Home Loan
Those who don’t have their own home have a dream to have a flat or home. But everybody may not have sufficient financial power to fulfill his dream. In spite of less financial power we can have a flat or home with the facility of home loan provided by various banks. Banks are ready to give home loans at an interest rate of 8% -8.5% to anyone who has a stable income. Because of this home loan facility many people are able to be an owner of a flat or home before the age of 30.
A few misconception about home loan
Due to lack of financial education many people face financial problems after availing home loan. Anyone may make wrong financial decisions due to not having enough knowledge about various financial concepts. First of all we have to understand that a home or flat is not an asset, it is a need like food and cloth. If you put your home or flat on rent to generate income then it will be considered an asset. There is one more misconception about buying a flat or home that in future the price of flat, home or any property will be higher than that of now. So, we should buy our desired property immediately. But this type of hasty financial decision without any financial planning may be harmful to our financial health. The price of a certain property is 10 lakh. In 10 years it will be 15 lakh. Seemingly it is a good idea to buy it now. But if you calculate, then you will find that cheap and expensive are relative terms. In 10 years time, the price of other daily needed articles has increased at 8% -9% inflation rates whereas the price of flat has increased at 4% rate. If you keep money in a savings account, you will also get 4% interest without depreciation.
A few things have to be kept in mind before buying a flat on loan
Before buying a flat on loan a few things have to be kept in mind. After buying a flat, EMI has to be paid every month without fail and nowadays jobs are dynamic and most of the people switch their jobs very frequently. Because of this type of job conditions, many people are compelled to change their residential place. In this type of situation buying a new flat and selling the old one is very difficult because of liquidity issues. In case of putting a flat on rent one must think of depreciation and maintenance of the flat. In case of selling a flat you may not get the desired sell value and return percentage must be calculated. For example if you bought a flat in the year 2000 for ₹3000000 and sold it in the year 2020 for ₹6000000, the percentage return would be near about 3.52% which is perhaps less than a savings bank interest rate but seemingly it is double the buying amount. Apart from this there are many charges like Registration fees, Tax, depreciation; these are not included in this calculation. An excel illustration has been given for your ready reference.
| Values | Dates | |
| -3,000,000 | 01-Jan-2000 | Buy |
| 6,000,000 | 01-Jan-2020 | Sell |
| Formula | Result | |
| 0.035240367 | 3.52% |
So, always compare return after converting it in percentage.
It does not mean we should not buy a flat; we should buy a flat/home but with proper financial planning. Please do not take any financial decision out of emotion; you should always seek advice from your financial advisor.
Important points to consider before buying Flat/Home
Before going into a contract with the promoter/developer understand all the terms and conditions carefully. Don’t trust the promoter’s lawyer blindly. If possible, engage your own lawyer.
Check the relevant document like land deed carefully. Loans are provided by banks, that doesn’t mean banks have checked all the documents.
Check whether the plan for building is sanctioned or not and also check if the construction is started within two years. If not then renew it and check the date of renewal.
Before flat registration, obtain a completion certificate from the promoter/developer.
Check whether the electric meter is according to your needs or not.
Have a detailed idea about mosaic/marble/tiles of your floor/kitchen/toilet and material of doors or any other construction related specification.
Check the quality of electric wiring. Check whether there are separate lines for AC/Microwave.
Check negative, positive and neutral lines in your main switch.
Check whether NOC is obtained from the fire brigade or not.
Check the quality of the drainage system and safety tank.
Your home loan should always be protected by Insurance. There are many benefits of insurance protected loan.
Those who want to purchase a flat just because of tax benefits think twice before making any financial decision. Check whether you are able to pay monthly EMI or not. Because everyone has different income, expenditure, purpose, ambition and liability. So, Your EMI should be according to your income.
Home loan is different from other types of loan
Suppose you want to take a home loan of ₹5000000 at an interest rate of 8% for the period of 20 years then your EMI will be ₹41822. If the tenure is for 25 years then the EMI will be ₹38591 and if the tenure is for 30 years then the EMI will be ₹.36688.
Don’t worry! There are some benefits of long tenure in case of home loan.
Lets understand this
Home loan is not like other types of loan,it is a basic need.
Home loan interest rate usually is less than other types of loan.
Home loan is insurance protected that’s why the nominee will not have to face any problem in future.
Tax exemption available for both principal money and interest rate on home loan. This great benefit makes home loan different from other type of loan.
Here is a illustration for your ready reference
| Deductions | Section | Maximum Deduction (INR) | Conditions |
| Principal | 80c | 1.5 Lakh | House property should not be sold within 5 years of possession. |
| Interest | 24b | 2 Lakh | The loan must be taken for the purchase/construction of a house, and the construction must be completed within 5 years from the end of the financial year in which the loan was taken. |
| Interest | 80EE | Rs.50,000 | The amount of loan taken should be Rs 35 lakh or less, and the property’s value does not exceed Rs 50 lakh. |
| Stamp Duty | 80C | 1.5 Lakh | It can be claimed only in the year these expenses are incurred. |
| Interest | 80EEA | 1.5 Lakh | The stamp value of the property should be Rs.45 lakh or less. The taxpayer is not eligible to claim deduction under Section 80EE. |
Can I get home loan without interest?
Now, we are going to learn how to make home loan interest free and tension free. Practically there is no such loan as interest free loan. Every loan comes with an interest. But we can make loan interest free with a strategy. If the tenure is for 20 years then the EMI will be ₹41822 and if the tenure is for 30 years then the EMI will be ₹36688 . That means if the tenure is long then the EMI is less. But interest will be more on long tenure. Now calculate 10% of the monthly EMI which is approx ₹3700. This 10% of the monthly EMI has to be invested in a Mutual Fund from which we may get more or less 12% return and the investment should be through SIP(Systematic Investment Plan).Now let’s understand this with an excel illustration in a simplified manner.
| EMI Calculator | |
| Loan Amount | ₹ 5,000,000.00 |
| Loan Terms(Year) | 30 |
| Payment/Year | 12 |
| Interest | 8% |
| Monthly Installment | ₹ 36,688 |
| Total Payment | ₹ 13,207,762 |
| Total Interest Payable | ₹ 8,207,762 |
| SIP Calculator | |
| Monthly Installment | 3700 |
| Time Period | 30 |
| Initial Investment | 0 |
| Interest | 12% |
| Total Value | ₹ 13,060,681 |
| Invested Amount | ₹ 1,332,000 |
| Expected Return | ₹ 11,728,681 |
| Total Interest Payable on Loan | ₹ 8,207,762 |
| Expected Return from SIP | ₹ 11,728,681 |
| Savings after interest payment | ₹ 3,520,919 |
After 30 year, total expected return from SIP will be ₹11728681 and total interest payable on loan will be ₹8207762. Now if we deduct the total amount of interest payable on loan from that of expected return from SIP, we get ₹3520919 which is total savings after interest payment. In this way we not only save the interest amount on loan and also are able to gain a profit of ₹3520919.