Types of Home Loans – Home Purchase Loan | Home Improvement Loan
Home loans are not only meant for buying a ready house or under-construction house, there are different types of home loans, following is the brief of different types of home loans:
Home Purchase Loan:
This type of home loan is available for purchasing a new home or an old house from its previous owner. This is the most popular variety of home loans available. Bank or housing companies generally finance up to 80% of the property value or sometimes 85% (when the property value is less than 20 lacs).
This type of loan is provided by almost all banks and financial institutions. You can choose either a floating rate of interest or a fixed rate of interest.
Home Improvement loan
Home improvement loans are usually short-term loans. This type of home loan is used for the repair or renovation of the already bought house. An individual who has already bought a home and wants to renovate or repair it but lacks funds can avail home improvement loan for this purpose.
This type of loan facilitates external as well as internal and other structural improvements like waterproofing and roofing, painting, electrical and plumbing works, flooring and tiling, Aluminum windows compound walls, Grills, and much more.
Purposes of home improvement loans are listed:
Flooring and Tiling
External and internal painting
Roofing and waterproofing
Aluminum windows and Grills
Construction-related to the water tank- underground/overhead
Compound wall paving (with tile or stone etc.)
Maximum funding for home improvement loans:
Existing customers- Upto 100% subject to the market value of the property and repayment capacity of the borrower, as assessed by a bank or financial institution.
New Customers- A maximum of up to 75% to 80% but subject to market value (of property) and repayment capacity of the borrower, assessed by the bank or financial institution.
A maximum period of up to 15 years is subject to retirement age.
The entire property is improved or any other security as may be assessed by the bank or financial institution.
Home extension loan
A home extension loan is typically a short-term loan advanced for improvements in an existing property like addition and alteration, replacement of structural parts. This type of loan facilitates adding some more space in your existing house as required for your growing family needs.
You may need a reading room for yourself or for your children, an extra room for your children, a guest room for your frequent guests, a bigger bathroom, a new floor, a new balcony, etc. Loans for home extensions are only available to homeowners.
Home conversion loan
As the name says itself clear that it is a loan for home conversion. This scheme is only for those individuals who have already bought a home and availed a home loan for the same from any bank or financial institution and now they want to move in a new or bigger home for that they also need some additional home loan.
There are 2 questions that arise in this situation:
1) You need to pay off your previous home loan, how you will close your existing home loan on your old home?
2) How you will arrange the extra amount needed for the new home?
With the help of a home conversion loan, you can get the solution for both questions in one go. A home conversion loan simply transfers your existing home loan to your new home along with the extra amount needed by you.
You don’t need to worry about pre-payment of your existing home loan and the best part is you don’t have to go through the entire process of getting your new home loan sanctioned.
Home construction loan
Constructing your dream home with your choice of designing on your own land is not comparable with anything. Building your own home is really a wonderful feeling and a fun experience too but also remember it can be a very lengthy and very expensive process.
You can build your desire of yours and also use the material of your choice of quality. This loan is available only for the self-construction of your home on a plot of land which you own.
A construction loan is a short-term loan. At the end of the construction when your home is complete in all manners and you can actually shift into your newly constructed home, you need to go for a fresh loan to pay off the construction loan.
Land purchase loan
This type of loan is available to purchase a plot of land. If you wish to buy a plot of land and are willing to build a home of your choice or you just want to keep the land as an investment you can opt for a land loan.
NRI Home loans
Every Indian who is staying abroad and wishes to buy his home in India and wants to avail home loan for the same then he can apply for the same with any bank or financial institute. Almost every bank and financial institute provide NRI home loans.
Balance transfer of outstanding principal of your existing home loan also known as refinancing or a home loan transfer. Any borrower can opt for the same for various reasons but most likely people switch their existing bank to avail themselves of the benefit of lower interest rates prevailing in the market. Usually, if any borrower is about 2 or more years into his loan tenure does not get the benefit of the falling interest rates in the market.
To attract new customers most banks and housing finance companies slashes their floating rates of home loan in the range of 0.5% to 1% during the festive season. Interestingly whenever there is an increase in the floating rate bank applies the same to existing customers also, however it does not affect their existing EMI but directly affect their loan tenure.
But if there is any decrease in the interest rate existing customers don’t get the benefit of the same as they did not see any reduction in their existing EMIs or the tenure of the loan. In this scenario, existing home loan customers got confused on whether they should go for a balance transfer or wait for a while to see if there is any further cut in the home loan rates?
This is really tricky for old borrowers as they will continue to pay higher rates every time interest rates come down unless the bank lowers the base rate. And it won’t be possible to repeat the same exercise of switching over the existing bank to get the benefit of the rate cut.
Existing borrowers can negotiate with the existing lender to get the rates at par with the rates quoted to new home loan applications on the basis of good payment track record etc. once the base rate comes down. If their bank does not accept for rate cut then they can shift to a new lender to get the benefit of lower interest rates.
Presently there are borrowers who are paying an interest rate of 12.5% on their home loans as compared to new borrowers who are paying 10.15%. There is a difference of 2.35% p.a. which is really very huge. In financial terms, old borrowers are paying Rs.162 per lacs per month extra as compared to new borrowers.
If you are paying above 1% of the prevailing rates then you should immediately switch over the bank even before the policy review. As an existing home loan buyer, you have the option of either switching to a lower rate within the existing bank by paying one-time switching charges ranging between 0.5% to 1% or you can opt for balance transfer of principal outstanding by way of shifting to another bank.
Earlier there was a prepayment penalty clause ranging between 2 to 5% but now there is no penalty for prepayment but some banks could still be charging this penalty so better you cross-check with your bank and if it is charging a prepayment penalty then try to negotiate before switching over.
The procedure of balance transfer
Once you decided to opt for a balance transfer of your balance principal outstanding you will need to submit an application to your existing banker for loan transfer. After receiving your application for balance transfer your bank will provide a NOC or a consent letter that has no objection for the same along with the statement mentioning your outstanding amount.
You will need to submit this NOC and the statement of the balance outstanding to your new lender along with your home loan application form. The new bank will then sanction your loan amount and release a Demand draft or pay the order in favor of your existing lender to account closure.
Once your loan is over with the existing banker then all the property papers mortgaged with the bank will then be handed over to the new bank and the remaining Post-dated cheques or ECS will be canceled. Remember you need to pay the processing fee to the new lender equal to what new customers are paying; this can be between 0.5% to 1%.
Some banks charge a fixed amount approx. Rs.2500 or Rs.5000. Sometimes to get the maximum benefit of the rate cuts to attract the new customers by way of balance transfer banks don’t charge any processing fee so cross-check this too. Consider all these cost factors between the 2 offers. If you can save a significant amount of interest by way of the move, then you can make a profitable switch.
Also remember new lender will consider your application as a fresh home loan application and you will need to go through all the procedures involved such as credit appraisal, legal verification of the property documents, and the technical evaluation too and the loan will be sanctioned only if all the conditions are met.
There can be other reasons apart from interest saving to switch a home loan. Following are some examples:
Bank does not agree to amend the loan terms:
Sometimes borrower wants to negotiate on certain terms and conditions with his bank such as he wants to go for a longer tenure to reduce his monthly EMI but the bank does not agree to the same.
You want a loan top-up to meet the additional financial liabilities or for a purpose of home renovation. If your existing bank does not agree to finance this you may opt for a balance transfer.
Issues related to services:
Sometimes one can be just unhappy with the services of his existing bank or its accessibility.
Factors to consider:
It is always better to transfer the balance loan in the early stage of loan tenure as initially, you have already paid out a substantial amount of interest.
Always get a statement or an undertaking from the existing lender mentioning the time frame for handing over the property documents to the new lender to avoid any hassle on this ground.
If you are irregular with your loan repayment with your existing lender then switching will not be possible.
Stamp duty loans
Stamp duty loans are available for paying off your stamp duty for purchasing a property or a plot of land. Almost every bank and the financial institute provides stamp duty loans to their existing home loan borrowers or to the new customers as well.