The beginner's guide to home loans


Note and Coin standing outside their very own home - on the post box outside, a symbol reads ‘OUR VERY OWN HOME’ Note and Coin standing outside their very own home - on the post box outside, a symbol reads ‘OUR VERY OWN HOME’

In an earlier chapter, we took a brief look at the various types of loans in India, which included home loans. Now, we’re going to take a more in depth look at the concept of home loans, the types of home loans, and the benefits that you’re likely to enjoy by availing them. So, let’s first start off by revisiting the meaning of a home loan


What is a home loan?

A home loan is essentially a loan that you take to fund the construction or purchase of a house. One of the highlights of a home loan is that you can use the amount that you borrow to purchase both new or old houses. 


How does a home loan work?

Generally, home loans are offered only up to 80% to 90% of the total value of the house. The remaining 20% to 10% of the value of the house has to be funded by you, out of your own pocket, in the form of a down payment. 


Also, the house that you purchase using the home loan will be held by the lender as collateral. That’s why home loans are termed as secured loans. And if you fail to repay the loan on time, the lender can possess the house, sell it, and use the proceeds received from the sale towards repayment of the loan. 


What are the different types of home loans?

Now that you’re aware of the definition of a home loan, it’s time to take a look at the different types of home loans available in India. Contrary to popular opinion, there are multiple types of home loans, each with its own purpose. 



  • Purchase loan 


This type of a home loan can be used only to purchase a house, be it new or existing. And as you’ve already seen above, to avail a purchase loan, you will have to make a down payment of around 10% to 20% of the total value of the house beforehand.  



  • Construction loan 


Home construction loans are for those individuals who wish to construct a house for themselves. The amount from these loans can be used to cover any and all expenses involved with construction of a home. However, this loan can only be availed if you already possess a land in your name. 



  • Extension loan 


If you already possess a house, but would like to extend it further by building more rooms or floors, a home extension loan is what you should go for. Extension loans are also offered for individuals looking to add spaces outside their homes like a stand alone garage. 



  • Improvement loan 


Home improvement loans are for those individuals looking to renovate or improve their house. These loans can be used to cover the cost of painting the house, adding new shelves, redoing the interiors, and so much more. 



  • Repair loan


Home repair loans, as the name itself signifies, can be used to cover the costs associated with repairing and restoring your house to its original condition. 



  • Home loan balance transfer 


A home loan balance transfer is a special loan option through which you can transfer your outstanding home loan from one lender to another at lower interest rates and better terms and conditions. 


What are the advantages of a home loan

We’ve seen what the meaning of a home loan is and the different types, the next thing that we’re about to see is the various benefits that you stand to gain from a home loan. 



  • Low interest rates 


This is one of the biggest advantages that you get to enjoy by opting for a home loan. The interest rates for home loans are some of the lowest that you can possibly get. Depending on the lender and your eligibility, you can get home loans at interest rates starting from 6% to 12%. 



  • Ability to transfer the outstanding home loan balance  


As you’ve already seen above, home loans offer you the option of transferring the balance to another lender offering lower interest rates and better terms. This way, you can save a lot on EMIs.



  • Ability to opt for a long repayment tenure


Home loans allow you to opt for a long tenure of 10 to 15 years. Some lenders even allow you to opt for a tenure far higher than that as well. This works to your favour since longer tenures effectively translate to lower monthly EMIs.



  • No part payment or prepayment penalty 


Many lenders don’t levy any penalty for making part payments on home loans. This allows you to make lump sum payments as and when you have accumulated cash, which can lower your EMIs and your repayment tenure considerably. 


What are the disadvantages of a home loan?

For the most part, a home loan is an extremely beneficial financial product that can help you make your dream of home ownership a reality. However, you also need to be mindful of the downsides of a home loan, which include the following.

  • You may lose the tax benefits on the HRA component of your salary.
  • It can have a negative impact on credit score if you fail to repay the loan.
  • It is a major financial commitment.


Wrapping up

We’ve come to the end of yet another chapter. Since a home loan is a long-term commitment, always make sure to read through the terms and conditions laid out by the lender thoroughly. In the next chapter of this module, we’ll decode another very popular loan option in India - personal loans.

How would you rate this chapter?

Comments (0)

Add Comment

Ready To Trade? Start with

Open an account