The concept of home loans is just 40 years old in India. But despite its short period, home loans have become an indispensable part of every homebuyer's life, who wants to fulfill their dream of having their own house.

A home loan is an amount of money that a person (borrower) takes from a bank (lender) or a non-banking financial company at a certain rate of interest for buying a house/flat or a plot of land for construction of a house, or renovation, extension, and repairs to their existing house. The borrower has to repay this amount every month until the loan is repaid to the lender in the form of equated monthly installments (EMI).

The borrower also offers the property as a security against the home loan which is called a mortgage. If the borrower is not able to repay their loan within the stipulated time frame, the lender possesses all the legal rights to recover the outstanding loan amount by the sale of the property mortgaged.

Origination and evolution of home loans in India

Earlier, the average age at which a person considered buying their own house was in their late 40s. Their financial planning for the house usually included dipping into their provident fund savings or retirement benefits. But the Housing Development and Finance Corporation (HDFC) changed the course of banking history.

Even though banking is a fairly old idea in India, the trend of home loans were introduced in India only in 1978 by HDFC. The group remained the pioneer in this segment for a long time, as home buying with the support loans did not pick up much traction until later.

The home loan market in India has grown all because of three lending institutions - HDFC from 1978, ICICI Ltd from 1999 and State Bank of India from 2009. These three establishments introduced concepts that made the home loan segment to what it is now. While HDFC is credited with introducing the concept of housing loans in the market, it was ICICI in 2000, who set the competition with its floating rate concept. SBI, the largest lender in the country followed suit and launched the teaser rate concept which became an instant hit among its huge customer base.

Before 2002, there were no regulations to deal with defaults on home loans. The introduction of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) in 2002 gave banks the power to deal with home loan defaults. This Act encouraged the banks to further foray into the home loan sector.

The present state of affairs

The home loan segment still runs on this concept, but it has come a long way since its inception. Now, the average age at which people are looking to invest in a home has come down to 30s, thanks to well-paying jobs, that are paving the way for higher disposable income.

Today, the percentage of loan borrowed has gone as high as 80% and it is quitecommon, showing home buyers' preference and trust for home loans. It also gives the homebuyers an assurance about the property they are planning to invest in, as banks perform due diligence of the property before lending.

The Government of India has been a catalyst in the growth of the home loan sector by introducing concessions in income tax for home loan borrowers. Today, these concessions are one of the principal reasons whypeople opt for home loans.

New govt norms for calculating home loan interest

While selecting a home loan, the primary factor that people take into consideration is the rate of interest the lender is charging. Before we get into interest charged by lenders, it is important to understand how the banks set up interest rates for loans. Until the recent Reserve Bank of India ruling, banks had been offering home loans linked to the marginal fund based lending rate, which was 8.55%. The actual home loan interest that a customer gets can be equal to the MCLR rate or be slightly higher than the MCLR, often based on the 'mark-up' or 'spread', but it can never be lower than the MCLR. However, the RBI has now asked all banks to link their home loans to an external benchmark. These benchmarks are the repo rate, 3/6 months treasury bills yields or any other benchmark.

Most banks such as Indian Overseas Bank, and Bank of Baroda have opted to link their loan rates to the repo rate. The repo rate is the rate at which the RBI lends to the bank. This move is expected to be beneficial for home buyers as banks has earlier failed to pass on the cut in the repo rate on to homebuyers, but were quick to raise interest rates whenever there was a hike in rate. The new norm will bridge the gap and bring in more transparency. For example, a 35 basis point cut in the repo rate has resulted in an equal reduction in SBI's repo-linked home loan rate. SBI has a minimum rate of 8.4%, it will come down further by 35 bps to 8.05% for both existing and new SBI borrowers depending on the loan amount. However, recently SBI has stopped providing loans linked with the repo rate.

When the RBI changes the repo rate, the interest rate on these products change automatically. The repo linked rate will change from the first day of the following month of RBI's revision in rates. For example, the RBI slashed its repo rate on August 7 and accordingly the change in RLLR (repo-linked loan rate) will be from September 1.

Now that we are aware of the new norms that the central bank of India has brought in, let us take al ook at the various types ofhome loans that a customer can avail.

Different types of home loans in India

The introduction of various new products in the segment has also boosted the scope of the segment. Presently, home loans make a significant portion of the bank's loan portfolio. Banks and non-banking finance companies provide an array of products in the home loan segment. One should carefully assess each of the home loans plans to identify that the correct one, that meets their requirements.

Before delving into the kinds of home loans available in India, it is important to understand the kind of interest rate one can opt for at the time of securing the loan. The interest rates available on home loans is usually fixed floating and hybrid. In a fixed interest rate, the rate of interest at which the consumer opts for the loan is fixed irrespective of the market conditions. This is one of the most sought after kind of interest rate as it offers the best protection against market volatility.

In the case of floating interest rate, the interest rate is subjected to be reviewed at regular intervals. The floating interest rate is generally lower than the fixed rate. For example, a fixed-rateloan may cost you 12% interest, whereas a loan with a rate that is reviewed every three years may charge you 11%.The hybrid interest rate is a combination of fixed and floating rates. The bank offers a fixed rate of interest for the first few years and then the prevailing floating rates apply.

For example, if one takes a loan for 20 years, for the first three years the fixed interest rate will be applicable and for the remaining 17 years, the floating interest rate is applied. The interest in the floating rate is calculated based on the remaining principal amount. This kind of home loan is well suited for young professionals who are starting in their careers and are not able to adjust to the volatility.

1. Loan for buying a house

This is the most common type of loan which is availed by the customer to buy a house. Banks usually provide loans up to 85% of the market value of the house.

2. Residential plot purchase loan

As the name suggests, this loan is for customers who are looking to purchase a plot of land to construct a house. Banks usually provide close to 85% of the land value as a loan.

3. Home improvement loan/Renovation loan

This loan is for those who already own a house and are looking to renovate the house by either painting the interiors, redoing the flooring and redecorating , etc. A home improvement loan is ideal if the customer would like to renovate his house but currently lack the necessary funds to do so.

4. Home construction loan:

In this type of loan, the customer owns the land and applies for a loan for construction of the house. Under this loan, the disbursement is as per the construction stage and cost. Also, the construction needs to be commenced within 12 months and completed within 36 months of the first disbursement for it to be classified under housing loan.

5. Balance transfer Loans

This loan helps customers transfer their existing home loan to another lender who may offer lower interest rates, better repayment terms or enhanced services.

6. NRI home loans

These loans are for non-resident Indians looking to buy a house in India. The process for this loan is very similar to that of regular home loans but it entails more paperwork.

How home loans benefit you?

1. Staying in a city having a high cost of rent puts a significant dent on the monthly expenses. instead, paying EMIs for your own house is far more practical and comfortable in the long run.

2. One of the biggest benefits is the tax rebate. In a move to encourage citizens to buy their own houses, the Indian government has made home loans eligible for tax deduction under section 80C. Buying a house with the help of a home loan provides multiple tax benefits that reduce tax outgo.

How to choose a home loan provider?

Finding the right home loan is a tough task. One needs to do proper research to find a home loan provided by a bank/ financial institution which caters to all their requirements. The step is crucial as the purchase is big and the liability extends for quite a few years. Factors like the interest rates offered on the loan, processing fee, repayment options, paperwork all of this should be taken into consideration before zeroing in on a bank or a financial institution.

However, there are some features provided by certain banks which make it easier for homebuyers. One such feature is the moratorium period or holiday period on EMI. This feature is usually provided for under-construction buildings and means that the customer availing the loan does not have to pay for the loan for a certain period. This wait before the EMI payment can help customers who have cash flow issues. A bank typically gives 2 years moratorium period, but a customer having cash flow problems can extend the period.

Homebuyers should also consider banks that get the paperwork completed in a short period so that the disbursement of the loan is done quickly. This helps home buyers as they usually have a time frame within which they want to complete the homebuying process.

Factors which banks consider before approving your home loan

While the above-mentioned points should be taken into consideration when one chooses the right bank, it is important to be aware of the requirements they need to meet as well, to have to get their home loan approved. There are few criteria based on which the lender approves the home loan to a customer. Before the process is started by the bank, the lender takes into account the repayment capacity of the borrower to determine the total amount of money he is eligible to get. The capacity of the borrower is based on monthly disposable income, which, in turn, is based on total monthly income, spouse's income, assets, liabilities and job stability, and CIBL score.

The basis for this assessment is to check the borrower's repayment capacity. The interest on the loan is determined by the tenure and the amount of loan the borrower asks for. Many other important factors also decide home loan eligibility such as age, financial history, and other financial liabilities.

Most non-banking finance companies and banks such as ICICI Bank, Axis Bank, Bajaj Finserv, HDFC have the facility of home loan calculators on their websites, to help customers get an idea of the amount they have to pay based on their tenure.

Buying a dream home is one of the biggest financial investments that one makes in a lifetime. Hence, meticulous research, planning, and awareness are of utmost importance. With banks providing an array of products, many people have been able to achieve their dream.After all, it is rightly said that "home is the starting place of love, hope, and dreams."