As interest rates on loans rise, you can now sanction a higher loan amount for home improvements.
In a circular issued on Tuesday, the Reserve Bank of India (RBI) said the ceiling on loans to make repairs, additions or conversions to your home is now raised in metropolitan areas (those with a population of 10 lakh and above) and Rs 6 lakh in other centres. The circular is addressed to all primary (municipal) credit unions.
The limit was changed from the old Rs 2 lakh in rural and semi-urban areas and Rs 5 lakh in urban areas as reported by the RBI on 13th September 2012.
Home improvement loans are used to finance repairs or additions that could improve the retail value and aesthetics of your home. For example, you could get a renovation loan to remodel your kitchen or paint the exterior of your home.
Characteristics of the mortgage loan
Interest Rates: Interest rates on home improvement loans are typically the same or slightly higher than regular home loans.
Most home improvement loans are unsecured loans, meaning they don't require any collateral. Instead, the lender assesses your actual eligibility by checking your credit history and income. According to the credit aggregator Paisabazaar.com, the interest rate for this is between 9.6% and 12.99%. These loans are offered by banks like State Bank of India, HDFC Bank, ICICI Bank, Bajaj FinServ and Yes Bank.
Some lenders also offer secured home improvement loans with lower interest rates of 6.5-7%. Some of the banks that offer these loans are ICICI Bank, HDFC Bank, Axis Bank, State Bank of India and Citibank.
Loan Amount: For renovation and renovation loans, the amount can be up to 100% of the estimated amount of the renovation or improvement. "However, the loan amount must not exceed the LTV (Lon-to-Value) ceilings for mortgage loans set by the Reserve Bank of India. For example, for loan amounts of Rs 30,000, the loan amount (home improvement) must not exceed 90% of the property value for loan amounts from Rs 30 to Rs 75 lakh, the LTV ratio cannot exceed 80% nor exceed 75% for loan amounts greater than Rs 75 lakh,” says Ratan Chaudhary, head of home loans at Paisabazaar.com.
However, the final LTV ratio offered by the lender would depend on the applicant's credit profile and characteristics.
Loan Term: Renovation loans have terms of up to 30 years. "Most lenders typically require the home improvement loan to be paid in full by the time borrowers turn 70," says Chaudhary.
Tax benefits: Interest payments on home improvement loans also provide a tax deduction benefit under Section 24b of the Income Tax Act 1961. Interest payments up to Rs 30,000 per tax year are deductible.
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