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Home Loans FAQs:

What are the types of home loans available?

There are a variety of home loans available. They are:

 HOME PURCHASE LOAN

This is the common loan for purchasing a home.

 HOME IMPROVEMENT LOAN

This loan is given for implementing repair works and renovations to your home.

 HOME CONSTRUCTION LOAN

This loan is available for the construction of a new home.

 HOME EXTENSION LOAN

Home extension loans are given for expanding or extending an existing home. For example, addition of an extra room, etc.

 HOME CONVERSION LOAN

Available for those who have financed the present home with a Home Loan and wish to purchase and move to another home
for which some additional funds are required. Through a Home Conversion Loan, the existing loan is transferred to the new
home, including the additional amount required, eliminating the need for pre-payment of the previous loan.

 LAND PURCHASE LOAN

This type of loan is sanctioned for purchase of land, for both home construction or investment purposes.

 BRIDGE LOAN
The Bridge Loan is designed for people who wish to sell the existing home and purchase another. The bridge loan helps finance
the new home, until a buyer is found for the old home.

 BALANCE TRANSFER LOAN

Balance Transfer loans help you pay off an existing home loan with a higher interest rate, and avail of a loan with a lower rate of
interest.

 REFINANCE LOAN
This loan helps you pay off the debt you have incurred from private sources such as relatives and friends, for the purchase of
your present home.

 STAMP DUTY LOAN

This loan is sanctioned to pay the stamp duty amount that needs to be paid on the purchase of a property.

 LOANS TO NRIs
This loan is tailored for the requirements of NRIs wishing to build or buy a home in India

What is an EMI?

EMI (Equated Monthly Installment) is the amount payable to the lending institution every month, till the loan is paid back in
full. It consists of a portion of the interest as well as the principal.

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How is an EMI calculated?

EMI Formula: l x r [(1+r)n /(1+r)n-1 ] x 1/12

l = loan amount
r = rate of interest
n = term of the loan

What are the incentives offered by lending institutions?

a) Some of the lending institutions sanction the loan without requiring you to identify property as a prerequisite for eligibility
b) Free accident insurance
c) Discounts
d) Waiving of pre payment penalty
e) Waiving of processing fee
f) Free property insurance

What are the eligibility conditions for a home loan?

To qualify for a home loan, most of the lending institutions in India require you to be:
a) An Indian resident or NRI
b) Above 21 years of age at the commencement of the loan
c) Below 65 when the loan matures
d) Either salaried or self employed

What are the interest rates offered for home loans? What are: Daily Reducing, Monthly Reducing and Yearly Reducing?

Interest rates are different from institution to institution and generally range from about 9.25% to around 12 %. The interest on
home loans in India is usually calculated either on monthly reducing or yearly reducing balance. In some cases, daily reducing
basis is also adopted.

Annual reducing:
In this system, the principal, for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a
certain portion of the principal which you have actually paid back to the lender. This means the EMI for the monthly reducing
system is effectively less than the annual reducing system.

Monthly reducing:
In this system, the principal, for which you pay interest, reduces every month as you pay your EMI.

Daily Reducing:
In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing
system is less than the monthly reducing system.

What is the best way to select the cheapest home loan?

Keep the loan period constant and calculate the total amount paid for the home through the different loan options available.

What is a fixed rate of interest?

Some institutions have a fixed rate of interest, which means the rate of interest remains unchanged for the entire duration of
the loan. This means you do not benefit, even if rates of interest drop in the market.

What is a floating rate?

This is the rate of interest that fluctuates according to the market lending rate. This means you stand the risk of paying more
than you budgeted for in case the lending rate goes up.

What are the other costs that usually accompany a home loan?

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Home loans are usually accompanied by the following extra costs:

a) Processing Charge: It's a fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or
may also be a percentage of the loan amount. The loan amount required by you cannot be less than the processing fee.

b) Pre-payment Penalties: When a loan is paid back before the end of the agreed duration, a penalty is charged by some
banks/companies, which is usually between 1% and 2% of the amount being pre-paid.

c) Commitment Fees: Some institutions levy a commitment fee in case the loan is not availed of within a stipulated period of
time after it is processed and sanctioned.

d) Miscellaneous Costs: It is quite possible that some lenders may levy a documentation or consultant charges.

e) Registration of mortgage deed.

What are the repayment period options?

Repayment period options range generally from 5 to 15 years.

How do HFCs decide on the loan amount?

Usually, most companies give up to a maximum of 85% of the cost of the house. The 15%, sometimes called 'seed money', will
have to be provided by the loan applicant. The amount, for which the applicant is eligible, is determined by the age, income, no.
of dependents, monthly outgoing and repayment capacity. This varies from case to case.

Are securities required for home loans?

In most cases, the property to be purchased itself becomes the security and is mortgaged to the lending institution till the
entire loan is repaid. Some institutions may ask for additional security such as life insurance policies, FD receipts and share or
savings certificates.

Do I require a guarantor to get a home loan?

Some institutions ask for 1 or 2 guarantors, others require no guarantor at all.

What is the time required for loan application approval?

About 0-15 days.

What is the time required for loan disbursement?

On an average, loans are disbursed within 3-15 days after satisfactory and complete documentation and completion of all
relevant procedures, including proof that 15% of the cost has been paid upfront to the seller of the property.

Can I make joint applications for home loans?

Most institutions are willing to consider the joint incomes of the applicants for deciding the loan amount. Some institutions do
not require the co-applicants to be co-owners of the property to be purchased.

What are the tax benefits of home loans?

Both principal as well as interest of home loans attract tax benefits. With effect from 1st April 2005 (i.e. assessment year 2005-
07) under section 80C of the Income Tax Act 1965:

Principal amount of repayment of loan along with other savings such as PF, PPF, Life Insurance premium etc up to a maximum
of Rs 1,00,000/- will be eligible for deduction from gross income.

Interest paid on loan after completion of construction will be deductible from income from property

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For self occupied - Income will be treated as nil and interest payment will be treated as minus income which will be adjusted
against other income.
For rental property - It will be adjusted against rental income.

Tax Saving & Benefits of Home Loan in India

Certainly “Saving Tax” on your income is always a spot of interest for each one of us and why not save on it when there is a
legal way? Home Loans are one of a better ways for saving on your taxes for a longer duration. So how it exactly works?

There are different sections of the “Income Tax Act” of India under which you can avail deductions on the taxes, confers you to
save a signification amount on your total tax liability.

There are two sections of the “Income Tax Act” of India which will allow you to get a deduction if you have taken a home loan;
this of course ignores home loans from “private sources” (Friend, Family, etc). The two sections are here under.

Sec 24(b) of the Income Tax Act, 1961

Sec 80(c) of the Income Tax Act, 1961
Section 24(b) is with respect to the “Interest Paid” on the Home Loan and Section 80(c) is with respect to the “Principal
Repayment” of the Home Loan.

The Section 24(b) of the Income Tax Act, 1961 is applicable on Home loan for purchase of house or construction of the house
property. You can avail a deduction of up to Rs. 1,50,000 of you total tax liability, Also reconstruction or renewal or repairs is
eligible for deductions under the said section.

The Section 80(c) of the Income Tax Act, 1961 allows you a deduction of up to Rs. 1,00,000 on the principal repayment amount.

Illustration
Suppose your total taxable income is Rs. 4,00,000.
Principal repayment is Rs. 1,50,000 and total Interest Payable is Rs. 1,80,000.

The total deduction allowed is Rs. 2,50,000 (1+1.5Lacs) under the sections. Hence now your total taxable income becomes only
Rs. 1,50,000 (4-2.5Lacs) and that saves a lot of money!

How home loan interest is calculated:

Daily reducing balance- home loan interest calculation

Most of the current home loans use the daily reducing balance method for interest calculation. Here's an example of daily
reducing balance method-

Lets say a person Z has taken loan of Rs 20,00,000 (twenty lakhs) on 12th September 2010 at a floating interest rate of 9% p.a.
Floating interest rate means it is linked to a reference interest rate, which varies from bank to bank. Lets say the reference rate
is 10% p.a for Z's bank. So, in the loan agreement that Z signed with his bank, the floating rate is stated as "1% below ref rate".
So whenever the reference rate changes, the effective interest rate changes too. (That's why it is called as "floating").

Coming back to the loan. The start date of the loan is 12-09-2010. So, the interest will be calculated that day onwards. The
interest is calculated for each day using the following formula:
interest per day= balance amount * rate of interest / ( 365 * 100 )

So, for Mr Z, the table for the two months starting September 12 would look as follows:
(Cr/Dr is Credit/Debit and RoI is Rate of Interest)
Row daily
Date balance ref rate RoI Cr/Dr Comment
No interest
1 12/09/10 2000000 10 9 493
2 13/09/10 2000000 10 9 493
3 14/09/10 2000000 10 9 493
4 15/09/10 2000000 10 9 493

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5 16/09/10 1980000 10 9 -20000 488 monthly emi credited

6 17/09/10 1980000 10 9 488

7 18/09/10 1972000 10 9 -8000 486 excess amount credited

8 19/09/10 1972000 10 9 486

9 20/09/10 1972000 10 9 486
10 21/09/10 1972000 10 9 486
11 22/09/10 1972000 10 9 486
12 23/09/10 1972000 10 9 486
13 24/09/10 1972000 10 9 486
14 25/09/10 1972000 10 9 486
15 26/09/10 1972000 10 9 486
16 27/09/10 1972000 10 9 486
17 28/09/10 1972000 10 9 486
18 29/09/10 1972000 10 9 486
19 30/09/10 1972000 10 9 486

20 MONTHEND 1981266 10 9 9266 9266 Interest added to balance

21 01/10/10 1981266 10 9 489

22 02/10/10 1981266 10 9 489
23 03/10/10 1981266 10 9 489

24 04/10/10 1961266 10 9 -20000 484 monthly emi credited

25 05/10/10 1961266 10 9 484

26 06/10/10 1961266 10.5 9.5 510 reference rate changed

27 07/10/10 1961266 10.5 9.5 510

28 08/10/10 1961266 10.5 9.5 510
29 09/10/10 1961266 10.5 9.5 510

30 10/10/10 1954266 10.5 9.5 -7000 509 excess amount credited

31 11/10/10 1954266 10.5 9.5 509

32 12/10/10 1954266 10.5 9.5 509
33 13/10/10 1954266 10.5 9.5 509
34 14/10/10 1954266 10.5 9.5 509
35 15/10/10 1954266 10.5 9.5 509

36 16/10/10 1954266 9.75 8.75 468 reference rate changed

37 17/10/10 1954266 9.75 8.75 468

38 18/10/10 1954266 9.75 8.75 468

39 19/10/10 1959266 9.75 8.75 5000 470 amount withdrawn

40 20/10/10 1959266 9.75 8.75 470

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41 21/10/10 1959266 9.75 8.75 470

42 22/10/10 1959266 9.75 8.75 470
43 23/10/10 1959266 9.75 8.75 470
44 24/10/10 1959266 9.75 8.75 470
45 25/10/10 1959266 9.75 8.75 470
46 26/10/10 1959266 9.75 8.75 470
47 27/10/10 1959266 9.75 8.75 470
48 28/10/10 1959266 9.75 8.75 470
49 29/10/10 1959266 9.75 8.75 470
50 30/10/10 1959266 9.75 8.75 470
51 31/10/10 1959266 9.75 8.75 470

52 MONTHEND 1974309 9.75 8.75 15043 15043 Interest added to balance

The table has a lot of redundant information but it is included just to explain things in a better way.

Points to note:

1) For the month of September, Z had to pay interest only for 19 days (12th Sep to 30th Sep).

2) Whenever some amount is credited to the account, the daily interest reduces marginally. All credit transactions are
highlighted in green. EMI is nothing but a simple credit transaction. So, for a daily reducing balance system, it wouldn't matter if
Z pays his EMI all at once or in installments. In fact, it does not matter how much he pays as long the balance at the end of the
month is continuously reducing-provided his bank doesn't care for a certain minimum each month. If Z pays less per month, just
enough to reduce his balance, the bank makes more profit.

3) The interest is calculated for each day on the balance amount. However, the interest accrued over the entire month is added
back to the balance only at the end of the month. See the entries highlighted in brown. So next month onwards, interest is
calculated on this new balance as principal.

4) The floating rate of interest MUST change along with the reference rate. The entries of rate change are highlighted in blue.

5) Though the interest is reflected in the balance at the end of month, the credits(and debits) are reflected the same day.

5) To summarize:
Total amount paid by Z so far (row num: 5,7,24,30,39)= 50000
Total interest paid = 9266 + 15043 = 24109.
Loan principal (or balance) reduced by = 2000000 - 1974309 = 25691

State bank of India uses this method to calculate the home loan interest. For other banks too, the method must be same with
minor differences. For example, the dates of compounding monthly interest and balance could differ. Using this table, the
impact of credits and withdrawals can be easily analyzed. In this case, the interest compounding takes place on last day of
month. So, it is advisable to do all credit transactions at month start and all debits just before month end. This way, most of the
month's interest is charged on a lesser amount.

Case study:
How SBI cheated me...
I am a home loan customer of SBI since October 2008. I have opted for a floating rate of interest.
SBIs floating rate was linked to SBAR (State Bank Advance Rate) upto June 2010. After that, the concept of base rate came into
existence and SBAR disappeared.

As per my agreement with the bank, the effective interest rate on my loan was 2.85% below SBAR. The SBAR was 13.75 at that

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time. Since then, SBAR changed at various points of time-

10/11/08 SBAR 13.75->13.00

01/01/09 SBAR 13 => 12.25
29/06/09 SBAR 12.25 =>11.75
17/08/10 SBAR 11.75 =>12.25

So, as per my agreement with SBI, the effective rate of interest should have been (current SBAR - 2.85 ) at all times. However,
the bank never reduced the interest rates accordingly. This continued for almost 2 years and I continued repayment at a higher
interest rate.
However, in August 2010, when it came to increasing the interest rates,the bank acted immediately and my effective rate of
interest straight away went up by 0.5%! Calculations told me that my balance (i.e. principal of loan) should have been 30000
(thirty thousand) less than what the bank statement reflected!

The real story began after this. When I brought this discrepancy to the notice of the bank officials, no one entertained me. The
officials gave me vague answers like "we don't control the interest rates", "the central server in Mumbai makes all changes",
"why are you cribbing about such a small thing? how much difference is it going to make?" etc. No one seemed to care about
the concerns I raised.

Then I tried the option of online complaint registration. After about a month of constant email communication with
helpline.lhomum@sbi.co.in (which was one way most of the time - me sending them emails asking about the complaint status),
they responded and the interest rate was altered. All this took about 4 months time.

The most frustrating part- I still had to recover the extra interest I paid because of faulty interest rate. I repeatedly met the
branch officials at SBI Pune City branch (where I have opened a Savings and a loan account). The officials kept promising me
that the balance would be recalculated. Let alone crediting the difference to my account, the bank debited 10000 from my
account - TWICE! I was being deprived of having my own money without any reason!
Moreover, no one in the bank had a clue why the amount was debited. Finally, I got to meet the branch manager and it seemed
like "light at the end of the tunnel". With high hopes, I tried to explain him the matter.
However, as they say, "the light could be that of an incoming train", my hopes shattered when the manager himself gave me
utter foolish answers. He told me that he had never seen a clause like "2.85% below SBAR" in his entire career of 20 years. Also,
he stated that all the changes were "done by system". He tried to convince me that "the system" (i.e. computer) was the root
cause of all the trouble. His colleague present there was of the opinion that 10000 (ten thousand) Rupees was a negligible
amount and the bank would surely refund it before the repayment period (of 20 years) is over.
Finally, the branch manager agreed to have a look into the issue and assured me that he would call me back within 3 days time.
The three days time is over today and no one has called me from the bank.

Moral of the story:

This is how the "banker to every Indian" SBI cheats its customers. If you are a SBI home loan customer, do check your interest
rates and calculate your balance as explained in my earlier blog. This might save you a few thousand rupees!

Home Loans Interest Rates

(Last edited on : 20 April 2011)

Bank Name Floating Interest rate

Processing Fee Prepayment Charges

9% (1st yr), 9.75%(2nd and 3rd 0.50% of loan

yr),10.25%(after 3 years) amount with a cap of
State Bank Of India N.A
(10.14% average floating rate upto 20 Rs.10,000 + service
years) tax
Rs.10,000/- above 1 crore
If Full Payment - 2% of
0.50% of loan
ICICI Bank 9.50% outstanding amount If
amount upto 1 crore
Part Payment - No
Penalty

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If 25% of outstanding
amount is paid within 3
0.5% plus applicable
HDFC Ltd 9.75% years - No Penalty ,
service tax and cess
otherwise 2% of
outstanding amount
2% of out standing
LIC Housing 9.90% ( Fixed for 5 yrs), Floating 9.25% 0.5 % -1%
Payment
1% of the loan
AXIS Bank 9.50% amount + applicable NIL
taxes
Up to 1%of loan
amount
(Rs 2500 to be If Balance Transfer then
IDBI 9.50%
collected at login and 2% Otherwise Nil
balance at the time
of sanction )
5000 + 10.30%
(service tax) (Upto
20Lacs)
ING Vysya 9.75% 2%
5000 + 10.30%
(service tax) (Above
20Lacs)
4% for 18 months and 2%
Standard Chartered 9.50% 0.5%
after 18 months
If 20% of outstanding
amount is paid every year
0.5% - 1%(basis on
DHFL 10.25% (Upto 15Lacs), then 10.50% -No Penalty , otherwise
profile)
2% of outstanding
amount

Citibank 10% - 10.75% 0.5%+Service tax 2%

up to 90% no charges
Deutsche Bank 9.75% - 10% 10000 + Service Tax
after that 2.5%
upto 30lacs - 2,500 +
10.30% (service tax)
above 30lacs to 1.5Cr
India Bulls 9.75% - 5,000 + 2%-3%
10.30%(service tax)
Above 1.5Cr - 10,000
+ 10.30%(service tax)
0.50% of loan
Allahabad Bank 10.75% amount, Maximum N.A
Rs. 10,000/-

Bank of Maharastra 10.00% N.A N.A

0.50 % of loan
Central Bank of India 10.50% amount, maximum N.A
Rs.20,000
Upto Rs.5 lakhs
0.50% of loan subject
Corporation Bank 10.50% N.A
to min. Rs.1,000/- &
max. Rs.2,500/-

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Above Rs.5 lakhs &

upto Rs.15 lakhs
0.50% of loan subject
to min. Rs.2,500/- &
max. Rs.7,500/-
Above Rs.15 lakhs &
upto Rs.20 lakhs
0.50% of loan subject
to min. Rs.7,500/- &
max. Rs.10,000/-
Above Rs.20 lakhs
0.50% of loan subject
to min. Rs.10,000/- &
max. Rs.50,000/-
For loans upto Rs.30
lacs One time @
0.55% of loan
amount min. Rs.
3000/- and max.
Rs.10000/-
For Loan over Rs.30 2.25% of outstanding loan
Bank of India 11.25%
Lacs upto Rs.50 lacs – amount.
One time flat
Rs.15,000/-
For Loan over Rs.50
Lacs upto Rs.1.00
crore – One time flat
Rs.20,000/-
0.25% of loan
amount subject to a
maximum of
Union Bank of India 10.50% N.A
Rs.15000/- plus
service tax as
applicable
0.50% of the loan
United Bank of India 10.70% N.A
amount

UCO Bank 10.50% - 11% - N.A

Bank of Baroda 10.50% N.A N.A

Canara Bank 10.50%

Nil for fresh Loans

upto Rs.20.00 lac,
For Loans above
Rs.20.00 lacs 0.50%
Oriental Bank of Commerce 10.50% N.A
of the loan amount
subject to a
maximum of
Rs.12,500/-
2% of Principal
Outstanding + 2% on
Kotak Bank 10% - 10.25% 0.25% - 0.5%
amount prepaid in last 12
months

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Dena Bank 10.40% N.A N.A

Punjab National Bank 10.50% 0.5% 2%

9.75% - 10% (for Salaried / SEP) , 10% -

Deutsche Post Housing Finance 0.5% Nil
10.25% (For Self Employed)

Vijaya Bank 10.25% - 10.75% N.A N.A

Syndicate Bank 10.00% N.A N.A

Indian Overseas Bank 9.50% N.A N.A

Barclays Bank 10% - 10.25% 0.5% 3%

Federal Bank 10% - 10.50% 0.50%

1% of the loan
amount applied for,
subject to a minimum
25%of the original loan
of Rs 10000 plus
HSBC Bank 10% - 13% amount free for every
service tax. This fee is
financial year
payable on
application and is not
refundable

PNB Housing Finance 9.75% 0.5% 2%

Development Credit Bank 11% - 11.50% 0.5% 2% of o/s + Service tax

9.25% (for 1 yr), 10% (from 2 & 3 yr), 2% of the outstanding

State Bank of Travancore
Indian Bank
Nil
10.25% (from 4th yr) loan amount
1) 0.25 % on Loan 1) No pre-closure charges,
amount (Non if loan is closed out of
refundable) (to be own funds.
remitted at the time 2) 2% on Balance
of submission of outstanding or applicable
10.75%
application) Drawing Limit whichever
2) 0.32 % on Loan is higher, if loan is closed
amount (at the time by way of take over by
of acceptance of another Bank / Financial
sanction) Institution.

EMI Calculator:
EMI_Calculator.xls
Sources:
http://vbsez.blogspot.com/2010/09/how-sbi-cheated-me.html
http://www.guide2homeloan.com/resources/home-loan-faqs.aspx
http://www.loanindia.in/home-loan-tax-saving-benefits-india.html
http://au.answers.yahoo.com/question/index?qid=20100714095237AA8hMf6
http://www.deal4loans.com/home-loans-interest-rates.php
http://www.naveen.info/2009/06/21/how-to-calculate-emi-download-excel-emi-calculator/

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