What is a Home Loan?

A home loan is an amount of money an individual borrows from a financial institution or a bank to buy a new or resale property, construct a new house or renovate an existing one. A home loan is usually taken for a long period of 10-35 years and has a lower interest rate than a personal loan.

How does a home loan work?

The home loan that the borrower avails of is typically a percentage of the cost of the property or construction value. The loan is availed for a specified period at a specified rate of interest and is to be paid back to the lender over this term. The property for which the loan is taken acts as a collateral for the loan and is the security for the lender.

What are the types of Home Loans available in India?

There are various types of Home loans available based on the interest rate structure that is charged on them. These are:

Fixed interest rate:

In this kind of home loan, the interest rate charged on the home loan remains fixed throughout the tenure of the loan. So, if there are any policy decisions with respect to lowering or increasing interest rates, the home loan with fixed interest rate will remain unaffected.

Floating rate:

As the name suggests, in a floating interest rate home loan, the interest fluctuates as per the fluctuating rates in the market. When a borrower predicts that the rate of interest is likely to reduce, they generally take the risk by choosing fluctuating interest rate home loans.

Hybrid home loan:

A hybrid home loan is one that encapsulates the features of both fixed rate and floating rate home loans. In this, the interest remains fixed for a period and then switches to a floating rate after the lapse of a specified duration.

What are the benefits of taking a home loan?

The benefits of home loans include:

Lower interest rates:

Home loans have a low interest rate compared to some other types of loans like personal loans.

Longer repayment period:

Home loans have long repayment tenures like 10 to 30 years. This makes the burden of loan repayment quite affordable

Due diligence of property:

When you apply for a loan, the lending authority like a bank or a financial institution will conduct a thorough due diligence of the property. This helps the borrowers against possible scams

No prepayment penalty:

In a floating rate home loan, you are at a liberty to close off your home loan before its due term without attracting any prepayment penalty on it.

Tax benefits:

A huge benefit of taking home loan is the tax deduction you can enjoy under the Old Regime of taxation as per the Income Tax Act 1961. Under this provision, you can claim up to Rs 1.5 lakhs on principal repayments under section 80C, up to Rs.1.5 lakh on stamp duty expenses u/s 80C and Rs.2 lakh on interest repayments u/s 24B.