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Housing finance 101 – All you need to know

Clix September 24, 2019

In today’s day-and-age, buying a house is one of the most substantial and impactful financial transactions in one’s life. It’s not just about choosing the right property – it’s also about mapping out your expenses in a manner that won’t hamper your day-to-day living further down the line. Apart from being an excellent investment, having a house is a great way for people to enjoy a comfortable and secure life. However, with increasing real estate prices, it has become difficult for people to complete this transaction without burning a sizeable hole in their pockets.

Home loans, or housing finance, have emerged to combat this problem and are continually helping the vast masses of the country fulfill their dreams and buy their own house.

Now, what is housing finance?

A home loan, as the name suggests, is a loan or ‘mortgage’ that’s offered by a financial institution in return for security over the property that you are using to buy. Typically, a housing loan will be of a 25 to 30 year term, with regular monthly EMIs that are designed to pay off the loan over a contracted term. If one fails to repay the amount, the lender has all the right to sell off the secured property to retain the value of the loan.

What are the types of home loans?

Floating-rate home loan

A floating-rate loan means that the interest rate is not specified, and can rise or fall over the period of the home loan. Usually, this is either in response to the movements in the official cash rate or it may merely be a business decision by the financial lender. The main advantage of these kinds of loans is the notion of flexibility. This implies that, while you must meet the minimum set monthly repayment, you can also pay more if you want to. Furthermore, there is also no break fee since there is no fixed term for you to break in the first place. Hence, you can sell the property and move out without the extra charges that would typically apply to a fixed-rate home loan.

Fixed-rate home loan

Contrary to the floating rate system described above, a fixed-rate loan simply implies that the interest rate is ‘fixed’ for a certain period. The main advantage of this type of loan is that it gives you a sense of certainty when it comes to the repayments over the specified term, as the interest rate is guaranteed to not waver over this fixed period. This makes it an excellent way to budget your costs as well. The disadvantage, however, is the inflexibility that comes with this loan. Generally, additional payments cannot be made, and one can face a ‘break-free’ charge if you decide to sell it before the fixed period. It might be a good idea to read about the cost penalties before considering a fixed-rate home loan.

Split home loan

A split home loan is when you have the option to divide your loan into the above two types – meaning you could nominate a portion to have a variable interest rate and the remainder to have a fixed interest rate. Such loans are particularly effective when the market is harder than usual to predict. When you don’t know if the interest rates are going to rise or fall, a split home loan allows you to hedge your bet. The fixed component allows to manage the risk of fluctuations in interest rate and at the same time, you can take advantage of rate cuts with the flexible component.

Now, which type of loan would be suitable?

Preferences and personal circumstances dictate which option might be best for you. If you’re concerned about the impact on family budget, then consider a fixed rate. If you want to smash your loan down, then a variable rate. If you want a bit of both, then consider split rate. If you’re confused, speak to us!

What are the costs included?

Your Housing loan comprises of several parts. Let’s talk about them!

  • Down payment: This is the amount that one pays upfront and is generally 20% of the property’s cost. However, if your credit score is good, the lender can put it down for much less.
  • Principal: This is the amount that the lender loans you.
  • Interest: Home loan interest rate is that rate that would be charged to you for borrowing money. Depending on what type of loan you get, this rate will either stay the same or fluctuate.
  • Insurance: There are various forms of insurance that come with being a homeowner – one of which is the homeowner’s insurance itself. This insures your belongings and home against any damage or loss that may occur from a theft, fire, or any other hazard.

Home Loan – Eligibility

Before starting the home loan application, one should determine their eligibility. This mainly depends on an individual’s income, repayment capacity, age, liabilities, and other things. At Clix Capital, we believe in a hassle-free loan process. You’re eligible if you:

  • are over 18 when applying and under 65 at the end of the loan tenure.
  • are salaried or self-employed.
  • have an annual household income that’s higher than Rs 3 Lacs.

The documents required for a home loan are as follows:

  • A completed application form
  • Any ID proof
  • Any address proof
  • Property documents
  • Income proof

Housing Finance Sector

The housing finance sector is growing at an exponential rate, to say the least. This can be illustrated through the findings of the India Housing Finance Report, which states that this sector has been growing at a rate of 18% in the last seven years. However, this sector still has ample room to grow. The home loan-to-GDP ratio in India is presently at 9%, but the inclusion of affordable housing finance is likely to make its presence felt even more.

Furthermore, the Pradhan Mantri Awas Yojana aims to build over 2 crore homes across 300 rural and urban centers. Under this scheme, people can avail an interest subsidy of 4% on loans up to INR 9 Lakh and 3% for loans up to INR 12 Lakh. These subsidies, which have made home loans far more affordable for low-income groups, have vastly helped people working in the unorganized sector.

Why go for a Home Loan

Tax Benefits

In response to the rising need of people to have their own homes, the government is now providing substantial tax deductions on the principal amount, as well as on the interest rate. Under Section 80C of the Income Tax Act, the borrower can claim a tax deduction of Rs 1.5 lakh in a single financial year. Furthermore, a deduction of Rs 2 lakh is also allowed, although this can only be availed if the property has already been constructed.

Tenure

One of the most significant advantages of a home loan is the long repayment tenure that a borrower can avail, which can go up to 30 years. It provides borrowers with the opportunity to reduce their EMI installments by extending their loan tenure. This ensures that one is not overwhelmed by high EMIs and can smoothly manage their ongoing expenses.

Capital Appreciation

For those who have seen property prices boom over the last few years, the prospect of outstanding capital appreciation is a convincing argument for buying a home. In fact, construction costs alone – accounting for more than 70 percent of the cost of the house – have risen by 15% annually in the past decade. Furthermore, rents are also keeping up with inflation, which makes owning a home one of the few investments that can shield you from inflation in the long run.

Chance to get a Better House

When one decides to pay the entire amount up front, they are left with lesser options to choose from since the budget is already restricted. However, using the best home loans will provide the liberty to go beyond the set budget and explore better properties in secure locations. At Clix Capital, we understand this and provide loans up to Rs 1 crore so that you never have to compromise on your dream home.

Mistakes to avoid while taking a Loan For Home – Home Loan Details

Don’t let the excitement of taking out a home loan rush you into this decision without any proper planning in place. While applying for an instant home loan, make sure to keep an eye on the before and after interest rates. Here are a few things to keep in mind before applying for a home loan:

Miscalculating Down Payment

A lot of people purchase property that is under construction and assume that they can pay the down payment amount proportionately while the bank disburses the rest of the amount. This is an incorrect assumption to make – all lenders, without exception, insist on you bringing in the entire amount as a down payment before they make the first disbursement. So, keep your down payment ready before approaching any financial lender.

Taking out other loans before applying for a home loan

Your outstanding debt and financial history will be evaluated thoroughly by the financial institution before moving ahead with the process. This implies that your Total Debt Servicing Ratio (TDSR) should not exceed 60% of your income. Otherwise, you face the risks of tipping over the TDSR with other loans before applying for a home loan.

Keep a check on one-time costs

Apart from the interest rates, ensure that you check other charges such as one-time processing fees, pre-payment charges, valuation fees, legal fees, and other hidden costs. If they all are one-time costs, make sure to add them as a capital cost and then settle on a valid EMI amount.

There’s no place like your own home! If you have read this article, it means you’ve already taken the first step to fulfill your dream. You can count on us to help you take the next important step!

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