Types Of Home Loans

Before we get into the nuances of home loans, let us first discuss the types of home loans available in India. 

1. Home purchase loans

This is the vanilla form of loans where the loan amount is used to buy a residential property such as an apartment, a bungalow or a row house. Usually, banks finance up to 90% of the present market value of the property and NBFCs finance upto 80%. Almost all banks and NBFCs who are into the business of lending, offer home purchase loans. 

2. Home construction loans

For generations, building your house has been the main mode of having a home for families in India. Many prefer to do so now as well. A home construction loan is meant for this purpose where the borrower can use the fund to build his/her own house. This loan can also be taken to finish the construction of an unfinished house. 

3. Home improvement loans

This type of home loan is provided to renovate, repair or refurbish an existing house. This kind is quite popular since it can finance up to 100% of the repair estimate and have lower interest rates too. 

Home improvement loans are provided by many major lenders such as SBI, HDFC Bank, ICICI Bank, Punjab National Bank and others. 

4. Land purchase loans

This kind of loan finances the purchase of plots of land for construction of a house or as an investment option. Financial institutions finance up to 90% of the purchase value. This loan can be used to purchase plots within housing societies, real estate projects or even resale of plots. The only criterion is that the plots have to be used for residential purposes only and hence, should be non-agricultural. You will need to provide requisite documents from authorities proving this. With a good Cibil Score and a commendable track record, plot purchase loans can be obtained at quite a low-interest rate, although it will still be higher than normal home loan rates. They are usually provided for a maximum tenure of 20 years. The major land purchase lenders are HDFC Ltd, HDFC Bank, PNB Housing Finance Ltd., etc. EMI repayment of these loans does not attract any tax benefit.

5. NRI home loans

These home loans are taken by non-resident Indians for purchasing a house, construction of a house or buying land in India. These help NRIs invest in properties in India. Many banks and financial institutions provide NRI home loans, the most notable of which include SBI, ICICI Bank, HDFC Bank, LIC Housing Finance and others. 

6. Home Loans Balance Transfer

Sometimes, people who already have a home loan from one lender want to switch to another home loan provider because of various reasons such as lower interest rates or better customer service. In that case, they avail of a home loans balance transfer where-in the loan with the existing lender is closed and transferred to the new lender. While doing so, in many cases the new lender can offer a top-up facility, where-in some extra cash is provided to the borrower. 

This again is quite popular since it helps people avail of lower interest facilities and better services. 

Key features:

• Usually there is a fee associated with home loans balance transfer (usually 1% of the loan amount transferred) which the borrower has to pay to the new bank/NBFC.
• In most cases, the new bank/NBFC considers balance transfer as a new home loan application. 
• This can be done only after a pre-determined period as per the original loan agreement. It cannot be done immediately after taking the original loan. 

Is it a good idea?

Many people consider switching home loans as soon as they get a lower interest rate somewhere else. However, it may not always be a good idea. Here are a few things that you should consider before availing of a home loans balance transfer:

Interest rates: As mentioned above, lower interest rates are definitely a reason to consider switching. However, remember that most home loans are taken on flexible interest rates which will fluctuate from time to time. So, what seems low today, may not be so low tomorrow. However, if the interest rate provided by the new lender brings down your monthly EMI burden substantially, then it will make sense to switch. 

Loan tenure: If the existing home loan has a long tenure, then switching makes sense. However, if you are left with only a few years of payment, then the costs involved with the switching will not justify the transfer. For example, in case of a 20-years loan, consider switching up to the 15th year. Avoid transferring after that. 

Terms of balance transfer: What is the cost of transfer? What are the terms being offered by the new lender? – Consider all these very carefully before deciding to transfer. 

Here is a concise list of all the features for the different types of home loans that we have studied in this unit:

Home Purchase Loans

To buy a new house/flat:

• Long tenure- up to 30 years
• Low interest rates
• 80-90% of the property value financed

Home Construction Loans

To construct a new house:

• Long tenure- up to 30 years
• Low interest rates
• Low processing fee

Home Improvement Loans

To repair/refurbish/renovate an existing house:

• Long tenure- up to 30 years
• Low interest rates
• Up to 100% of repair value or 90% of the property value, whichever is lower is financed.

Land Purchase Loans

To buy a plot of land:

• Long tenure
• Lower interest rates
• Up to 90% of the land value financed

NRI Home Loans

To help NRIs invest in Indian properties:

• Long tenure up to 30 years
• Quick and transparent online processing
• No prepayment charges

Home Loans Balance Transfer

To transfer an existing home loan to a new lender:

• Opportunity to avail better interest rates
• May reduce the EMI burden 
• Should be decided after considering several aspects