Home Renovation Loan: Check out interest rate, eligibility criteria, tax benefits

A home renovation loan is a type of loan that is used to finance the renovation or remodeling of a home. This type of loan is specifically designed to help homeowners cover the costs associated with making upgrades or improvements to their home.

Home renovation loans are a popular financial product in India, as many homeowners seek to make improvements and upgrades to their homes.

Most banks, non-banking financial companies (NBFCs) and housing financial companies (HFCs) provide home renovation loans either through their regular home loan product or as a separate offering within the broader category of home loans.

The loan may be used to pay for a variety of home improvements, such as kitchen or bathroom remodels, adding a new room or addition, updating plumbing or electrical systems, or improving the home’s energy efficiency.

Also Read: Two home loans? Combine them into one and save money – Here’s how

Renovating your home can bring many advantages, including:

1. Increased comfort: Renovating your home can make it more comfortable by improving the insulation, upgrading the heating and cooling systems, and installing better lighting and ventilation.

2. Enhanced functionality: Renovating can improve the layout and functionality of your home, making it easier to use and more practical for your needs.

3. Increased home value: Renovating your home can increase its value, making it more attractive to potential buyers if you decide to sell in the future.

4. Improved energy efficiency: Renovating can also improve the energy efficiency of your home, which can reduce your energy bills and lower your carbon footprint.

5. Updated style: Renovating can give your home a fresh, updated look and feel, which can be a source of pride and enjoyment for you and your family.

6. Increased space: Renovating can also create more space in your home, whether by adding an extension, converting unused space, or reconfiguring the existing layout.

Overall, renovating your home can be a great way to improve your quality of life, increase your home’s value, and make it more comfortable, functional, and attractive. However, while opting for a home renovation loan it’s important to carefully consider the terms and conditions of the loan, including interest rates, repayment terms, and any fees associated with the loan. Homeowners should also have a clear understanding of the total cost of the renovation project and how much financing they will need before taking out a home renovation loan.

Here are some things to keep in mind if you are interested in obtaining a home renovation loan in India:

1. Types of loans: There are different types of loans available for home renovation in India, such as personal loans, home improvement loans, and top-up loans. Personal loans are unsecured loans that can be used for any purpose, while home improvement loans are secured loans require collateral and are specifically designed for home renovation projects. While you may avail a personal loan for the purpose of your home renovation, the interest on such a loan is typically high as this is an unsecured loan. A house renovation loan is typically available at the same rates as a home loan, making it an attractive option as it is secured against your home ownership. Top-up loans are an extension of your existing home loan and can be used for renovations.

2. Loan Amount and loan to value ratio : Generally, you can receive a loan amount of up to Rs 5 lakh for personal loans, and up to Rs 25 lakhs for home improvement loans. Loan-to-value (LTV) ratio is a term used in lending to describe the ratio of the loan amount to the value of the asset being financed. In the context of a home renovation loan in India, the LTV ratio represents the percentage of the total cost of the renovation project that the lender is willing to finance.

The LTV ratio for a home renovation loan in India typically ranges from 70% to 90%, depending on the lender’s policies, the borrower’s creditworthiness, and the value of the property. This means that the lender may be willing to finance up to 70% to 90% of the total cost of the renovation project, and the borrower will be responsible for the remaining percentage.

For example, if the total cost of the home renovation project is INR 10 lakh, and the lender’s LTV ratio is 80%, the lender will provide a loan of INR 8 lakh (80% of INR 10 lakh), and the borrower will need to contribute INR 2 lakh (20% of INR 10 lakh) as a down payment.

It is important to note that the LTV ratio for a home renovation loan may vary from lender to lender, and borrowers should carefully compare and evaluate loan offers from different lenders before selecting a loan.

3. Interest Rates: The interest rates for home renovation loans in India are usually higher than regular home loans, as the risk associated with such loans is higher. Lenders usually provide home improvement loans at floating interest rates. The interest rate for a loan applicant availing a home renovation loan depends on several factors including their credit score, loan amount, employer’s profile and occupation profile. The interest rates vary depending on the lender and the type of loan. Personal loan interest rates typically range from 10% to 24%, while home improvement loan interest rates range from 8% to 12%.

4. Repayment Tenure: The repayment terms for home renovation loans in India vary depending on the lender and the type of loan. Personal loans typically have a repayment period of up to 5 years, while home improvement loans can have a repayment period of up to 20 years.

5. Eligibility Criteria: To be eligible for a home renovation loan, you must be a resident of India and have a regular source of income. The eligibility criteria for home renovation loans in India vary depending on the type of loan you choose. Generally, you will need to be a resident of India, be at least 21 years old, and have a good credit score. You may also need to provide proof of income and employment, have a good credit score and a stable financial history.

6. Documentation: The documents required for home renovation loans in India include proof of identity, address, income, and employment. You may also need to provide proof of property ownership and collateral, estimated repair cost quotation.

7. Customizing a home renovation loan: Customizing a home renovation loan involves tailoring the loan to meet your specific needs and financial situation. Firstly, determine the amount of money you need for the renovation project. This will help you decide on the loan amount that you will apply for. Secondly, research lenders who offer home renovation loans. Compare interest rates, fees, and other terms and conditions to find the best loan for your needs. Also, consider the type of loan that you want to apply for.

There are two main types of home renovation loans: secured and unsecured. For example, you may be able to negotiate a lower interest rate or longer repayment period if you have a good credit score or a strong financial history. You may also be able to choose a repayment plan that fits your budget, such as a fixed or variable rate loan. Secured loans require collateral, such as your home, while unsecured loans do not. Secured loans typically have lower interest rates but carry more risk since you could lose your collateral if you can’t repay the loan. It is also important to review the terms and conditions of the loan agreement carefully. Make sure you understand the interest rate, repayment period, and any other fees or charges associated with the loan.

8. Tax benefits: Home renovation loan borrowers can claim interest repaid of up to Rs 30,000 per financial year as tax deductions under Section 24(b). This deduction of Rs 30,000 is within the overall limit of Rs 2 lakh available on loan interest payment of self-occupied homes. Cumulatively, interest payments on home purchase and house renovation loans put together qualify for a deduction of up to Rs 2 lakh. The Rs 30,000 deduction could result in a tax saving of up to Rs 10,300 annually, thus lowering your overall cost of borrowing.

Remember that customizing a home renovation loan involves careful consideration of your financial situation and the terms and conditions of the loan. This may involve adjusting the loan amount, repayment schedule, or other terms to better align with your financial situation and renovation goals. It is important to shop around and compare different lenders and loan products before choosing the most suited home renovation loan that is customised to your needs.

(By Atul Monga, Founder and CEO, Basic Home Loan. Views are personal)