It’s the ultimate dream of every Indian to own a house one day. The first day at your school, college, office, your first home, first car – these have and will always be an indelible bookmark in the chapters of your life. But, since life doesn’t give all these an easy start, it counts to have a checklist ready before you leap to realise your life’s ultimate dream.
Once the desire to buy your first home urges you to apply for the home loan, try revisiting these 5 critical pointers:
Buy vs. Rent Analysis
To determine this aspect, it is highly important to look at two key parameters i.e. property value vis-a-vis rental value. Now this is subjected to the city that you wish to dwell. One should always cautiously choose the city of settlement, the duration, the stability of the income. Its best to buy a house if you plan to stay in a city for more than 10 years because considering the EMIs payment and the initial down payment, it is only after the 10th year that one actually starts gaining over renting. Houses and apartments tend to be expensive and if you don’t have the means to pay for it outright, you’re probably going to have to opt for a Home Loan. But, usually you would get a loan of around 80-90% of the property cost, depending on the bank principles. The remaining 10-20% is the buyer’s responsibility. Having spare cash at hand is important. Also note that your debt-to-income ratio should be below 50%.
Interest Rate Type to Follow
There are two types to choose from – Fixed and Floating. For the former, the interest rate is fixed over the entire tenure of the loan and doesn’t change with the market fluctuations. While this do bring in a sense of certainty in the repayment schedule, they are usually 1-2.5 percentage points higher than the floating rate home loan and experts recommend that it’s idle to opt for if economic scenario is conducive to rising interest rates in the near future.
Floating loans are tied to a base rate and have a floating element. Interest rates are cyclical over the long run and hence will fall for some time over the tenure of the loan. Hence. Floating interest rate helps with savings in terms of amount of repayment depending on which phase of the interest rate cycle a loan in contracted. However, uneven monthly instalments make it difficult for budgeting and customers benefit from them as long as the interest rate does not go beyond 11.5%. Banks do offer combination loan that is part fixed and part floating and you can switch anytime between fixed and floating at a nominal fee.
Increasing your EMI affordability
One simple way to repay your loans faster is to bump up the EMI with every rise in your income. Assuming that a borrower gets an 8% raise, he can easily increase his EMIs by 5%. The EMI for a 20-year home loan of Rs 20 lakh at 11% rate of interest comes to Rs 20,644. The borrower should increase it by around Rs 1,000 every year. Don’t underestimate the impact of this modest increase. Even a 5% increase in EMI ends the 20-year loan in just 12 years.
A lifestyle change is needed until all debts are repaid. This means cutting down on luxuries and unwanted spending. Go slow on movie shows, dining out and weekend getaways. Keep the credit card locked up when you go to the mall and try to make purchases with cash. This will automatically curb your propensity to spend.
Choosing the Tenure of Repayment
Shorter the tenure, higher the EMI and the loan gets repaid faster. You pay less in terms of absolute interest cost. In case of longer tenure, it’s the opposite. However, shorter duration doesn’t indicate the loan becomes cheaper since for both cases interest cost remains the same. One needs to keep in mind that a longer tenure increases your loan eligibility. Home loan repayment comes with certain tax benefits under Section 80C and Section 24 of the Income Tax Act. Many borrowers choose to continue (or not prepay) their home loan to enjoy tax benefits. Always opt for an EMI that you are comfortable with and that your finances permit. The tenure will be calculated automatically. Don’t make your other goals suffer due to your home loan commitment. When in doubt about your repayment ability, go for a longer tenure.
Selecting the Home Loan Insurance
Term Plan is a simple product which might provide you cost-effective insurance against all your liabilities including home loan. Being insured with adequate amount (through term Insurance) for the appropriate tenure doesn’t only help you manage your financial risk but may also give you better bargaining power against banks hard pushing their bundled loan products.
Buying a property is adding a lifetime asset to you. Planning the financial aspects and then going forward makes the entire exercise comfortable. It’s always recommended to opt for your first home loan in the early years so that you have the time to plan your life and career. Never burden yourself with multiple loans and its best to once visit a financial advisor whenever you are in a fix.