Choosing a housing loan is a complicated process. All borrowers want to minimize the costs of borrowing. So before finalizing a housing loan, you should analyze the conditions subject to which the loan is being offered. Many of the conditions have an impact on the total cost of the loan.

With keen competition in the housing loan market, banks are coming out with new and innovative products. In this scenario, choosing one that comes at the lowest cost becomes difficult. In addition to the interest rates, many other costs and benefits should be analyzed. Although individually these may look insignificant, cumulatively they have a substantial impact. A borrower should seek all details from the bank. A borrower can negotiate on most of these charges depending on the loan amount, tenure and his credibility.

Make a Summary of your property

  • Processing Fees: It is payable at the time of filing of the loan application. This is non-refundable and is charged to cover the costs of determining the loan eligibility of the potential borrower. It varies from 0.5 to one percent of the loan applied for.
  • File Charges: These are charges for preparing the documentation. Some banks and HFCs charge this fee.
  • Legal Charges: These pertain to the legal evaluation of the house documents. Some banks charge this separately.
  • Commitment Charges: These charges are payable if the loan is not utilized within a specified period of time after sanction.
  • Administrative Fee: This is payable on the acceptance of offer i.e. once the loan has been sanctioned. The amount is the same as processing fees - 0.5 to one percent of the loan sanctioned. Some companies charge both processing and administrative fees together.
  • Commencement of EMI: In some cases, EMI starts from the month of final disbursement of loan. In other cases it starts from the month following that. Depending on the cash flow position of the borrower, a decision on this behalf should be taken by him. The timing of commencement of EMIs has an impact on the total interest cost to be paid by the borrower over the period of loan.
  • Change of mode of interest: In case you want to switch over from a floating rate to a fixed rate (because the interest rates are accepted to come down) you will have to pay a penalty amount to the lender.
  • Insurance: Some banks insist that the house should also be adequately insured or the borrower should take a life insurance policy where the sum assured is at least equal to the loan amount. Some offer free insurance to the borrower or the house.
  • Switchover charges: In case of borrower decides to switch over from one bank to another, because the other is offering better terms, a penalty is charged. However, if the loan is repaid out of one's own funds, these charges may not be payable.
  • Prepayment charges: Some banks levy prepayment penalty in case the loan is repaid before the full term or certain agreed minimum period. This is done because it disturbs their cash flow and income estimates. The amount varies from one to five percent of the outstanding amount of loan. Some banks do waive off these charges. The charges are payable on the balance amount outstanding.

Tax Benefits on Home Loan

  • Alarge number of people are buying houses in the city. Even as property prices skyrocket, they have a good reason to be happy. The tax benefits on home loans ease the burden of repayment.
  • The equated monthly installment (EMI) payments made by a borrower has two components - the principal component and the interest component. During the initial years of the loan tenure, the EMIs would have a higher share of interest component. It would have a higher principal component only towards the end of the loan tenure.
  • The principal repayment that borrowers make on their home loans is eligible for income tax deduction under Section 80C of the Income Tax Act. The limit under Section 80C is Rs 1 lakh. Apart from home loan principal repayments, other investments included are provident fund, public provident fund, life insurance premium, equity-linked savings schemes of mutual funds, infrastructure bonds and pension plans to name a few.
  • With no sub-limits for each investment in Section 80C, homeowners can take advantage of the entire Rs 1 lakh deduction limit on principal repayments made.
  • Let's take a sample scenario to illustrate this further. Ganesh's taxable income is Rs 4 lakhs. The principal component of the EMI that he repaid to the lender comes to around Rs 50,000. Ganesh can deduct the home loan principal amount repaid from his taxable income directly.
  • Therefore, Rs 4 lakhs minus Rs 50,000 i.e. Rs 3.5 lakhs is his taxable income. He can invest in other instruments mentioned under Section 80C and further reduce his taxable income.
  • Homeowners can avail tax benefits on the interest component repaid under Section 24. Under Section 24 of the Income Tax Act, the maximum amount of interest that can be deducted from your taxable income is Rs 1.5 lakhs. As a result, your taxable income decreases by that amount. This limit is for self-occupied property only.
  • Suppose Ganesh has repaid Rs 1.7 lakhs towards the interest component of the home loan. Since there is a limit of Rs 1.5 lakhs, he can deduct this amount from his income. Therefore, Rs 3.5 lakhs minus Rs 1.5 lakhs, i.e. Rs 2 lakhs is his taxable income. The first house with tax benefits under Section 80C and Section 24 is viewed as a self-occupied property. The tax benefits on both interest and principal repaid towards the home loan makes it lucrative for many.

Tax benefits on second house

  • Suppose you invest in a second house. This is not treated like the first one which is a self-occupied property. The second house is treated as a property that is rented out.
  • There are no benefits of principal deduction that borrowers can avail. Homeowners can however claim benefits for interest repayment of the home loan. There is no limit on the interest repaid unlike the Rs 1.5 lakh limit under Section 24 for self-occupied property.
  • You can seek tax benefits under Section 24 and deduction under Section 80C of the Income Tax Act only when the EMI payment is made. If you default or fail to make EMI payments, you cannot claim tax benefits for them.
  • Further, only the person who has taken the loan can claim tax deduction. In case of a joint loan, the persons can avail tax benefits in proportion to their individual contributions towards loan repayment.
  • It is left to the borrowers to use these benefits well and reduce the overall cost of the home loan.