A home loan is one of the major ways of arranging finance to purchase, renovate, repair or build a house for an individual. It entails contacting and applying to banks and lenders to get them to sanction the required funds to undertake the goals related to housing.
A middle-class individual or family has strong sentiments attached to the dream of owning their own house. A home loan is a means to achieving this end. But, it comes at a cost. Or must I say costs? Lenders advance money as home loans with interest serving as their earnings on the principal amount. However, they levy other charges also which are a part of the overall transaction between a lender and a borrower.
There are charges on the application and processing of loan applications, verifying of documents, administrative charges, so on and so forth. All these expenses have to be met if the individual intends on going ahead with the course of availing a home loan. This article seeks to address some major questions related to these miscellaneous charges accompanying home loans and explain certain concepts related to them.
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What are some things you have to pay besides monthly payment and interest in buying a house with a loan?
In a transaction involving the purchase of property using the home loan funds, where the home loan money is paid to the seller/builder, there are taxes levied on this transaction which is to be remitted to the Government. These taxes are the stamp duty which forms about 0.1 to 0.2% of the loan amount and is remitted to the Government. The Indian Stamp Duty Act, 1899 was legislated to raise revenue for Governments. These duties are a source of revenue for states and hence their rates vary from state to state.
The lender levies a charge called franking charges to certify that the stamp duty has been paid to the Government. The property purchased also needs to be registered in your name. There is another fee imposed by the Government for registering property in your name imposed. Thus, there are things you have to pay for besides the monthly payment and interest in buying a house with a loan.
When you are buying a house, can you take more money out on the home loan for repairs?
Many a time, borrowers find themselves in a position where they have purchased a house that needs repairs to make it fit for habitation. The borrower has already availed a home loan from lenders to purchase a house. However, lenders are profit-driven entities. They extend extra funds called top-up loans for house renovation or repairs. These top-up loans have lower interest rates than home loans and personal loans and are very useful to borrowers to undertake repairs of the house. Hence, yes, you can make more money if you show the bank you can repay the loans for undertaking repairs.
Are there any other charges that accompany home loans?
Home loans other than the periodic EMI and interest payments come along with several other visible and hidden charges that the borrower has to pay to avail a home loan. Some of these costs and charges are:
A lender incurs certain costs to conduct a background verification of your credit-worthiness. To cover these costs, they charge an application fee from you, the borrower, when you submit your loan application for the lender’s approval. These charges range from Rs. 1000-5000.
This is another fee charged to cover the expenses incurred by the lender in assessing your credit-worthiness. The cost of processing your application ranges from 0.5-1% of the loan amount and applicable taxes. As you can see, the percentage does not seem significant but in terms of figures, these charges yield four-figure numbers in the higher bracket or five-figure numbers subject to a maximum limit. This also warrants your attention when comparing the lending options on offer to you.
Technical Valuation Charges:
Lenders assess the property for verifying its value and incur costs as a consequence. In the case of high-value property, two valuation assessments are conducted and a loan is sanctioned based on the lower value determined. To recover these expenses, technical valuation charges are levied.
After the sanctioning of the loan, the bank charges a fee called an administrative fee. The quantum varies from lender to lender.
Balance Transfer charges:
Many a time, borrowers wish to change their lender to seek home loans with cheaper interest rates, or they may seek to transfer their balance home loan funds from one bank to another or from one option to another. In this case, you have to pay a balance transfer charge to the lender to facilitate such transfer.
Pre-payment charges are levied when a borrower prepays the loan amount to the lenders. Pre-payment charges are charged on home loans with fixed rates of interest. The RBI has abolished the imposition of pre-payment charges on floating rate loans.
This is the fee charged by the lender to scrutinize your documents like an agreement for sale or purchase which you have submitted for the loan application.
On property transactions, stamp duty needs to be paid by the buyer at the rate of 0.1 to 0.2 % of the loan amount. The lender certifies that such stamp duty has been paid by the buyer and for such certification, they charge the borrower. However, stamp duty is levied only in some states.
For NRI home loans, KYC details and a Power of Attorney is required to be notarized by the Indian embassy or any local notary established abroad.
This cost is charged by taking the borrower into confidence that if the builder fails to get approval or pay the property tax in full, the borrower pays the fee in advance.
The Central Registry of Secularization Asset Reconstruction and Security Interest has the objective to check fraudulent activities in case of home loans and mortgages like taking multiple loans against a single asset. Borrowers have to pay a small charge to CERSAI regardless of whether the loan is sanctioned or not.
There are times when borrowers fail to pay their EMIs on time. It is in response that lenders impose a recovery charge in an attempt to recover the payments.
This is a fee charged by the lender for getting the loan agreement signed, the ECS mandate activated and few other formalities completed. The quantum is nominal Rs 500 to Rs. 2000. These charges can be negotiated based on the time taken for the presentation of the documents. The faster you present the documents, the lower the rate of documentation fee. If lenders are unfairly charging a high rate without any reason, you can complain to the RBI’s banking ombudsman who will look into the matter and resolve it.
Taking a home loan is a major decision for an individual or family. However, you need to be aware of certain things before leaping. Other than its major components comprising principal amount and interest payments, some several costs and charges form a part of the sanctioned loan amount. Some of the costs are visible and some are hidden. It is for the borrower to be apprised of these costs and charges for they form a significant source of financial outflow.
There are several sites like bankbazaar, myloancare etc. that allow you to compare processing fees which you should undertake before choosing the lending option for your home loan. A home loan is a liability that has to be repaid to the lender, but it is also an “investment” which is made to purchase a new house. Take appropriate measures to reduce the costs and maximize the gains.