Home Loans

Q. What are a Good loan and a Bad loan?

A. Good loan is a loan which is used to invest in an asset that grows in value or generate long-term
income thereby increases net asset value by appreciation.
Example: 1. Home loan
2. Business loan (Machines, buildings, cars for business etc)
3. Education loan
Bad loan is a loan which is used to invest in an asset that decreases in value over a period of time
and decreases net asset value.
Example: 1. Car loan for personal use.
2. Phone loan
3. Consumer durable loans for personal use.
*We get TAX benefits on interest paid on good loan. There is no tax benefit on interest paid on bad
loan.

Q. Interest paid on home loan is tax deductible, what is the maximum amount deductible per year?

A. Up to 2 Lac interest paid on home loan / per person/ per year can be deducted from income for
tax benefit. If husband and wife both earning and take home loan up to 50-70 Lac each then total
benefit is on 4 Lac interest. If both are in 30% tax bracket, can save total 1.2 L tax per year ( 4 Lac
x 0.3 =1.2Lac).
Hence, I recommend to take home loan up to 50-70L per person, which would be enough to get
optimum tax benefit.
Note: this calculation is based on taxation year 2019, please calculate the benefits based on current
tax rules.

Q. What is MCLR?

A. It is Marginal Cost of fund based Lending Rate, used to calculate lending rate by bank. It was
introduced by RBI in April 2016, to improve transmission of rate cut to borrowers. It has replaced
older Base Rate loan system.
Many people are paying EMI based on BASE RATE system which is much higher than MCLR.
IF YOU HAVE NOT SWITCHED home loan to MCLR, then Do it TOMORROW.

RBI Guidelines about MCLR:

  • Fixed rate home loan will not be affected by MCLR.
  •  Banks must publish marginal cost of funds based lending rate for different tenors.
  •  MCLR as on the sanction date of the floating rate home loan will stand the same till next reset
    date.

Q. Few banks like SBI offers Maxgain home loan, should one use it?

A. yes, SBI Maxgain is a type of home loan account that helps you park your extra money to save
home loan interest. If you have Surplus fund you can deposit it in loan account and home loan
interest is charged only on the difference between principal loan amount and surplus amount in the
Max gain home loan account. Also the amount is available to withdraw anytime.

Q. Traditional belief of having your own home in India, does it make any sense considering a long duration of 25 to 30 years of loan, where one ends up paying more interest on loan than borrowed capital?

A. Optimum EMI is 50-70 K to get full tax benefits.
Adjust your EMI to that level. You can reduce duration if loan amount is less.

Q.Is it better to repay home loan which is at 8.65 percent interest, or use excess money to invest in mutual funds shares for asset creation?

A. It depends on returns expected from market in near future. If Market is overvalued prepay the
loan as it may give less to negative returns in next few years. If Market is undervalued invest in
mutual fund.

Q. I want to take a commercial loan around 1.2cr. I have existing home loan with balance around 40lakh. Should I top up my home loan and take remaining amount as commercial loan. Is it possible?

A. Take separate Business loan. Don’t mix Home loan with Business.

Q. Is second home loan not exempted from tax?

A. Second home get tax benefit on interest up to 2 lacs. However, you need to show certain income
from 2nd home.

Q. It is advisable to close home loan before tenure?

A. If you are loan Intolerant then you can prepay.

  • If you have excessive funds; you can prepay.
  • However; it’s better to have some home loan.

Q. Is a loan taken on home as collateral similar to home loan? Is it possible to take tax benefit, and home loan interest rate?

A. When you put home as collateral security. It’s not home loan. You don’t get home loan benefits.

Q. Is there any tax benefit in buying Clinic premises with commercial loan? How to avail this benefit?

A. All interest paid on business building loan is deducted as expenses in profit and loss statement.
It’s direct benefit to tax liability.

Q. Can I take home loan in my name for construction of a house on a land which is in my father’s name? If yes, would I get income tax benefit on that loan?

A. Your father has to be a co-owner of house or you should transfer land in your name, to be able to
take loan.

Q.I have existing home loan amount 16 Lac where EMI is paid from joint account , next year I will move to my new house where home loan will Be 45 Lac, EMI will be paid from joint account .Which loan one can apply for TAX benefit?

ANS: It depends on you. Obviously higher loan would be choice.
You can claim benefit from second home as well, if you have rent income from that house.

Q. Are tax implications same for home loan and loan taken for commercial property?

A. Home loan and Commercial loans are different from tax point of view.

Q. What should be ideal tenure of home loan considering I am 36 year old and having 20 year tenure for Home loan?

A. There is NO ideal tenure. Look at OPTIMUM tax benefits and adjust tenure accordingly.

Q. For an investment with time horizon of 10 years, what will be good option- a commercial loan real estate asset or investment in share market?

A. For investment horizon of 10 year Equity is better choice. It also depends upon your GRED
(Gold, Real estate, Equity, Debt) asset allocation. Appropriate asset allocation for diversification is
important.

Q. If someone has enough cash to buy home, should they still take home loan to buy property?

A. If you want some tax benefits then home loan is OK. But, if you have too much money then you
are beyond thinking of Tax break. No need to take home loan in second case.

Q.RBI is going to increase Repo rate, so home loan interest rate will also go up, is it advisable to prepay some amount to get benefit of older rate of interest?

A. If you have Excess cash you can make some pre payment.

Q. I am 42 year old. I have more than 50% of my GRED asset allocation in real estate. Should I sell one of property and invest in equity to balance my asset allocation?

A. I would NOT recommend to SELL real estate. You can increase future investment in Equity.
You are just 42 yrs old; you can balance GRED before age 50.

Q: At what age ideally we should be free from home loan? 15 to 20 yrs of loan period is long?

A: If you have passive income to cover EMI, you are FREE.

  • If you are loan intolerant then get rid of it ASAP.
  • Each individual is different. No fixed formula

Q. People take loan on assets like gold, house (mortgage). How about loan on LIC policy and LAS (loan against securities like Mutual funds and shares) as alterative to home loan?

A. Home loan is cheapest loan.

Q. Should we reduce the tenure of home loan when it doesn't give advantage in tax as principal amount is increased?

A. Adjust tenure to get Maximum tax break.

Q. If loan is in name of husband. Home registration is in name of husband and wife, and both are doctors and have income. Who should take the tax benefit?

A.
1. Husband wife should be Borrower and Co Borrower
2. Husband and wife should be Owner and Co Owner
3. Both should pay EMI and person paying the EMI should take the tax benefit in that proportion.

Q. One should go for fixed or floating interest rate home loan?

A. Floating appears better than Fixed in falling interest rate cycle and vise versa.

Q. Should one switch to lower interest rate by paying conversion fees? if interest rate is going to change very regularly then is it worthwhile going for conversion?

A. If bank is ready to reduce spread then get it switched. If MCLR is 9.5 % then bank gives spread
0.25, 0.5, 0.75 or 1. They charge different rate to different people – check what they are offering.
In short reduce rate even if you have to pay conversion fee.

Q. Do NBFC follow MCLR?

A. No.NBFC don't follow RBI rate. There rate is decided by competition.

Q. What is the minimum home loan amount to get full tax benefit/ deduction?

A. 50-70L. Total 2 Lac annual interest in home loan gives max tax benefit.
Note* this is based on current (year2019) taxation. It is prudent to find out latest rules.

Q. We both husband and wife are co-owners and co-borrowers. EMI paid through a joint account. Is it necessary to show payment from both our individual salary accounts to the joint account? Is it ok if one of us transfers money to joint account and other person spends at other places?

A. You both should transfer to Joint account and pay EMI from joint account.

Q. If we can negotiate with NBFC for lower interest rate than bank. Should we take loan from NBFC instead of Bank?

A. It is better to take home loan from bank.

Q. Between home loan and top up loan which one should be closed first?

A. Close Top Up loan first.

Q. I had booked to buy 2 flats, 1 for clinic and one for residential purpose, but cancelled the booking later. Now builder is asking for GST and Cancellation charges Or option to continue with one flat and no cancellation charge. Should I continue with one flat by taking home loan to resale it after completion of project in next 2 yr?

A. 1) Builder can’t ask for GST for undelivered flat.
2) You can sell flat after 2 years but gains might be gone in interest.

Q. If I have taken commercial loan for clinic premises and I am not earning from the clinic as it is under renovation. Can I still avail tax benefit on the interest I am paying ?Currently my income is from other hospital where I am employed . According to my CA income earned has to be from the clinic ( and not from other hospitals).

A. Your interest will be shown as loss and carried forward in next financial year. Once you start
income from clinic you can set it off.

Q. I have 36 Lac home loan since almost 3 yrs, now l want to renovate home – estimated expenses around 7 – 8 Lac Rupees, shall l top up my home loan or use savings and cash for same?

A. If you have Cash in hand then use cash.

Q. What is better renting or buying a house in Mumbai?

A. Renting home in Mumbai is better than buying.