Things To Know Regarding Home Loans
It is easy to be overwhelmed with complex terminologies and concepts while researching home loans. We have dealt with some of the important concepts here that will help you understand the purview of home loans better:
Home loan eligibility
The first question that you must be thinking is how much home loan are you eligible for? Home loan eligibility is primarily dependent on two factors – your income and your repayment capability. Of course, other things such as credit history, credit score, age, other financial obligations etc. are taken into consideration as well.
Here are a few most common eligibility criterion used by most banks and NBFCs:
Maximum loan term: 30 years
Age: An applicant’s age is important to determine the remaining years that he/she will be working. The tenure of the home loan depends on this and hence may vary from one person to another.
For example, let us assume that a bank considers 65-years as the retirement age. Hence, if a 25-year old applicant applied for a home loan, he/she will be able to get a repayment period of 30 years since at the time of repayment, the applicant will be 55-years of age, and still be working. However, if a 45-year-old applicant applies for a home loan, he/she will get the home loan for 20 years only.
The present and future income of the applicant are taken into account to determine how much EMI will he/she be capable of paying.
The loan approving authority also assesses a person’s financial obligation such as other loan obligations, credit card debt, dependants etc. while assessing the loan eligibility of a person.
Credit history and credit score
This is a very important aspect. Good credit history and credit score are important, not only for availing home loans but for availing any kind of loans.
We mentioned earlier that banks/NBFCs do not finance 100% of the market value of the property. The borrower has to finance 10-20% of the amount – which is termed as a down payment or own contribution. In most cases, the loan approving authority reviews whether the down payment has been made and may reject the application if payment has not been made.
In case you plan to avail of a home loan, keeping aside 20% of the total purchase amount for making a down payment will be a good idea.
Having a co-applicant is mandatory to apply for a home loan. In this case, the loan is known as a joint home loan. If someone is a co-owner of the property, then he/she has to be the co-applicant of the home loan as well. However, if you are the single owner of the property, then you can choose any of your immediate family members as the co-applicant.
Some lenders allow changing the co-applicant during the term of the loan. This process is known as novation. In case you want to avail of it, contact your lender regarding the process to do so.
Difference between co-signing and co-application
Sometimes, the bank may ask you to add a co-signer to your loan. A co-signer is liable to pay the loan only when the main applicant defaults. He/she does not have an obligation to pay the EMI of the loan. However, a co-applicant is a co-borrower of the loan and is liable to pay the EMI.
Sanction and disbursement of loan
Once the bank decides to provide you with the loan, the bank will issue you a sanction letter which will have all the details of the loan sanctioned such as loan amount, tenure, interest rates and various terms and conditions of the loan.
When the loan is actually released by the bank, it is known as loan disbursement. In the case of a fully constructed property, the payment is made in full to the builder. However, in the case of purchasing an under-construction property, this amount is given directly to the builder and not to you. The bank/NBFC will release the payment in tranches as and when different stages are completed by the builder.
Ensure that the terms of payment of your agreement with the builder match the bank’s disbursement terms and schedule.
Almost all banks and NBFCs take a processing fee for the loan application, which typically ranges from 0.5-1% of the loan amount. This is to cover the various charges borne by the bank such as legal fees, technical evaluation of the building etc. In most cases, this amount is included in the loan amount. However, some banks may choose to charge the borrower separately. Many banks may also choose to waive this fee.
Home loan EMI
EMI or Equated Monthly Instalments is the monthly payment you make to repay your home loan. The EMI consists of interest amount and principal amount. When the home loan is sanctioned, you will be issued a repayment schedule, where the breakup of the principal and interest amount for each EMI will be provided.
Do note that as per the repayment model, in the first few years, most of the EMI consists of interest amount. As the years go by, the interest amount comes down and the principal amount goes up.
Let us understand this through an example.
The monthly EMI for a home loan of ₹ 50 lakhs taken for 20 years at an interest rate of 8.25% (we are considering fixed interest rate for the ease of calculation) will be ₹ 42,603 per month. Now, let’s see the breakup of principal and interest component of this EMI for Year 1:
So, at the end of Year 1, the borrower will be paying more than ₹ 4 lakhs as interest and repaid only ₹ 1 lakh of the interest amount.
Now, let us see, how the above table would look like in Year 10:
So, in Year 10, the borrower will be paying ₹ 2.96 lakhs as the interest, while the contribution towards principal will increase to ₹ 2.14 lakhs.
By the time the loan reaches year 15, the principal component in the EMI will get significantly higher, while the interest component will come down, as can be seen from the table below:
Now, this is a crucial aspect to consider while thinking of a home loan balance transfer. Consider how much interest you have actually paid, how much needs to be paid after balance transfer and if it is lesser than the total interest you need to pay to your original lender. Sometimes by availing a home loan balance transfer, people end up paying more interest than even the original loan.
Along with the documents that you receive from the bank for your home loan, you would receive something titled amortization schedule. This is a detailed breakup of your entire repayment schedule. It will consist of the following things:
- Opening principal – The total amount of the loan, which you have to repay
- Payment number – Each EMI will have a serial number
- Instalment amount – The amount of EMI
- The principal component in the EMI – Indicates the amount of principal being repaid in each EMI
- Interest component in the EMI – Indicates the interest component in the EMI
- Due date – The date on which the EMI is payable
- Interest rate per annum – The applicable annual interest rate. This will also indicate whether the loan has been taken on a fixed rate of interest or floating rate of interest.
- Closing principal – Indicates the principal amount that remains to be paid at the end of each EMI payment.
Let us see how the loan amortization schedule will look for the above mentioned example (₹ 50 lakhs home loan for 20 years taken @ 8.2% per annum)
When does the EMI payment start?
Once the home loan is disbursed in full, the EMI payment starts immediately. In the case of a home loan on an under-construction building, the bank releases the payment in tranches. During this phase, you will have to pay only the interest amount on the amount disbursed. This phase is known as the Pre-EMI phase. Once the entire loan is disbursed by your bank, then the actual EMI will start.
Usually, the home loan EMI starts from the day the home loan is disbursed in full. However, some lenders may offer an EMI holiday before the loan repayment stars which means you can opt for an EMI-free period. A moratorium period enables you to plan your finances better.
Although you do not have to pay the EMI during this duration, the interest is calculated from the day of full disbursement of the loan.
Home loan account statement
Once you start repaying your home loan, you will receive the home loan account statement which will contain the entire details of your repayment. In most cases, you can access it online or it will be emailed to your email id. However, physical statements will also be available, if you choose to receive it.
The home loan account statement will show all the important things that you need to know – loan amount, start and end dates of loan tenure, interest rate, type of interest (fixed or floating), EMI amount, total principal repaid till date, total interest paid and other things. It will also contain the details of pre-payment, in case you have made it as well as missed
This is a very important document to keep track of your home loan. We suggest saving the soft copy or storing the hard copy safely. These copies will prove that you have completed the repayments on time.