Home Loan Expert Interview with Nitin Bhatia

[ecis2016.org] A candid, yet thorough look at burning questions in the home loan segment today.

Be it while buying a house, investing in a lucrative property, or helping a family member choose an apartment, there’s always that one important issue that seems to complicate the process: the home loan! But is it really that challenging? Does it really have to muddle with your mind as much as you’d expect it to? Nitin Bhatia, the pundit of home loans in India, spoke to us about some of the issues that you may be concerned about. Enjoy!

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How can a buyer save stamp duty and registration charges?

As per the guidelines of RBI (Reserve Bank of India) and NHB (National Housing Bank), Banks or HFCs do not include the stamp duty and registration charges for Home Loan eligibility. Therefore, it is an additional burden on the pocket of a buyer. The buyers can save the stamp duty and registration charges by registering the property at Circle Rate / Guidance Value / Ready Reckoner Rate. It is perfectly legal and is a legitimate way to save the stamp duty and registration charges.

If you are buying an under-construction property, then you can save stamp duty and registration charges by registering the property at Sale Agreement value that is UDS (Undivided Share) value in the property. In short, you can exclude “Construction Agreement” value from the Registration Value.

Some states like Haryana and Delhi offer a discount on stamp duty and registration cost if one of the buyers is a female. Therefore, a male buyer may consider buying a property in the name of his wife as the sole owner or include her as a co-owner to save Stamp Duty and Registration Charges.

Lastly, a buyer should be very well-versed in the local rules and regulations related to stamp duty. You may take professional help in this regard. For example, not many buyers in Maharashtra are aware that if the owner sells the property within one year of buying from a developer, then the stamp duty is applicable only to the profit from the sale of property. For example, if I bought a property from the builder for 1 crore and sold it within one year for 1.25 crore, the buyer will pay stamp duty only on profit, i.e. 25 lacs.

The only flip side to registering a property at Circle Rate is that it may impact your Home Loan Eligibility. Some of the banks like SBI fix Home Loan Eligibility at the Registration Value. Therefore, if your property value is 50 lacs, and you decide to execute sale deed at 40 lacs (Circle Rate) to save stamp duty and registration charges, the bank will consider 40 lacs as the consideration value of the property and Home Loan Eligibility will be a maximum of 80% of 40 lacs, i.e. 32 lacs. You should discuss this point with your Home Loan Provider in advance.

What is the difference in Home Loan from a Bank and Housing Finance Company?

Whenever you are availing a Home Loan, as a borrower, you should know the difference between Home Loan from a Bank and a Housing Finance Company. An example of HFCs is HDFC Ltd., IndiaBulls Housing Finance, DHFL, LIC Housing Finance, etc. whereas SBI, ICICI Bank, and Axis Bank are Banks (as we all know ☺). Please note that Home Loan from ICICI HFC is different from ICICI Bank. Similarly, a home loan from CanFin Homes Ltd is a loan from HFC not from Canara Bank. Let’s check out the difference in Home Loan from a Bank and HFC.

1) A Home Loan from a Bank is linked to Base Rate of the Bank whereas Home Loan from HFC is linked to the Benchmark Rate i.e. BPLR/RPLR.

2) Banks are governed by RBI whereas HFCs are regulated by NHB (National Housing Bank), which is a wholly owned subsidiary of RBI.

Read also : EMS housing scheme: All about Kerala’s housing scheme for the homeless and BPL category

3) Banks add a markup on Base Rate whereas HFCs offer spread or discount on their benchmark rate. For example, Home Loan at 9.7% from a Bank means Base Rate + Mark Up, i.e. 9.5% + 0.2%. On the other hand, same home loan interest rate from HFC means BPLR/RPLR – spread/discount, i.e. 16% – 6.3%. It is important to understand this difference as it will help one to understand the movement of interest rate during home loan tenure.

4) One of the common misconceptions among borrowers is that if RBI cuts REPO Rate, then their Home Loan Interest Rate will drop in the same proportion. The fact of the matter is that Home Loan Interest is linked to the Cost of Funds for a Bank or HFC. RBI’s policy only impacts the cost of funds, not the Home Loan Interest Rate. Though lower cost of funds means lower interest rate. Many of our readers asked, “How come Banks like SBI, ICICI Bank, etc. provide Home Loan at Lower Interest Rate, whereas Home Loan Interest Rate of HFCs is on the slightly higher side?” The reasonis that Banks have access to cheap funds through CASA (Current Account Savings Account) deposit, whereas HFCs borrow funds from the open market. In short, Cost of Funds of HFCs is normally higher compared to Banks. Therefore, existing borrowers of a Bank pay lower interest rate compared to existing borrowers of an HFC (assuming both availed Home Loan at the same time)

5) Generally, HFCs are a bit lenient in fixing Home Loan Eligibility compared to Banks. Therefore, a borrower may avail higher Home Loan amount compared to Banks.

6) Though the borrower cannot hold the bank responsible for the title of the property, The title check/verification process of Banks are more stringent compared to the HFCs.

How can I secure my Home Loan?

A Home Loan is long term and substantial liability on the shoulders of a Borrower. At the same time, we all agree that Life is uncertain. If I bought a property, then I would like to leave an asset for my near and dear ones rather a burden of financial liability. At the time of availing Home Loan, almost all Home Loan Providers push Home Loan Protection Plan or Home Loan Insurance.

Let me clarify, it is not mandatory. I personally don’t prefer this product. The key reasons are too high premium; insurance cover is depleting in nature, and the cover is available only during Home Loan Tenure. If you include Premium in Home Loan amount, then you will be paying approximately 10% interest in the same. Another reason for not availing Home Loan Insurance is that if I have a co-borrower & in case of an unfortunate event, the Insurance Provider will only clear my Home Loan contribution. My co-borrower, i.e. my wife, will still struggle to pay the outstanding balance.

The best way to secure Home Loan is to opt for Online Term Insurance Plan. It is very cheap and is also a must-have from a financial planning perspective. Also, note that, as per recent amendments to Insurance Laws (Amendment) Act of 2015, if the nominee is an immediate family member, then the Nominee and Beneficiary of the Insurance policy are the same. It is referred to as Beneficial Nominee. The point is that the person who will inherit the property through Will/Legal Heir and the Nominee of insurance policy should be the same. It will ensure that Home Loan will be cleared as the beneficiary of both policy and property is the same.

If you are not sure of Nominee of policy and beneficiary of property, then you can assign your Life Insurance Policy to the Home Loan Provider. Please note that assignment is not possible in Term Insurance Plans. The concept of assignment of an insurance policy is not popular in India. Under the assignment of insurance policy, the bank or Home Loan Provider will become the beneficiary of insurance policy.

In case of the death of a borrower, the insurance company will pay the home loan outstanding amount to the home loan provider. The balance amount will be paid to the original nominee of the policy. It will ensure that Home Loan is cleared in case of an unfortunate event. In short, Insurance Policy will act as collateral security for Home Loan. The partial assignment is also possible. For example, for a life insurance policy of 1 crore, the insured person can assign 30 lacs in favour of the home loan provider.

How can I avail tax deduction on Home Loan? 

The tax deduction on Home Loan depends on the status of property, i.e. Self Occupied, Let Out or Under Construction. Please note that to claim a tax deduction, the borrower should be either an owner or co-owner of the property. Let’s discuss each of them separately.

Self Occupied Property: For self-occupied property, you can claim a maximum tax deduction of Rs. 1.5 lac on principal amount u/s 80C. An additional deduction of a maximum of Rs. 2 lac is available u/s 24(B) for interest component.

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Let Out Property: For let out property, you can claim a deduction of Rs. 1.5 lac u/s 80C and interest component can be claimed under “income/loss from house property.” The formula is as follows:

Income/Loss from House Property = (Annual Rental Value of House property – Property Tax) – 30% of (Annual Rental Value-property tax) – Interest paid on Housing Loan

Under Construction Property: You cannot claim any tax deduction till you receive the possession of the property. Property loan interest rate paid till the date of possession will be considered as Pre-EMI interest and can be claimed in 5 equal installments (subject to max limit) starting from the Financial Year in which you receive the possession of property.

Important Points to Remember:

1) If both husband and wife are working, then to maximise tax benefits, it is advisable that they buy a property jointly and also avail a joint Home Loan. In this case, for a self-occupied property the husband and wife can individually claim a tax deduction of 1.5 lac (80C) + 2 lac (24B). In short, the maximum tax deduction can be up to 7 lac.

2) If the property is sold within five years, then all the deductions claimed u/s 80C will be reversed. The sum total of deductions claimed till date will be treated as income for the year in which the property is sold, and tax is due on this amount.

3) In case of joint ownership and joint borrowing, if the EMI is paid by one of the borrowers then he/she can claim 100% tax deduction. On the other hand, any income from the property should be distributed in the proportion of ownership.

What is your opinion on housing.com’s home loan tracker feature?

If I have to explain ecis2016.org’s Home Loan Tracker in a single sentence, then I will say that it is a Convergence of 5 ‘C’s, i.e. Convenience, Connect, Choice, Control and Customisation! Taking a Home Loan is a complex process. All potential borrowers heavily rely on the word of mouth from their colleagues, friends, and relatives. Imagine a single interface that handholds you from the 1st step of finalising the best home loan provider till the process is complete.

The biggest problem faced by potential borrowers is to check latest interest rates. For this, he/she needs to run around a bit. The information available on the web is not accurate. The home loan tracker connects with Home Loan Providers on a real time basis and also provides choices to potential borrowers depending on their requirements. A borrower can track the status of his/her application at every stage of the Home Loan process. Being a pioneer in the technology and real estate sectors, ecis2016.org has again proved their dominance. I wish the convenience of their Home Loan Tracker feature existed when I availed my home loan four years ago. In short, this feature will turn the home loan experience of a borrower from Meh to Wow!

We hope this interview answered some of your most burning questions on the home loan process!  What one thought required a troublesome (and exorbitant) procedure can, it seems, be broken down and made much simpler. We will be back soon with more helpful answers to your frequently asked questions, so stay tuned!

Have a home loan tip to share? Tell us in the comments below!

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