Home Loan Tips and Tricks - First Time Buyers in India

First of all,before going into the home loan tips and tricks, let us understand what Home Loan is and what you should keep in mind before taking a Home Loan.

What is Home Loan – Definition and Process

Home Loan is a loan given to a person in helping him buy a house. You cannot think of buying a home without a Home Loan in the current market condition. Home Loan will help you in reducing your tax liability along with creating an asset. You must be careful in going for a Home Loan because it can create problems for you at a later stage. Given below are some areas, where you have to be careful.

Home Loan Tips and Tricks for First Time Buyers in India

Here are home loan tips and tricks for the first time buyers in India. Below mentioned are the points to remember while taking home loan :

Eligibilty for Pradhan Mantri Awas Yojana -PMAY

First check if you are eligible for Pradhan Mantri Awas Yojana. Some of the features are given below:

EWS– Economically Weaker Section- Annual family income not exceeding 3 lakhs
LIG– Lower Income Group- Annual family income 3-6 lakhs
MIG I– Middle Income Group-I- Annual family income 6- 12 lakhs
MIG II– Middle Income Group-II- Annual family income 12-18 lakhs

You can also read the complete article here: Pradhan Mantri Awas Yojana

Repayment Capacity

You should decide the loan amount based on your repayment capacity, though the lender may be ready to offer you more. Please make sure that the Equated Monthly Instalment (EMI) is within 40% of your net salary. This is because you have to provide for other financial goals in life, along with repayment of the Home Loan. It is better to go for insurance cover equal to the loan amount as will make sure, your legal heirs will continue to stay in the house in case of your untimely death before the Home Loan is fully repaid.

Value of Property

If the value of the property is above Rs. 20 Lakh, you can get up to 80% of the value of the property as a loan. It is 90% if the value is less than Rs. 20 Lakh. So you should plan for the remaining 20% or 10% as the down payment. If possible, avoid other costly loans along with Home Loan to arrange for the down payment. It is better to save for 3-5 years and accumulate enough for the down payment. You can invest in Debt Mutual Funds, Balanced Funds or bank RDs for accumulating money for down payment.

Increasing Interest Rates

Floating Rate Loans and MCLR are now popular with customers. But be ready for any change in interest rates. If the interest rates go up , you will find it difficult to pay the higher EMI. Let us see how it affects you:

In the case of a Home Loan of Rs. 20 Lakh given at the rate of 8.5% for a 20-year term, the EMI works out to Rs. 17,356. If the interest rate is increased by 1% to 9.5% after 1 year, you have 2 options. Pay the increased EMI of Rs. 18,599 for the balance 19 years or pay the same EMI of Rs. 17,356 for a further period of 57 months. You will stand to benefit if you go for higher EMI instead of extending the duration of the loan.

Joint Home Loan

If your wife is also a tax payer, it is advisable to go for a Joint Home Loan, because she can also have home loan tax benefit up to Rs. 1.5 Lakh in a year.

Prepayment of Home Loan

RBI and National Housing Bank have instructed all banks and housing finance companies to stop charging penal interest on pre-closure of Home Loan under Floating Rates. It is better to pre-close the Home Loan and make your home debt-free. But don’t discontinue your investment towards other goals like retirement, children’s education to pre-close the Home Loan.

Also Read – Is Prepayment of Home loan beneficial?

Base Rate or MCLR

Earlier, Home Loans were based on Prime Lending Rate of the banks. Now, Home Loans are based on the Base Rate and MCLR, which is more transparent. Banks allow existing customers to opt for the new structure by charging a small fee. You have to do a cost benefit analysis before applying for this. Switching Home Loan to a new bank will be beneficial in some cases.

First Time Home Buyer – Tax Benefits

If you are taking a Home Loan from your relatives or friends, you cannot claim the home loan tax benefit under Section 80C for the principal repayment, but you can still claim tax benefits for the interest paid on the loan.