For most of us, owning a home is a matter of pride and one of the important milestones of our life. From exploring the neighbourhood to examining the civil amenities, we make sure that our home offers comfort and convenience. While finding an ideal home is an exciting journey, choosing the most suitable financing option from different types of home loans can be tricky. Primarily due to the eligibility criteria, interest rates offered, and multiple formalities.
So in this blog, we will shed light on some of the housing finance options in India and explain their significance. We will also elucidate a few factors that you must consider before applying for a home loan.
Are Home Loans Only Available for Buying a Flat?
While most of us avail loans for purchasing a flat, there are several other reasons for applying for a home loan. For instance, if you want to renovate your current residence, you can opt for a home improvement loan. Other than this, if you wish to construct a new house on a plot of land, then you can apply for a construction loan. Hence, there are different types of home loans that you can avail based on your needs and requirements.
10 Types of Home Loans in India
Based on the purpose they serve, we have listed down the most popular types of home loans that you can avail in India.
1. Standard Home Loan
It is one of the most popular types of home loans used for purchasing a residential property. You simply borrow money from the lender and repay the same through equated monthly installments (EMIs). Generally, lending institutions provide up to 80%-90% of the total property cost as the loan amount.
The biggest advantage of availing a home loan is that you will receive tax benefits of up to Rs 2 Lakhs on the interest. This provision has been specified in section 24(b) of the Income Tax Act 1961. Although the eligibility and document list can vary from one bank or NBFC to another, here are some common papers that you need to submit for this type of loan:
- Passport size photographs
- Bank statement for the last 6 months
- Proof of age and residence (PAN Card, Voter ID card, etc.)
- Photocopy of all relevant property documents
- For salaried class individuals, copy of salary slips for the last 3 months
- Details of the guarantor
- Processing fee cheque
For self-employed individuals, a copy of IT returns, tax challans, and a certified copy of balance sheets for the last 3 years is also to be submitted.
2. Home Renovation or Improvement Loan
If you are planning to make small repairs to your existing property or want to refurbish your flat completely, then a home renovation loan is what you can apply for. One of the major advantages of such types of home loans is that they are available for tenure as long as 30 years (subject to conditions). Based on age, a borrower’s repaying capacity, and other factors, banks also offer variants on such loans.
While some documents remain the same as that of a basic home loan, no-encumbrance certificate, title deed, and Architect’s estimates are some of the other documents you may have to submit.
3. Home Extension Loan
Want to add another room to your existing flat? Or do you want to change the existing structure of your home? Then home extension is one of the most popular types of home loans that you can avail. Just like a home renovation loan, the tenure can be as long as 25-30 years. While some banks have a separate home extension loan category, the others offer it as a part of renovation loans.
Income papers, KYC documents and certificates like title deeds, plans approved by local authorities, etc are some of the documents that you will be required to furnish.
4. Loan for Constructing a Home
While some individuals prefer buying ready-to-move-in apartments, others want to construct a home as per their needs and requirements. If you fall in the second category and are exploring financing options for the same, then a housing construction loan is the most suitable choice for you. The tenure and interest rate for this type of home loan ranges between 15-30 years and 6.9-9.25%, respectively. However, this will vary based on the bank you choose, their eligibility criteria, and other requirements.
It is important to note that in self-construction home loans, the money is disbursed based on the progress of construction and not lump sum.
5. Balance Transfer Housing Loans
Have you already purchased a home loan but now want to change the lending institution? Then don’t worry. Balance transfer loans will cater to your needs. You can apply for such types of home loans if you want to:
- avail the benefits of low interest rates
- reduce your term period to pay off your loan faster, or
- take a top-up on the existing loan for personal needs
The conventional documents like the income statements, address and age proof, income tax returns have to be furnished. However, you will also be required to submit records like NOC from the current bank, photocopy of loan statement, bank statement of the last 1 year (from where EMIs were deducted), etc.
6. Short-term Bridge Loans
There tends to be a difference between the selling price of your current property and the new house you intend to purchase. So if you don’t have sufficient funds to invest in your new property, you can avail short-term bridging loans. It is a type of financial arrangement where you can secure a working capital for your new home till you find a suitable price for your old property.
These loans are issued for a short period of up to 2 years and are backed by collateral security. In comparison to other specific types of home loans, a higher interest rate is charged on this loan type.
7. Home Loans for NRIs
These types of home loans open an avenue for non-resident Indians to fund and own a residential property in India. For NRIs, the loan amount sanctioned depends on multiple factors like repayment capacity, the age at loan maturity, the city where the property is located, etc.
When it comes to loan repayment, your contribution and the EMIs will be deducted from your NRO/NRE bank account. Additionally, you should appoint a power of attorney (POA) in India so that your loan is facilitated with ease. Although the loan application process is almost similar to that of standard home loans, the documentation process is exhaustive.
8. Types of Loans for Plots in India
If you need to buy a residential plot. Home loans are available for both new and used land purchases.
9. Reach Home Loans
These home loans are offered to people working in unorganized sectors. Reach loans are available for the acquisition of new or existing properties, the construction of a dwelling on a freehold or leasehold parcel, or on a parcel allotted by a development authority, or for the expansion and enhancement of existing dwellings.
10. CLSS Scheme Under PMAY
One of the latest additions to the list of types of home loans in India is the Pradhan Mantri Awas Yojana-CLSS. The Credit Linked Subsidy Scheme or CLSS was initially launched for the economically weaker sections in 2016. It was later extended for middle-income family groups.
The primary objective of this scheme is to offer interest concessions on home loans to individuals belonging to the low- and middle-income groups. Before understanding the methodology followed, let us first go through the categories which are eligible for this scheme.
| Conditions | LIG/EWS | MIG | MIG-2 |
| Definition | Individuals falling in the ₹3 Lakh-₹6 Lakh annual income category. | Individuals falling in the ₹6 Lakh-₹12 Lakh annual income category. | Individuals falling in the ₹12 Lakh-₹18 Lakh annual income category. |
| Interest Amount | 6.5% | 4% | 3% |
| Maximum Subsidy | ₹2.67 Lakh | ₹2.35 Lakh | ₹2.3 Lakh |
Let’s say you purchase a home loan of Rs 7 Lakh (MIG category) from a bank or NBFC. This amount will be credited to your account. Now based on the loan period and interest concession, the subsidy amount will get deducted from the principal amount of your loan. This leads to a reduction in the EMI which you, as a homebuyer, have to pay. The amount which you don’t have to pay is borne by the government.
Factors to Consider when Applying for Different Types of Home Loans
With digital banking and different types of home loans available, financing your dream home has become very convenient. However, before applying, you must take into consideration the following factors to strike the best deal:
1. CIBIL Score
When you apply for different types of home loans, the CIBIL score is the first thing that a lender checks. CIBIL is a credit information company that is licensed by RBI. It maintains the payment records of companies or individuals and issues a report and a 3-digit CIBIL score. This score defines your credit history and your loan repayment capacity.
The score in the report ranges between 300-900. Generally, a CIBIL score of 750 or above is considered very good. Hence, higher the CIBIL score, the chances of getting a loan sanctioned at better interest rates increases.
2. Total Loan Amount
Generally, the loans provided by lending institutions cover 75-90% of the total property cost. This depends on various factors including eligibility criteria, credit score etc. Hence, it is important for you to check the amount the bank or NBFC will finance. For example, if your property is valued at 80 lakhs, then the bank will provide Rs. 60 Lakh (if 75% covered). The remaining amount of Rs. 20 lakhs has to be borne by you.
3. Floating vs Fixed Interest Rates
For different types of home loans, you have the option to choose between fixed or floating interest rates.
Since the interest rates are decided before taking the loan, your EMI will remain fixed throughout the tenure in the case of Fixed IR-based loans. On the other hand, the interest rates of floating loans will increase or decrease based on the change in repo rates.
So if you feel that the IR is low at the time of application, then you can proceed with loans having fixed interest rates. But remember, the interest on fixed rate loans are generally higher than those for floating rate loans.
4. Equated Monthly Installments (EMI)
EMI forms an essential component of all the types of home loans. It is the fixed amount that you pay the lending institution every month. Along with the principal amount, you will also have to pay the interest on the outstanding value.
But if you want to take a loan for an under-construction property, you can opt for the Pre-EMI scheme. In this, you only have to pay the interest incurred. The principal amount will be paid once the construction of the flat or house is complete.
5. Repayment Tenure
The time taken to pay off the outstanding loan amount is referred to as the repayment tenure. Different types of home loans can be sanctioned for a period up to 30 years.To choose the most suitable loan, let us understand the correlation between EMI and repayment tenure.
If you take a loan with a longer tenure, the EMI amount will come down. However, this will also increase the interest burden on you. But if you go for a shorter loan period, your monthly EMIs will increase. This option is viable for those who follow a strict budget and have a stable yet recurrently increasing income.
6. Calculate Cost-to-benefit-ratio
While Balance Transfer Housing loans are very attractive in terms of reduced rates, you also need to examine the cost-to-benefit ratio. That is, the benefits must outweigh the costs of switching the bank. For this, expenses like stamp duty charges, processing fee, valuation fee, etc should be closely evaluated.
The Role of Interest Rates in Home Loans
Increases in Repo Rates have a Negative Impact
The Reserve Bank of India sets the repo rate, this change in repo rate affects the interest rates on floating-rate home loans. A rise in the repo rate triggers an elevation in these loan’s interest rates, consequently, if this repo rate escalates further, borrowers could encounter increased monthly payments for their floating-rate home loans. Borrowers on floating-rate home loans may encounter increased monthly payments, this results from repo rate hikes. It is important to note that such increases do not impact borrowers with fixed-rate home loans: their interest rates remain locked for the duration of their loan terms.
Interest Rate Estimation
The estimation of interest rate boils down to two main parts. The first part is the base price, set by the bank or linked to a national rate set by the Reserve Bank of India (repo-linked lending rate or MCLR). Think of it as the starting point. The second part is a markup added by the bank to cover its costs and profit, similar to an extra fee. This markup is called the “spread.” So, the final interest rate you pay is the sum of this base price and the bank’s markup. For floating-rate loans, the base price can change based on national rates, but there’s usually a delay before this affects your actual interest rate.
Also understanding these two methods of interest rate calculation can assist you in deciding while choosing a house loan, these two methods are widely used by Indian banks.
Flat Interest Rate: In this method, the interest rate is calculated based on the entire loan amount of the whole loan tenure, regardless of the outstanding principal amount. This method often results in higher interest rates even though it seems simple.
Reducing Balance Method: This is the most common method used for home loan calculation, instead of interest charged on the whole principal amount, interest is calculated instead on the remaining principal amount which is decreased from paying your monthly installment. This method results in lower interest rates, for the long term it is a preferable method as it saves interest costs.
Hence, there are different types of home loans that you can avail based on your requirements. But before applying, it’s important to thoroughly check the eligibility criteria and whether the loan is being offered at a fixed or floating rate. In addition to this, you must verify details like the loan amount, interest rates, and total EMI payable. This will help you in planning your finances and in choosing the most suitable loan option.
