Understanding Home Renovation Loan Interest Rates and the Loan Disbursement Process

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If you’ve been eager to turn your house into your dream home, a home renovation loan can be your perfect solution. This specialised loan allows you to transform your living space by making essential repairs, expanding existing structures, or carrying out significant renovations. This blog will provide valuable information about all things related to home loans, including home renovation loan interest rates and the loan disbursement process. 

Understanding Home Renovation Loans 

Here are a few key things to consider when it comes to home renovation loans.

  1. Interest Rates 

A home renovation loan usually comes with varying interest rates. The interest rate for this loan depends on various factors, like their monthly income, credit score, loan amount, the applicant’s profile, and occupation. The home renovation loan interest rate is similar to or slightly higher than those offered for regular home loans.

  1. Loan-to-Value Ratio (LTV)

In home renovation loans, the LTV ratio indicates the percentage of a property’s worth that can be financed with a loan. Typically, lenders will contribute up to 100% of the anticipated cost of renovations, but only if the LTV ratio stays under the RBI’s house loan cap. The allowed LTV ratios differ based on the loan amount, ensuring responsible lending.

  • Up to Rs. 30 lakhs: Up to 100% of the renovation estimate, subject to the LTV ratio not exceeding 90%.
  • Rs. 30.01 lakhs to Rs. 75 lakhs: Up to 100% of the renovation estimate, subject to the LTV ratio not exceeding 80%.
  • Above Rs. 75 lakhs: Up to 100% of the renovation estimate, subject to the LTV ratio not exceeding 75%.
  1. Loan Tenure

Home renovation loans usually come with flexible repayment periods of up to 20 years, with some lenders even offering extended tenures of up to 30 years. Lenders consider the applicant’s repayment capacity, ensuring that the monthly EMI, including the proposed loan, is within 50-60% of their net monthly income.

Tax Benefits: Home renovation loan borrowers can claim tax deductions on the interest repaid, under Section 24(b) of the Income Tax Act.

  1. Balance Transfer Facility

Existing home renovation loan borrowers can transfer their outstanding loan to another lender at a lower interest rate through a balance transfer. This allows them to reduce their overall interest cost, but the new lender will conduct a thorough credit risk assessment before approving the transfer request.

  1. Processing Fees and Prepayment Charges 

Banks, NBFCs, and HFCs typically charge processing fees for new and existing borrowers availing of a home improvement loan. The processing charges are usually between 0.25 to 2.00% of the loan’s total amount. The RBI prohibits prepayment costs on floating-rate loans, but lenders can impose or waive prepayment fees on fixed-rate loans at their own risk.

Home Loan Disbursement 

The home loan disbursement process involves verifying documents and the property’s technical and legal valuation. It can be divided into three key phases — Application, Sanction, and Disbursement.

Application: To initiate the home loan disbursement process, applicants must complete an application form providing essential details about their income, property, and investments. Documents like passport-sized photographs, proof of identity, and residence proof must be attached.

Sanction: After applying, the lender conducts a legal and technical verification of the property. This includes an on-site inspection to assess the property’s value based on location and construction quality. Once the verification is complete, the bank issues a home loan disbursement letter to confirm the loan’s sanction status. 

Disbursement: Upon loan sanction, applicants receive a sanction letter with details like the disbursed amount, installment date, loan tenure, and the housing loan interest rate. Before the final disbursement, the applicant must provide the down payment receipt to the bank. The bank then evaluates the property value per the terms and conditions mentioned in the sanction letter. The disbursement can be made in full or installments, depending on the applicant’s credit score and property progress.

Read: Empowering YSR Housing Schemes 2023 Application Form & Beneficiary List

Who Can Apply For a Home Renovation Loan?

  • Resident Indians and NRIs can apply for home improvement loans from some lenders.
  • The minimum age to apply for a home renovation loan is 18 years. 
  • Both salaried individuals and self-employed business owners can apply for a home improvement loan.
  • Borrowers can increase their eligibility for a home loan by adding co-borrowers, selecting a longer loan tenure, or providing additional sources of income.
  • A credit score of 750 and above increases the chances of approval for a home improvement loan, and some lenders may offer a lower housing loan interest rate to applicants with higher credit scores.

Conclusion

A home renovation loan provides the perfect opportunity to turn your house into the home of your dreams. Whether you want to make essential repairs, expand your living space, or undertake significant structural changes, this financing option offers endless possibilities for creating your ideal living environment.

Read: Calculating Your Way to Homeownership: Utilizing a House Loan Calculator

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