A home loan against the cost of property implies that a lending institution loans you a sum of money based on your property’s valuation. It is an effective way to avail of a large sum of money, that you may use for construction and repairs, to buy another property, or for other personal reasons. Note that if you are paying a low down payment, your interest rates may be higher.
Benefits of availing of home loans against the cost of property
One of the biggest benefits of taking home loans against property costs is that you can close them, in case you are unable to repay the loan amount. If your home loan offers variable interest rates, you do not even have to pay penalties for early closure. If your home loan was on fixed interest rates, you have to pay a nominal penalty charge to close your loan. If you take home loans against the cost of the property, you can own your house and at the same time, use the loan amount for your personal needs at affordable interest rates.
Can you get 100% home loans?
You cannot pay the entire cost of a property through home loans. You have to make a certain down payment (around 30% of the full property cost). You can pay the rest of the money through home loans taken from NBFCs, banks, or your personal savings. If you are paying a small down payment, lending institutions may require you to add collateral (an asset) to take a loan.
However, if you meet certain conditions, you can avail of home loans of up to 90% of the property’s valuation. RBI regulations state that 90% of individual home loans can be funded if the total loan amount is up to INR 30 lakh rupees. If the loan amount is between INR 30 lakh rupees and INR 75 lakh rupees, lending institutions will finance 80% of the entire property cost. And, if the loan exceeds INR 75 lakh rupees, you can only avail of home loans of up to 75% of the total property cost.
In such cases, where the loan amount is disproportionately higher than the down payment, lenders ask for higher interest rates. You will also be compelled to maintain an excellent CIBIL score and never miss any of the monthly settlements.
Loan-to-value (LTV) ratio in home loans
A loan-to-value ratio is the amount of the total cost of the property that will be financed by a lending institution. Loan facilitators use this ratio before approving home loans against the cost of the property to ensure that they do not give a higher amount than the property’s value. A higher loan-to-value ratio raises the borrower’s risk, while a lower loan-to-value ratio guarantees lower interest rates and better terms.
How to calculate the LTV ratio for home loans
Lenders calculate the loan-to-value ratio using the following formula.
LTV ratio (%)= Loan amount/Property value x 100
The formula implies that if the ratio is 90%, you have to pay 10% of the property value as a down payment from your own savings, and the rest of it will be given by the loan distributors. The LTV ratio determines the amount of down payment you need to make to avail of a loan against the cost of the property.
Eligibility criteria to avail of home loans against the cost of property
You need substantial income and a good credit score to be eligible for a home loan. If your LTV ratio is on the lower side, you can ask for lower interest rates, longer repayment tenure, and other benefits. The higher the LTV ratio, the higher the risk associated with the borrower, so lenders are likely to give you raised interest rates.
Documents required to take home loans against the cost of property
- Proof of identity: PAN card, Aadhar card, Voter ID, passport, driving license
- Proof of address: Electricity bills, water bills, passport
- Property documents: Sale agreement, NOC from housing society, possession letter
- Income proof: Form 16 income tax documents, salary slips, bank transactions, audited finance sheets, sales tax certificate, certificate of practice
How is a personal loan different from a home loan against the cost of the property?
A home loan against the cost of the property is a type of loan that measures your property’s value. Lending institutions hold your house as a mortgage and sanction you a large sum of money, which you may use to make repairs, buy another house, or for other reasons. Personal home loans factor in your creditworthiness, repayment ability, income, and other assets as risk minimizers. Loan facilitators see your house as a security in itself when sanctioning your home loan. Personal loans typically have a much lower rate of interest than collateral loans. They are also much easier to obtain than loans against the cost of the property.
It is quite normal to be dubious and second-guess everything when applying for a home loan. A home loan is quite possibly the largest loan in anyone’s lifetime. If you want to weigh your income and assets, calculate your monthly settlements, or want an expert opinion, reach out to ApnaPaisa. It is a digital platform that helps you connect with experienced loan partners and make informed decisions.
Home loan FAQs
Q. Which is better- personal loans or home loans on the cost of the property?
A. If you are looking to buy a property, it is best to avail of a home loan, based on your income and creditworthiness. If you urgently need a large sum of money, you can take a home loan on the cost of your property.
Q. Will my home loan be more than the property value?
A. You cannot avail of a home loan, whose amount is more than your property’s valuation. You have to pay a certain down payment, beyond which the loan amount that gets sanctioned depends on the property and your lender.
Q. What are some of the biggest home loan myths?
A. A double-edged home loan myth that is often misinterpreted is the tax benefits one acquires after taking a home loan. Under section 24 B of the Income Tax Act, you can claim tax deductions of up to INR 2 lakh rupees per annum, payable on renovations, repairs, and loans. And, you can also claim INR 1.5 lakh rupees per annum on the principal repayment of a home loan. Due to these tax benefits, people try to take home loans without gauging their net income and assets. If you are struggling to pay the monthly installments, you will not be able to enjoy the tax benefits of availing of home loans.