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6 Types of Home Loans in India

Buying a home is a significant milestone in everyone’s life, and for most people, it requires financial assistance in the form of a home loan. In India, there are various types of home loans tailored to meet the diverse needs of individuals. Understanding these different types of home loans can help you make an informed decision when choosing the one that best suits your requirements. In this blog, let us explore six common types of home loans available in India that will serve as a quick guide in planning your finances and understanding the type of home that will suit you. 

Fixed Rate Home Loan

The most common type of home loan is the fixed-rate home loan. In this type of loan, the interest rate remains constant throughout the loan period. This means that the person’s (who opted for this loan) monthly EMI (Equated Monthly Installment) remains unchanged. This loan is ideal for those who have been planning their budget as this ensures stability and predictability in your budget. The fixed-rate home loan is also ideal for those who prefer certainty and want to avoid fluctuations in their loan repayments.

Floating Rate Home Loan

The next type of loan available for Indians is the floating-rate home loan. Unlike fixed-rate home loans, a floating-rate home loan has an interest rate that fluctuates with market conditions. The interest rate is linked to a benchmark rate set by the lender (in most cases, banks or any authorized loaners), such as the RBI’s repo rate or the MCLR (Marginal Cost of Funds Lending Rate). As the set benchmark rate changes, so does the interest rate on the loan. Floating-rate home loans offer the potential for lower interest rates during periods of economic stability but can also lead to higher EMIs if interest rates rise.

However, if we look broadly, the floating interest rate loan has advantages. The interest rate is usually lower than the fixed-rate home loan, and even so, the interest changes; it only happens if the market is very volatile. And the chances of the market shifting drastically are very low. 

Home Construction Loan

The next most preferred home loan type is a home construction loan. Before buying apartments became a norm, the majority of Indians would secure a loan from the bank for home construction. The home construction loan is specifically designed for individuals who want to construct a new house on a plot of land they own. Unlike traditional home loans, where the entire loan amount is disbursed upfront, a home construction loan provides funds in staggered installments as construction progresses. This ensures that you only pay interest on the amount disbursed, reducing your financial burden during the construction phase.

Home Improvement Loan 

Also known as a renovation loan, the home improvement loan is intended for those who want to renovate or repair their existing property. Whether it is upgrading the kitchen, renovating the bathroom, or adding an extra room, a home improvement loan provides funds to undertake these improvements. The loan amount is based on the estimated cost of renovation, and the repayment terms are similar to those of a regular home loan.

In this type of home loan, the tenure of repayment of the loan is generally shorter compared to other loans. The reason for this is the amount granted for a home renovation loan is relatively less than for an entire home construction loan. However, the interest rate is typically like that for a regular property loan.  

Home Extension Loan

Very similar to a home improvement loan, a home extension loan is suitable for homeowners who wish to expand or extend their existing property. Whether it’s adding a new floor, constructing a balcony, or expanding the living area, a home extension loan provides the necessary funds for these purposes. Similar to a home construction loan, the loan amount is disbursed in stages as construction progresses. The interest of this loan is charged only on the amount utilized.

An additional point to be noted here is that those who have an existing home loan can get a house extension loan from the same lender and add it to their loan. Home extension loans are cheaper and carry lower processing charges. 

Home Loan Balance Transfer

A home loan balance transfer allows borrowers to transfer their existing home loan from one lender to another to take advantage of better terms or lower interest rates. By switching to a new lender offering lower interest rates or additional benefits, borrowers can potentially save money on their loan repayments. However, it’s essential to carefully evaluate the terms and conditions of the new loan offer before opting for a balance transfer to ensure that it aligns with your financial goals.

In addition to the aforementioned types of home loans, there are several other home loan options available: 

  • NRI Loans: This type of home loan is a tailored financial solution designed specifically for non-resident Indians (NRIs) looking to purchase property in India.

  • Plot loans: Those who are looking to buy plots can opt for plot loans. 

  • Bridge Loan: The ones benefiting from bridge loans are those who have sold their homes and are immediately looking to buy a new one.

Most of these home loans are provided by banks, both private and national. However, paying a high-interest rate is not accessible to everybody, considering the people who fall under the low-income margins. For people like the Indian government, various loan programs are offered to help them buy homes with better terms and financial support. One important program is the Pradhan Mantri Awas Yojana, which helps low-income families by giving them subsidies on their home loan interest rates. This makes it easier for them to afford and buy homes.

Conclusion

Understanding the different types of home loans available in India is essential for making an informed decision when purchasing a home. Whether you prefer the stability of a fixed-rate loan, the flexibility of a floating-rate loan, or the convenience of specialized loans for construction, renovation, or extension, there is a home loan tailored to meet your needs. By evaluating your requirements and eligibility criteria and comparing loan offers from different banks, you can choose the right type of home loan that suits your budget and financial goals.

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