All about home improvement loans in India

[ecis2016.org] We discussed the concept of home improvement loans in India and how it helps home buyers to spruce up their property

Apart from lending credit for property purchases, a majority of Indian banks also offer loans for making improvements to your property. These could be in the form of renovation, expansion, etc. Such products are known by different names – home improvement loan, home renovation loan, home expansion loan, etc. In this article, we discuss the details of home renovation loans in India and who could apply for them.

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Purpose of home improvement loan

This product is unique, because property owners can avail of home improvement loans for various purposes. In case of home loan, land loan or reverse mortgage, for example, specific guidelines are issued, with respect to the usage of the fund. However, you could get home improvement loans for a variety of expenses, right from renovation to the purchase of furniture of your new home.

At Punjab National Bank (PNB), home improvement loans are offered for the purpose of:

• Complete renovation of property.
• Upgrade.
• Repair of your house/flat.
• External and internal repairs/paint.
• Waterproofing and roofing.
• Tiling and flooring.
• Plumbing and electrical work.
• False ceiling and woodwork (fixed to the building).

Similarly, home improvement loans offered by Canara bank, can be used for the purchase of household furniture, fans and air-conditioners, refrigerators and wardrobes.

By and large, most banks offer home improvement loans for the above mentioned purposes.

Home renovation loan eligibility

Any property owner looking to make changes in his asset, can apply for a home renovation loan, either individually or jointly with a co-borrower. While scrutinising your application, the bank would examine several factors, including:

Your age: The younger you are, the higher the loan amount that could be granted. You ought to be at least 21 years of age, to apply for this loan. The upper age limit is capped at the retirement age of the applicant. This means, the loan tenure must end by the time the applicant is 60 years. In case of self-employed applicants, the age limit could be stretched to 65 years. At Tata Capital, for example, you should be in the age group of 24-65 years, at the time of completion of the loan.

Your occupation: The higher the income, the higher the loan amount. Both, salaried and self-employed individuals, can apply for these loans.

Your credit score: The higher the credit score, the lower the interest rate. If the property is owned by multiple people, each co-owner will have to be a party in the loan application. It must be clarified here that a co-borrower need not be a co-owner. Even if the property is not registered in the joint name of you and your spouse, for instance, she can still be a co-applicant in your home improvement loan application.

Loan-to-value ratio for home renovation loan

Just like home loans, banks typically fund a portion of your overall liquidity requirement, in case of home renovation loans. Typically, Indian banks offer 70%-90% of the amount required, as a home renovation loan.

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Finance major HDFC, for example, offers 90% of the fund required as home renovation loan – on a total bill of up to Rs 30 lakhs, you will get Rs 27 lakhs as home improvement loan, in this case. However, in case the estimated improvement cost is pegged at over Rs 75 lakhs, the bank would offer only 75% of the total amount. This means you will get Rs 56.26 lakhs as a home improvement loan, in this case.

Depending on your credit profile, credit score, repayment capacity and negotiation skills, the bank may also agree to offer you the entire loan amount as lump sum. However, this is more of an exception than a norm.

Some banks offer the entire estimated home improvement loan amount to their existing customers. For example, HDFC, for example, gives its existing customers 100% of the billed amount.

Home renovation loan tenure

The loan tenure could last between one and 30 years, depending primarily on your age and the bank from which you are taking the home improvement loan. The tenure would largely depend on your age at the time of applying for the loan. In case the borrower is young, the loan tenure could be stretched up to 20 years.

Home improvement loan interest rates

Depending on the bank from where you are applying for a home improvement loan, the interest may vary between 6.95% and 12.99%.

Home renovation interest rates at key banks

Why are rates so high in some banks?

Most banks charge the same interest rate for home improvement loans, as they do on personal loans. Since they are treated as belonging to the same category, home renovation loans are as costly as personal loans.

Do note here that unless you specifically ask the bank to tie your home improvement loan with a fixed rate, you would be provided a loan on a floating rate. This means each time there is a change in the RBI-regulated repo rate, it would be reflected in your EMI outgo, in the form of lower or higher deduction. In case of a fixed rate, you would be servicing the loan on the fixed rate only for a certain period.

Processing fee

While the charges vary from one bank to another, banks generally levy a certain percentage of the estimated loan amount, as processing fee. This fee could vary between 0.20% and 0.50%. So, if the total loan amount is, say, Rs 40 lakhs, you will have to pay Rs 8,000 as processing fee, if the bank charges 0.20%. On a similar loan amount, the processing fee amount would go up to Rs 20,000 in case the charge is 0.50% of the sanctioned amount.

Other charges

Borrowers also have to pay the applicable Goods and Services Tax (GST) on the loan processing.

Processing time

At ICICI and Fullerton India, the money gets credited into your account in 72 hours. At Bajaj Finserv, the borrower is promised the processing of his application within 24 hours. Even at banks that do not offer a quick disbursal, the borrower can get the loan in his account within a week, at last.

Documents required for home renovation loan

Here is an indicative list of documents the bank would ask for, to process your home improvement loan application:

Proof of identity: Voter ID card, Aadhaar card or driving licence.

Proof of residence: Passport or utility bills.

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Proof of income: Salary slips, total turnover, proof of income tax returns, PAN card, bank account statement.

Property documents: Sale deed, home loan documents, etc.

[ecis2016.org] Documents required for a home loan application

Depending on your work profile, there may be variations in the documents asked for. At PNB, salaried individuals and non-salaried individuals have to submit the below mentioned documents, along with their duly filled home improvement loan application.

You will have to submit self-attested copies of all these documents and produce the originals for verification.

Home renovation loan tax benefits

Under Section 24 (b) of the Income Tax Act, a borrower enjoys deductions of up to Rs 2 lakhs in a year, on the home loan interest payment. Within that limit, this borrower is also allowed to claim Rs 30,000 as deduction against the interest paid on home improvement loans from the taxable income in a financial year. The deduction on the interest part of the payment can be claimed, even if you have missed the actual payment.

However, this deduction is available for a self-occupied house only. If the loan is taken, to make improvements in a let out property, then, the borrower will not be able to claim the benefits. Also, no deduction can be claimed on the principal repayment of this loan under Section 80C of the income tax law.

[ecis2016.org] All about home loan tax benefits

Dos and don’ts for home improvement loans

• Many banks try to sell their credit cards along with home improvement loans. Unless there is an absolute need to take a credit card and you have experience in handling them diligently, it may not be a good idea to avail of another credit card that would increase your financial liabilities.
• Even if the bank is willing to lend you the entire amount for your home improvement, it would be prudent to keep the amount low, considering that the rate of interest is quite high. Similarly, the tenure must also be kept short, to make the loan more affordable.
• Ideally, a home buyer should not burden himself with excessive credit, especially if he is already servicing a home loan. Online calculators can help you to calculate your EMI, to understand how it will affect your monthly budget. Borrow home renovation loans, only if you think you and your family will be able to bear the combined financial burden.
• Those who are already servicing a loan with a bank should first approach their existing lender, to avail of the home improvement loan, as the borrower will have a better chance of negotiating on the interest. This way, the documentation process is also less rigorous. However, do compare the interest rates of various financial institutions. If there is a wide difference between the interest rates, opt for a bank that offers you the most low-cost option. To arrive at the right choice, also factor in the additional expenses, including processing fee, GST, etc.
• In case you are going to another lender for your home improvement loan, your existing lender will have to be informed about the same. In fact, they will also have to issue a no-objection certificate to you, which you would have to submit along with your application.
• If you are switching to a new lender, it must also be borne in mind that the bank will send a technical assessment team, to review the property, in case they are not treating the loan as personal.

FAQs

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