Introduction

Everybody deserves a home of their own. Thanks to home loans, the dream of buying a house and turning it into a loving home is now a reality for millions in India. 

In this module, we will tell you all the essential information you need to know about home loans. You will find answers to questions that you might have. 

What is a home loan?

Simply put, a home loan is an amount of money borrowed from a financial lender for purchasing a house. However, the purview of home loans extends beyond purchasing a house only. From buying land to renovating your own house – home loans can be taken for a variety of purposes. 

While talking about home loans, it is important to remember that financial institutions such as banks and non-banking financial institutions (NBFCs) do not finance 100% of the market value of the property. They finance a certain amount only, which depends on the type of loan.

For example, for home purchase loans (where the loan is provided to purchase a flat/house), the bank finances up to 90% of the loan amount. The proportion of finance solely depends on the discretion of the loan approving authority.

Sometimes, they can decide to finance less than the maximum amount, if they evaluate a greater risk in the loan (such as lower credit rating of the borrower).

4 Important aspects of home loans

1. Large principal amount: Since we are talking about purchasing houses, the principal amount of home loans is usually large and range from few lakhs to a few crores. 

2. Longer tenure: Home loans typically have longer tenure which extends up to 30 years. 

3. Interest rate: Home loans are given on fixed and floating rates of interest. We have discussed this in detail in section 4 of this module. 

4. Credit score: The borrower’s credit score matters significantly while providing a home loan. Hence, having a Cibil score of 750 and above is ideal for availing a hassle-free home loan. This has also been discussed in detail in section 6 of this module. 

Advantages and disadvantages of taking a home loan:

Like everything else in this world, taking a home loan has its own advantages and disadvantages. Let’s take a quick look at some of them:

Advantages:

• Ideal for everyone: Home loans have made buying a home affordable to everyone. A person starting his/her career or a middle-class businessman can today think of owning a house, thanks to home loans. 
   
• Cost-effective: Home loans have lower interest rates. It is more cost-effective than other credit modes such as personal loans, credit cards or gold loans.
   
• Saving and investment: Your house is an investment. So, don’t consider your home loan EMIs as a part of the expense. Rather, it is a mode of saving and investing in a tangible asset. 
   
• Safety of the property: We all know that buying a house can be tedious, and sometimes risky. Incidents of dubious builders and bad constructions are not rare. When you avail of a home loan, the bank or NBFC will have a qualified legal team to look into all the papers of the property and ensure everything is in order. They will have your best interest in mind. You can be assured of the legality of the entire transaction. 
   
• Tax benefit: Well, this is a significant benefit of availing a home loan. You can claim deduction on the principal and interest component of the home loan while filing your income tax. We suggest consulting your tax consultant to know the details of these deductions. 

Disadvantages:

• Commitment: Yes, the first thing that comes to anybody’s mind while considering a home loan is the commitment to pay. A home loan repayment can take up to 30 years – a long time, isn’t it? A lot of things can happen during this time. 
   
• Loss of opportunity to invest somewhere else: Once you have committed to a home loan, a significant chunk of your income will be blocked for paying EMIs. You could invest that money somewhere else and earn short term returns. 

In the long run, the advantages of a home loan far outweigh the disadvantages. And above all, the happiness of having your own home and making it a happy place for your family is a different feeling altogether. Hence, if you can afford it, home loans are always a good idea. 

Renting vs taking a home loan

A frequently asked question, with regards to home loans, is whether you should buy a house or stay on rent. Let’s do a quick comparison of both:

• Buying your own home has some inherent benefits such as the pride of owning a house. It brings in a sense of security.
  Rent keeps increasing every year. With a home loan, you pay the same EMI for a long period of time. 
• In case of renting, you may not stay in the same house forever. Shifting is a cumbersome process. 
• When you stay on rent, you don’t have to be bothered about the maintenance of the house and other paraphernalia. That remains the owner’s responsibility. However, if you are the owner, maintenance becomes your responsibility. 
• Your home loan EMI is a saving. You are eventually investing the money in real estate. Your rent, on the other hand, is an expense. You don’t get anything in return. 

What should you do?

So, should you rent?Or should you buy your own home?

If you are sure to stay in the same city for long, buying a home is better than renting. However, if you plan to move cities, then purchasing a home may not be a good idea. 

From an investment perspective, purchasing a home does make sense.