Understanding housing loans and how your pension scheme could help
Sujoy, 35, has just started his retirement planning. The management professional from Mumbai has already invested in the National Pension Scheme (NPS). This will give him a regular income once he retires. But he also wishes to buy a home. Becoming a property owner is a dream for Sujoy. Besides, he already pays close to Rs 30,000 as rent. This money could be better diverted into a home loan. But the number of home loans and providers in the market is confusing for him. He wants to find the best home loan for his needs but is unsure how to go about it.
What are the options?
Like Sujoy, do you wish to buy real estate with a home loan? If so, you must know the three basic types available to homebuyers.
- Home purchase loans: This is the standard home loan. Use this to buy an apartment or an existing house. You could be buying a brand new apartment from the builder or a second-hand one from the current owner. Typically, the lender disburses up to 85% of the property’s market value. You would have to pay the remaining 15% yourself.
- Land purchase loans: Apply for this loan if you want to buy a plot of land rather than a ready residential unit. This is a good option for young homebuyers who have limited income. That is because land tends to be cheaper than a finished housing unit. Later, once your income grows, you can take a loan to construct a house on this plot. A land purchase loan also offers up to 85% of the land’s market value.
- Home construction loans: This is the next step after a land purchase loan. Go for this once you have the financial ability to build your dream home. Say, you approach a finance company like Bajaj Finserv. They will ask you to submit a plan for the construction along with the cost estimate. The lender will then verify the details before approving your loan. Typically, the lender will disburse the loan in instalments.
Yet another home loan route
The Pension Fund Regulatory and Development Authority is currently looking into another option. There could soon be a housing finance option under the National Pension Scheme (NPS). A committee has been set up to look into the matter. Former HDFC Life MD and CEO Deepak M Satwalekar is heading the committee.
A priority for this committee would be to provide affordable housing finance for NPS subscribers. This would be welcome because home loan rates in India are rather high. They range upwards of 9%.
Currently, subscribers can make early withdrawals on their NPS account. But they can avail this only after contributing for 10 years. At this point, withdrawal of up to 25% of the contributed amount is permitted. But you can make such a withdrawal only for specific reasons. One such reason is the construction or purchase of a first house.
Now, consider another instrument for retirement planning. Subscribers to the Public Provident Fund (PPF) can take a loan against the PPF balance. This usually works out as cheaper than a personal loan or a credit card. Besides, you need not worry about recovery agents. However, on the flip side, a loan against the PPF balance may eat into your retirement savings.
The committee will have to look at many factors with regard to the NPS and housing finance. After all, there are serious pros and cons that need consideration. But affordable housing finance of any kind would certainly be a welcome step.
Any possibility of loans on the NPS will only be announced once the committee has reached a decision. In any case, the steps to selecting the right home loan remain the same. First, identify what type of home loan you need. Next, compare the various aspects. You would have to look at the housing loan terms. You would also have to compare the home loan interest on various products. This may mean doing your research online. Or, you could speak to the representatives at different banks and finance companies.
Before you sign anywhere, make sure to run a detailed comparison. Do the homework. Choose a home loan option that works for you.