A home loan is a loan taken by an individual to finance their home. Like any other loan, home loans are offered by banks and financial institutions for a set tenure at a rate of interest. The borrower must repay the loan in the form of Equated Monthly Installments or EMIs every month as the name suggests. Depending on the loan amount, interest rate, and repayment schedule repayment tenure may go up to 30 years.
Eligibility
The eligibility criteria for home loans change with the financial institutions. However, certain criteria remain the same for all. The minimum and maximum ages that are eligible for home loans are 18 to 70. The applicant can be salaried or non-salaried with a credit score of 750 and above. They should have a minimum work experience of 2 years. They can be a permanent Indian resident or an NRI (non-resident Indian).
Home Loan Repayment
According to the home loan guide, the home loan is repaid in the form of equated monthly installments (EMI), paid every month for a set period (years) till the loan is repaid. The EMI amount is calculated by adding the principal amount of the loan with interest and divided into the number of months for which the payment is made to pay the loan completely.
So here is how it is calculated:
- Principal – The amount borrowed from the bank
- Interest – The interest that the lender applies as a charge for the loan
So the EMI is calculated as
EMI = [ P x r x ( 1+ r)^n ] / [( 1 + r) ^ n-1 ]
Where:
- P = Principal loan amount
- r = Monthly interest rate
- n = Loan tenure in months
Factors Affecting Home Loan EMIs
- Loan Amount: Higher loan amounts lead to larger EMIs.
- Interest Rate: The interest rate offered by the lender directly affects the EMI.
- Banks and NBFCs provide competitive rates for home loans.
- Loan Tenure: A longer tenure reduces the EMI but increases the total interest paid.
- Type of Interest Rate:
- Fixed Rate: EMI remains constant throughout the tenure.
- Floating Rate: EMI varies based on market conditions.
Current Home Loan Rates
Home loan rates vary from 8 % to 10 % depending on the lender or bank, the borrower’s profile, the amount, and the tenure. State Bank of India, ICICI Bank, HDFC bank, etc are some major banks, and L&T Housing, Aditya Birla Capital, GIC Housing, etc are some of the major financial institutions that offer home loans.
Tax Benefits
Indian residents can avail themselves of the following tax benefits under the Income Tax Act:
- Section 80C: Deduction of up to ₹1.5 lakh on principal repayment.
- Section 24(b): Deduction of up to ₹2 lakh on interest repayment.
- Section 80EEA: Additional deduction of ₹1.5 lakh for first-time homebuyers, subject to conditions.
Some Useful Tips
- It is better to plan finances properly before opting for a home loan. It is easier to choose the amount, tenure, and interest if the monthly EMI amount is known.
- Compare the interest rates, payment conditions, pre-payment penalty, and processing fees and choose the most suitable one.
- A healthy credit score can ease the process of loan approval. Check your score before applying for the loan.
These are the important pointers from our home loan guide to help you when taking out a loan to finance your new home.