Home Loans in India: Complete Guide

Buying a home is often the largest financial decision you’ll make. Understanding home loans thoroughly can save you lakhs of rupees over the loan tenure and help you avoid costly mistakes. This comprehensive guide covers everything about home loans in India.

What Is a Home Loan?

Definition

A home loan is a secured loan where you borrow money to purchase, construct, or renovate a home, using the property itself as collateral. If you default, the lender can seize the property.

Key Characteristics

Types of Home Loans

1. Home Purchase Loan For buying ready-to-move or under-construction property.

2. Home Construction Loan For building a house on land you own.

3. Home Improvement/Renovation Loan For repairs, renovations, or extensions.

4. Land Purchase Loan For buying a plot (some restrictions apply).

5. Home Loan Balance Transfer For transferring existing loan to another lender with better terms.

6. Top-Up Loan Additional loan on top of existing home loan.

Understanding Home Loan Interest Rates

Fixed vs. Floating Rates

Fixed Rate:

• Interest rate stays constant throughout tenure
• EMI remains same
• Higher initial rate (usually 1-2% more)
• Protection against rate increases
• Less flexible

Floating Rate:

• Linked to external benchmark (RBI repo rate)
• Rate changes with market conditions
• Lower initial rate
• EMI varies with rate changes
• More common in India

Which to Choose:

• Rising rate environment: Fixed may be better
• Falling rate environment: Floating benefits you
• Long tenure (20+ years): Floating typically better over time

External Benchmark Lending Rate (EBLR)

Since October 2019, RBI mandates floating rate loans be linked to external benchmarks:

Common Benchmarks:

• RBI Repo Rate (most common)
• 91-day T-Bill yield
• 182-day T-Bill yield
• FBIL publishing rate

How It Works:

Your Rate = Repo Rate + Bank's Spread

Example:
Repo Rate: 6.5%
Bank Spread: 2.35%
Your Rate: 8.85%

If Repo Rate changes to 6.25%:
Your Rate becomes: 8.60%

Rate Comparison 2024

Eligibility Criteria

Standard Requirements

For Salaried Individuals:

• Age: 21-60 years (at loan maturity)
• Minimum income: ₹25,000/month typically
• Employment: 2+ years total, 1 year with current employer
• Credit score: 700+ (750+ for best rates)

For Self-Employed:

• Age: 21-65 years (at loan maturity)
• Business vintage: 3+ years
• ITR proof: 3 years
• Credit score: 700+

How Much Can You Borrow?

Loan-to-Value (LTV) Ratio:

Loan Amount = Property Value × LTV%

Property Value up to ₹30 lakhs: 90% LTV
Property Value ₹30-75 lakhs: 80% LTV
Property Value above ₹75 lakhs: 75% LTV

Example:
Property: ₹1 crore
Maximum Loan: ₹75 lakhs (75%)
Your Down Payment: ₹25 lakhs (25%)

Income-Based Eligibility:

Maximum EMI = 50-60% of Net Monthly Income

Example:
Net Monthly Income: ₹1,00,000
Maximum EMI: ₹50,000-60,000
Approximate Loan Eligibility: ₹55-70 lakhs (at current rates, 20-year tenure)

EMI Affordability Formula:

Monthly Income: ₹1,00,000
Existing EMIs: ₹15,000
Available for Home Loan EMI: ₹35,000-45,000 (35-45% of income)

Co-Applicant Benefits

Adding Co-Applicant Helps If:

• Combined income increases eligibility
• Co-applicant has better credit
• Property is jointly owned

Common Co-Applicants:

• Spouse (most common)
• Parents
• Adult children

Documentation Required

For Salaried Applicants

Identity & Address:

• Aadhaar Card
• PAN Card
• Passport/Voter ID
• Utility bills

Income Proof:

• Salary slips (3-6 months)
• Bank statements (6-12 months)
• Form 16 (last 2 years)
• Employment letter
• IT returns (optional for some banks)

Property Documents:

• Sale agreement
• Title deed
• Approved building plan
• NOC from builder
• Property tax receipts
• Encumbrance certificate

For Self-Employed

Additional Requirements:

• ITR (3 years)
• Business registration
• GST registration
• Bank statements (12-24 months)
• Financial statements (audited if applicable)
• Business profile

The Home Loan Process

Step-by-Step Journey

Step 1: Assess Affordability (Week 1)

• Calculate how much you can afford
• Check credit score
• Estimate down payment capacity

Step 2: Research & Compare (Week 2)

• Compare lenders (minimum 5)
• Check pre-approved offers
• Understand all fees

Step 3: Get Pre-Approval (Week 2-3)

• Apply for in-principle approval
• Know exact eligibility
• Strengthens property negotiation

Step 4: Find Property (Varies)

• Search within budget
• Verify property documentation
• Negotiate price

Step 5: Formal Application (Week 1-2)

• Submit full application
• Provide all documents
• Pay processing fee

Step 6: Property Verification (Week 1)

• Bank conducts legal verification
• Technical valuation
• Title search

Step 7: Loan Sanction (Week 1)

• Receive sanction letter
• Review terms carefully
• Accept offer

Step 8: Disbursement

• Sign loan agreement
• Register mortgage
• Receive funds

Processing Time

Costs and Fees

One-Time Costs

Processing Fee:

• Range: 0.25-1% of loan amount
• Often negotiable or waived in promotions
• Example: ₹10,000-40,000 on ₹40 lakh loan

Legal/Technical Charges:

• Valuation fee: ₹2,000-5,000
• Legal verification: ₹2,000-5,000

Registration Charges:

• Stamp duty: 5-7% of property value (varies by state)
• Registration: 1% of property value
• These are property costs, not loan costs

Other Fees:

• CERSAI registration: ₹500-1,000
• Insurance (if mandatory): Varies

Ongoing Costs

Interest: The biggest cost—calculated on outstanding principal.

Insurance:

• Property insurance (often required)
• Life insurance (recommended, sometimes mandatory)

Hidden Charges to Watch

EMI and Repayment

Understanding EMI

EMI = Equated Monthly Installment

Each EMI contains:

• Principal repayment
• Interest payment

EMI Calculation Formula:

EMI = P × r × (1+r)^n / [(1+r)^n - 1]

Where:
P = Principal loan amount
r = Monthly interest rate (annual rate / 12)
n = Number of months

Example:

Loan: ₹50,00,000
Rate: 8.5% annual
Tenure: 20 years (240 months)

EMI = ₹43,391

Total Interest: ₹54,13,840
Total Payment: ₹1,04,13,840

Impact of Interest Rate

₹50 Lakh Loan, 20 Years

Rate 8%: EMI ₹41,822, Total Interest ₹50,37,280
Rate 8.5%: EMI ₹43,391, Total Interest ₹54,13,840
Rate 9%: EMI ₹44,986, Total Interest ₹57,96,640

0.5% increase = ~₹3.76 lakhs more interest

Impact of Tenure

₹50 Lakh Loan at 8.5%

15 years: EMI ₹49,235, Total Interest ₹38,62,300
20 years: EMI ₹43,391, Total Interest ₹54,13,840
25 years: EMI ₹40,261, Total Interest ₹70,78,300
30 years: EMI ₹38,446, Total Interest ₹88,40,560

Longer tenure = Lower EMI but much higher total interest

Prepayment Strategy

Benefits of Prepayment:

• Reduces total interest
• Shortens tenure
• Increases home equity

Types:

• Part prepayment: Pay lump sum toward principal
• Foreclosure: Pay off entire loan early

Prepayment Example:

Loan: ₹50 lakhs at 8.5%, 20 years
Original EMI: ₹43,391
Original Total Interest: ₹54.14 lakhs

Prepay ₹5 lakhs after 5 years:
- Saves ~₹7 lakhs in interest
- OR reduces tenure by 2+ years

Prepay ₹1 lakh every year:
- Saves ~₹15 lakhs in interest
- Loan closes 4-5 years early

RBI Rule: No prepayment penalty on floating rate home loans.

Tax Benefits

Section 24(b): Interest Deduction

For Self-Occupied Property:

• Deduction up to ₹2,00,000 per year
• Interest paid on home loan
• Must be for purchase or construction/renovation

For Rented Property:

• Full interest deduction (no limit)
• Against rental income

Section 80C: Principal Repayment

Deduction up to ₹1,50,000 per year:

• Principal portion of EMI
• Stamp duty and registration (year of purchase)
• Within overall 80C limit

Section 80EEA: Additional Interest (If Applicable)

For Affordable Housing:

• Additional ₹1,50,000 deduction
• Loan sanctioned April 2019 - March 2022
• Property value up to ₹45 lakhs

Tax Calculation Example

Annual Interest Paid: ₹4,00,000
Annual Principal Paid: ₹1,50,000

Tax Deductions:
Section 24(b): ₹2,00,000 (self-occupied max)
Section 80C: ₹1,50,000 (within overall limit)

If in 30% tax bracket:
Tax Savings on Interest: ₹60,000
Tax Savings on Principal: ₹45,000
Total Tax Savings: ₹1,05,000

Effective Interest Rate = (₹4,00,000 - ₹60,000) / Loan × 100 = Lower effective rate

Home Loan Balance Transfer

When to Consider Balance Transfer

Transfer Makes Sense If:

• Rate difference: 0.5%+ lower
• Remaining tenure: 10+ years
• Substantial outstanding amount
• Savings exceed transfer costs

Balance Transfer Process

1. Check current loan outstanding
2. Compare offers from other banks
3. Apply for balance transfer
4. New bank pays old loan
5. Property mortgage transferred

Calculating Transfer Benefits

Current Loan:
Outstanding: ₹40,00,000
Rate: 9.5%
Remaining Tenure: 15 years
EMI: ₹41,776
Remaining Interest: ₹35,19,680

New Loan:
Amount: ₹40,00,000
Rate: 8.5%
Tenure: 15 years
EMI: ₹39,388
Total Interest: ₹30,89,840

Savings: ₹4,29,840
Transfer Costs: ~₹50,000

Net Savings: ₹3,79,840 ✓ Worth transferring

Transfer Costs

• Processing fee (new bank): 0.25-0.5%
• Legal/technical charges: ₹5,000-10,000
• Stamp duty (some states): Variable
• Documentation charges: ₹1,000-3,000

Choosing the Right Home Loan

Comparison Checklist

Step-by-Step Selection

Step 1: Know Your Eligibility

• Check with 3-4 banks
• Get pre-approved offers

Step 2: Compare Rates

• Use same tenure for comparison
• Check if promotional or regular rate

Step 3: Calculate Total Cost

Total Cost = (EMI × Months) + Processing Fee + Other Charges

Bank A: Lower rate, higher fees
Bank B: Higher rate, lower fees
Compare total cost, not just rate

Step 4: Read Terms Carefully

• Prepayment clauses
• Rate reset frequency
• Documentation requirements

Step 5: Negotiate

• Banks can negotiate on rate
• Processing fee often waived
• Especially for high-value customers

Common Home Loan Mistakes

Mistake 1: Not Shopping Around

Problem: Taking first offer without comparison Solution: Compare minimum 5 lenders

Mistake 2: Stretching Budget Too Much

Problem: Buying more house than you can afford Solution: EMI should be max 40% of income

Mistake 3: Ignoring Prepayment

Problem: Never prepaying despite ability Solution: Prepay annually if possible

Mistake 4: Choosing Longest Tenure

Problem: 30-year tenure for low EMI Solution: Choose shortest affordable tenure

Mistake 5: Not Reading Fine Print

Problem: Surprised by hidden charges Solution: Read all terms, especially prepayment and foreclosure

Mistake 6: Not Maintaining Emergency Fund

Problem: All savings go to down payment Solution: Keep 6+ months EMI as emergency fund

First-Time Home Buyer Tips

Before You Start

1. Save for Down Payment + Costs:

   • 20-25% of property value minimum
   • Plus 8-10% for registration, moving, etc.

2. Build Strong Credit:

   • Score 750+ for best rates
   • Clear existing debts

3. Know Your Budget:

   • Calculate true affordability
   • Include maintenance, property tax

During the Process

1. Get Pre-Approved:

   • Strengthens negotiation
   • Know exact budget

2. Verify Property Thoroughly:

   • Title verification essential
   • Check builder reputation
   • Verify approvals

3. Read Everything:

   • Loan agreement
   • Property documents
   • Builder agreement

After Purchase

1. Set Up Autopay:

   • Never miss an EMI
   • Maintain buffer in account

2. Keep Documents Safe:

   • Original documents
   • Loan papers
   • Property papers

3. Review Annually:

   • Check for balance transfer opportunities
   • Make prepayments when possible

Conclusion

A home loan is a long-term commitment that will likely be your largest liability for decades. Taking time to understand the process, compare options, and make informed decisions can save you lakhs of rupees and years of repayment.

Key Takeaways:

1. Compare extensively—rates and fees vary significantly
2. Borrow within means—EMI max 40% of income
3. Choose shorter tenure—if EMI is affordable
4. Prepay when possible—massive interest savings
5. Use tax benefits—reduce effective interest cost
6. Review periodically—balance transfer may help

Your home is likely your biggest asset. Make sure your home loan serves your financial goals rather than becoming a burden.

This guide provides general information about home loans in India. Rates, terms, and policies vary by lender and may change. Always verify current offerings and consult professionals for property and legal verification.