All You Need to Know About Home Loans

Are you a middle-class Indian citizen? Do you dream of having a house of your own but don’t have enough capital for it? Do not worry because in this blog you will get to know about home loans and everything that you should know about it.

In a very simple term, the term ‘loan’ refers to the lending of an amount of money by one or more individuals or bank or an organization or other form of entities to another individual(s) or organizations, etc. The borrower is liable to repay the principal amount as well as interest amount in future, obviously within the stipulated time.

The interest is calculated using a formula which is given below:

C.I. = P (1+ R/100)^T – P

In the above formula, C.I. symbolises Compound Interest, P represents principal amount of money, R represents Rate of interest, and T is the time in which the entire amount is to be paid. It is to be noted that Amount is the total money to be returned; it incorporates within itself both the principal and the interest. In the same way, home loan refers to that kind of loan when a borrower receives the loan for the purpose of purchasing, renovating, repairing or extension of the existing residential house.

Let us take an example

Suppose, you have a land and you want to build a house because you are bored living in a flat since a long period of time. You belong to a middle-class family. Further, you are the only bread earner of your family. Naturally, you would not have enough savings to build a house. So, you go to the XYZ bank for a home loan. After the documents are verified, they give you a loan of Rs. 10,00,000 for a period of 10 years at 8% p.a. (per annum). So, the amount to be paid back is Rs. 21,58,925.

Home is considered to be one of the very basic demands (food, clothing and shelter) of human being. Therefore, the fulfilment of the requirement of home for the citizens is considered as an important issue of the government. The government has taken a number of initiatives and works with various financial institutions to fulfil the requirement of houses of its citizens. It asks the banks to provide loans to its customers at a considerably low rate of interest. The rate of interest for home loans can be either fixed/rigid or floating, or partly rigid or partly floating depending on the requirements of the borrower. Under section 80EE of Income Tax Act, Indians have got certain advantages of home loans too. Nevertheless, only the first home buyers can only be benefitted by deduction of the income tax.

In India the person who borrowed the first home loan is D B Remedios who took a home loan of Rs 30,000 from HDFC bank in 1978 for the construction of home. Thus, the concept of home loan is not very primitive in India.

In earlier time, people used to save an amount to purchase the target thing/goods, etc. It was also witnessed that people used to raise the money of retirement benefits for the construction of house. But the final agencies like banks stated to offer home loan by holding the deed of the property or other form of guarantees. The property remains mortgaged to the bank or the lender for security purpose; once you repay the loan amount, the documents of the property is returned to you. Although Bank treated home loan as profitable one, the number of borrowers of home loan was not very high initially. Why? Because at that time the concept of home loan was treated to be an alien concept. Because there is a lot of confusions to the common people regarding the terms of home loan, difficulties for the access of home loan, etc.

Surprisingly, the rate of interest was around 11% to 14% till 1994. The average age of the borrowers as 42 years, while to principal amount being around Rs. 39,000. In the earlier days, the Loan to Value (LTV) ratio is used to be below 50 per cent for home loans. But with the rise of competition the LTV ratio went up. On the other hand, the Reserve Bank of India (RBI) have taken the policy of capped it at a rate of 80 per cent. when the loan amount is below 30 lakhs then the banks have the right to go up to 90 per cent LTV ratio. In the present scenario the age of the home buyers or home loan borrowers is comparatively low than before. The average age of the home buyers in present is witnessed to be early thirties. The loan borrowers have the less ability to put up their own capital initially which tend to increase the LTV ratio in the current scenario. It is witnessed that at present, in India, the home loan is gradually turning to be an essential part of life especially for urbanized people.

The HDFC bank introduced the concept of housing finance which promoted home loan largely among the Indians. The financial year 1991 is recognized as the era for liberalization of Indian economy and the opening of the economy promoted the banks to enter the home loan market of India. ICICI Ltd ventured in the market of home loan for the first time in the year 1999. In the year 2000 the ICICI bank introduced the concept of floating rate (although the HDFC had the same product earlier). State Bank of India also entered the market of home loan introducing the concept of teaser rate (fixed-cum-floating). State Bank of India has the largest number of branches in India and with the help of these large number of branches, it successfully operates the teaser rate throughout the country.

Before 2002 there were no such guidelines to manage defaults on home credits. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 enabled banks to manage Home Loan defaults.

Recently, RBI gave banks the opportunity to fix their paces of revenue on Home Loans relying upon the expense of assets. It extinguished a financing cost battle with banks going up against one another to offer the best rates to the clients. There were a spate of Home Loan offers from banks attempting to tempt clients.

The clients have understood that taking a Home Loan to purchase a house is better compared to doing as such with their investment funds. The Government of India has assumed the part of the impetus in the development of the Home Loan area by presenting concessions in annual expense for home credit borrowers. This assists with expanding the market of home advances in India strongly.

Lastly

I hope that you have got a clear picture about home loans. Still, if you have any query, you can connect us at info@roodland.com. You can visit our official website to get more information on Real Estates.