Home Loans beyond Repayment Capacity

Today, you cannot buy a house without taking a housing loan given the sheer cost of real estate, especially in metros and larger towns. Further, it is considered as good loan as you are building an asset with the loan amount. Since owning a house a cherished dream of many Indians, stretching the budget is considered acceptable. But most of the borrowers let their loan amount float so much that  the biggest asset of their life turns out to be a while elephant. This is a common, cardinal mistake among many borrowers overestimate their repayment capacity while taking of home loans.

Most of the people, who have taken a home loan, are living in a much bigger home than they need. They look to stretch their budget to accommodate, say, if a 3 BHK is the right choice for a recently married couple who has no one else with them, to live with. The justification can be that in future they may require it, however if that’s going to happen in next 15-20 years, a 1 BHK or 2 BHK is a better choice. It’s better to live in a 1 BHK and breathe easy, rather than a 3 BHK and suffocate every day from the burden of the heavy EMI.

Affordability of Loan or EMI?

Let’s take classic example of home loan as a person earning Rs50k per month, plans for a loan, he makes sure that the EMI figure is affordable to him and does not concentrate much on the final value.  The EMI for a home worth Rs25 lacs @10% will be Rs 33,000. This may look unaffordable to him, so he increases the tenure to 20 years instead of 10, and brings down the EMI to Rs24,125/- Magically, this same home starts looking affordable to him! What they concentrate upon, is the initial years, and not the big picture.

He might not be considering that when-ever a bank increases the home loan rates, he can factor in the hike by either paying a higher EMI or increasing the loan tenure. In that case, what if interest increase to 14%, the EMI will go up to Rs31,000/- Ideally, increasing the EMI is the best option. But what if he will be walking on the right rope and has no idea of where he will be working in next 5 years, may he be in same job or same industry. If he is not in a position to service any more, EMI that he is doing currently, then he can allow the tenure to increase but the interest cost will rise. However, he is confident that he is going to prepay at regular interval, increasing the tenure can be considered as an option.

Down Payment Capacity

A good sizable down payment is considered ‘good’ loans and can lower your interest burden. It shows that the lender is capable of paying the rest of the amount and the maintenance of the property. The down payments have a selected amount to be paid by the buyer. Generally the down payment ranges from 15-20 per cent of the overall property value. Like a property worth Rs50 lakh will demand the down payment of 20 per cent which would come up to Rs10 lakh per period. This is a substantial amount. If you plan to buy a house in the next two-three years, you can set aside any bonus or windfall gain towards this purpose.

However, there is no restriction on how much a buyer has to pay as a down payment. The basic necessities is that he has to pay the demanded percentage of down payment and if he wishes to clear all his loan in just one go depending on his financial structure he can as well pay them. Doing this will reduce his interest and will complete his loan in a shorter period.

It is advisable that a buyer should try and repay his loan within a short period as this can reduce the interest rate of his loan.

Getting rid of your home loans faster

Don’t stop reading further if you think you don’t have a lump sum to pay off your loan or enough surpluses to increase your equated monthly instalment (EMI) substantially. We are not suggesting either of the two ways.

Start Investing: You could open a recurring deposit with a bank of post office. Alternatively, you could start SIPs in debt funds to build a sizable corpus at a term of 3-4 years. For anything beyond five years, you could look at SIP in equity-oriented mutual funds. Unlike an RD, you can stop your SIP half way, if you are unable to cough up the money. But you should strictly at SIPs on debt products and liquid-plus categories.

Annual Bonus: Similarly, you can earmark a part of your annual bonus or the entire bonus for part prepayment of the principal. This will lower your interest cost substantially. However, you should use the entire bonus towards the home loan repayment only after meeting the expenses and investment needs for long term financial goals. Home loan is a good debt because it’s used in creating an asset plus you get tax benefit under section 80C and 24 towards its principal and interest respectively.

Internal Credit: You can take loans from your relatives, family friends and the most conveniently from your employer at concessional rate or interest free loans for prepayment, you must check with them.

Next Increment: You can also look at your increment for further years or at least some part of it as “for prepayment purpose”. For most people, an increment in their salaries means an upgrade in their lifestyle. But you should prepare to use it only and only for prepayment purpose and keep a check on your lifestyle for few years.

Conclusion

People should consider buying house only when they can put in their portion of the money required and be able to service the EMI easily. There is nothing wrong in taking loans on EMI, as long as you know what you are doing, and then only if you really need it. Don’t run after everything you can get on EMI, and don’t drown you in so much debt, that it gets tough to come out. Save a good amount for down payment and take debt only when buying something becomes inevitable. An early Start in saving today will make you wealth overtime. While tax saving itself should never become the big reason to go of a loan (like home loan).

Comments