What Should You Know About Property Loans Before Applying?

Most Indians consider buying a property as a momentous fiscal resolution. Many people employ property loans to fulfil their aspirations of owning homes or even business premises. 

Through these credits, people can acquire new properties or utilize the current ones for other financial requirements. Therefore, being aware of their relevance, benefits, and tax implications is crucial.

What is a Property Loan?

A property loan is a type of secured credit that uses residential or commercial properties for collateral. The money lender advances an amount based on the value of the security pledged, and the borrower makes repayments through installments known as EMIs.

Key Features of Property Loans

• Purpose: You can use these loans to acquire, renovate or expand your property.

• Loan Amounts: Lenders typically extend loans worth 60% to 70% of the market prices of properties.

• Interest Rates: The rates on such loans are lower compared to personal loans. Loans against property have interest rates ranging from 8.50% to 18% per annum.

• Tenure: EMI tenures up to 20 years may be flexible over extended periods.

• Eligibility Criterion: Banks consider income levels and credit history when offering property loans in India.

Types of Property Loans in India

(1). Loan for Purchase of Property — Used for purchasing new residential or commercial properties.

(2). Loan Against Property — Funds borrowed against an existing property for business or personal needs.

(3). Loan for Renovation — This is used to repair or upgrade an existing property.

Income Tax Benefits on Property Loans

Property loans come with substantial tax benefits. Through various tax deductions, the government these days attempts to encourage property ownership and reduce people’s financial burden, particularly regarding the housing sector in India. 

There are two key tax benefits available under the Income Tax Act of India, 1961, on property loans:

1. Deduction on Interest Paid (Section 24(b))

• A borrower can claim an interest deduction of up to ₹2 lakhs annually in case of the self-occupied property only.

• In the case of rented properties, the entire interest paid can be claimed as a deduction, thereby reducing taxable income.

2. Deduction on Principal Repayment (Section 80C)

• Borrowers can claim a deduction under section 80C of principal repayment up to ₹1.5 lakhs annually.

• Retain tax benefits if the property is not sold within 5 years.

Using an Income-Saving Calculator

An income tax saving calculator is one of the most useful tools that can be used to estimate the tax benefits one may get from taking a property loan. The calculator allows a borrower to enter information such as the amount of loan taken, rate of interest charged, and duration for which the money was lent. 

After this information is entered, the calculator accurately shows how much tax savings could be achieved by borrowing money from different lenders.

Benefits of Using an Income Tax-Saving Calculator

1. An income tax saving calculator can help planners plan finances effectively by showing estimated tax savings.

2. It provides insights into how much annual tax deductions can be claimed.

3. It allows borrowers to compare different loan options based on their tax impact.

Factors to Consider Before Taking a Property Loan

Some key aspects should be evaluated to ensure financial stability before applying for property loans:

1. Interest Rates – Comparison of fixed against floating interest rates provided by several lenders.

2. Loan Tenure – Selecting a term that ensures affordability but minimizes the expenses of interest.

3. Processing Fees – Lenders often charge processing costs ranging between 0.5% and 2% of the total amount borrowed. Such charges vary according to bank policies.

4. Prepayment Charges – Early repayment attracts penalties from some banks. Hence, check out if there is a zero prepayment penalty option within your bank.

5. Loan-to-Value Ratio (LTV) – The proportion against which one can obtain finance from the property value.

Documents Required for a Property Loan

Some of the key documents that you will need while applying for a property loan include the following:

• Identity proof as well as address proof. (Aadhaar, PAN, Voter ID).

• Income proof in terms of salary slips and ITR filings.

• Property-related documents, such as ownership papers and valuation reports.

• Bank statements for the last 6-12 months.

How to Apply for a Property Loan

The procedure followed in obtaining property loans is usually straightforward:

• Choosing the Right Financier: Interest rates, loan term length and customer service are among the factors one can compare when selecting a lender.

• Check Eligibility: Use online eligibility calculators to check if you can get a loan.

• Submission of Application: Fill in a loan application form with all required documents.

• Valuing Properties: Before accepting a proposal, the bank appraises the client's security assets.

• Loan Approval And Disbursement: Immediately after the loan is approved, the disbursement takes place virtually within 3 to 5 days minimum.

The Bottom Line

Property loans are the best way to own property and enjoy tax benefits. Moreover, tools like an income tax saving calculator can help you efficiently plan tax savings. When planning to take any property loan, some things can help maximize financial gains. These include comparing various loans from different lenders based on their interest rates your monthly salary, and taking into account the total amount which should be paid every month.

Now that you know these factors, it should be easier to navigate the application process for property loans. Best of luck applying!