Guide to home loans in India

When considering a home for investment the first thing that you want to know is the details about home loan. Loan has become an integral part of everyone’s life today and help us achieve our goals of buying a new home. Get an insight of the details of home loan provided in India.

Source of finance:

For purchasing any property NRIs consider financial institutions as an easy option available in India.  At the same time financial institutions consider NRIs as their potential clients as they are very much prompt at the time of repayment. Furthermore, the repayment can readily be done by inward remittance through the proper banking channel. If someone is already getting income in India from sources like rent or dividend, he/she can directly repay the loan as well.

These financial institutions easily grant loans under the norms set by RBI.

RBI has predetermined these norms in home loans for non-residents who are looking forward to buying any property:

  1. A maximum of 80 per cent amount is financed by the financial institution. The rest should be given by the NRI.
  2. The remittance of the amount for down payment can be done from the place of residence by normal banking channels, i.e., NRO/NRE account in India.
  3. The NRI has to repay his principal amount as well as interest part from that similar channel only.

What is the rate of interest and different rates of interest?

Every bank charges certain percentage of interest on the loan amount. Specifically, the interest rate is a percentage of amount paid in a certain number of times per period for all periods during the total term of the loan or credit. Interest rate it depends on current market situation, inflation and monetary policies.

There are two types of interest rates:

Fixed interest rate

A fixed rate of interest is offered on a loan by a lender when a buyer opts to make repayments in fixed monthly installments over the entire tenure of the loan irrespective of the interest rate cycle. For those who want certainty in their repayment schedule a fixed interest rate on the home loan is a better option.

Floating interest rate

A floating rate of interest is one that varies according to the prevailing conditions in the market. Home loans that are disbursed on the floating rate of interest, are done so in relation to the base rate of a lender. Therefore, if there is a change in the base rate, there will be an impact on your floating rate of interest as well. Floating Rate of Interest is cheaper than a fixed rate by at least 2 to 2.5% and as interest rates are cyclical in nature floating interest rates bring in a lot of savings for the borrower when the interest rates soften in the market. The only drawback of such rates is the impact they have on your monthly outgo as EMI. Given the uneven nature of floating rates, EMI’s may shoot up for a limited period of time.

What is an EMI?

If you are planning to get a home loan to buy your house in India, the EMI, which stands for equated monthly instalment will be your main consideration. The benefit of an EMI for borrowers is that they know precisely how much money they will need to pay toward their loan each month, making the personal budgeting process easier.

EMI is the sum of money that you as a borrower will pay your lender to clear your outstanding loan. Equated monthly instalments are used to pay off both interest and principal each month. These payments are made every month on a date that is stipulated by a bank till such time that the loan has been completely repaid.

What is loan amortisation schedule?

This mortgage loan calculator also known as an amortisation schedule calculator lets you estimate your monthly loan repayments. It shows the amount of principal and the amount of interest that comprise each payment so that the loan will be paid off at the end of its term.

What are the factors affecting EMI?

Bank calculate EMI’s on the basis of three things:

1) Loan Amount: This stands for the total amount that has been borrowed by an individual from a bank.
2) Interest Rate: This refers to the rate at which the interest is paid by the borrowers on the loan amount. Specifically, the interest rate is a percentage of principal paid at a certain number of times per month during the total term of the loan or credit.
3) Loan Tenure: This refers to the time by which the loan amount will be repaid.

How is EMI calculated?

The most popular method of computation of EMI owed to a bank is on the basis of ‘monthly reducing loans’ where the principal amount is reduced with every EMI paid and the interest is calculated on the remaining amount owed. This computation is used by banks in India to calculate home loans, auto loans and personal loans.

The mathematical formula to calculate EMI is: EMI = P x r x (1 + r) n/ ((1 + r) n - 1) where P= Loan amount, r= interest rate, n=tenure in number of months.

For instance, the EMI for a principal amount for Rs 10 lakh, 10% interest rate and 24 months tenure is shown in the following table:

Principal Amount 10,00,000
Rate of interest 10%
Loan tenure in no. of months 30
EMI 8,776

As the loan tenure reduces, the interest component reduces too as the principal gets paid back to the bank.

An increase in the tenure of the loan naturally leads to an increase in interest rates and therefore, the interest component on the loan. EMI’s paid regularly and as much as possible shortens the tenure of the loan.

What is a down payment?

Making a down payment makes expensive assets like house more affordable. In this certain amount of the property is paid in cash while the remaining amount is paid in instalments. It is basically a commitment from the buyer that he is sealing the deal. Such payments usually range between 15-20 % of the value of the property one intends to purchase. The more money you can put aside for a down payment the better it is, since it will result in a shorter tenure of a loan and easier EMIs. Other costs such as stamp duty, registration, transfer charges etc. are not part of the home loan and are additional costs.

What is the Processing fees?

To process the home loan certain amount of fees is charged by the bank. This fees differs from one bank to another. Some may have no processing cost while some may charge negligible amount.

What is a Fees and charges checklist?

When you apply for loan you must be well aware of the various charges and fees incurred by the banks. It’s important to figure out the hidden costs.