount is based on an estimation of the cost of renovation or repairs.
You could also take a top-up home loan to fund renovation or repairs. This means the bank will lend you an extra amount of money – as a top-up – in addition to the loan already taken. The tenure of this type of loan varies from bank to bank, but it can match the tenure of repayment of the existing home loan. Most often, the eligible loan amount can go up to 80% of the property value. To avail of this kind of loan, you should have paid your existing EMIs on time (at least 12 payments consecutively).
Here’s a trick: Top-up home loans are available at lower interest rates when compared to personal loans. It is not necessary to take a home improvement loan or top-up loan for renovation purposes only. Even though the loan is linked to your existing home loan, you can use the money for personal expenses (child’s education or wedding), taking advantage of the low interest rates.
"There are no foreclosure and prepayment charges applicable for home loan under the following conditions:
• if the loan is taken on floating interest rate basis
• if the loan is on fixed interest rate basis and pre-closed using the individual’s own sources
Due to the prepayment or foreclosure of housing loan, the credit score will also increase. However, if the home loan is taken on fixed interest rate basis and is closed through balance transfer, then foreclosure charges of 2%+taxes is applicable."
— K Satish, Director, Zen Money
We hope you find these home loan ideas useful. We trust that these tips and tricks ease the burden of your home loan. We leave you with one last advice: before you avail a home loan, be sure to realistically assess your capacity to repay it. After all, it is a long-term commitment!
About the author:
Written by Amrita Gracias on 22 August 2019
Amrita Gracias holds a degree in English Literature from Stella Maris College, Chennai and a Post Graduate Diploma in Journalism (specialising in Print Media) from the Asian College of Journalism, Chennai. She takes to writing and editing when she isn’t answering to the duties of motherhood!
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