The Hindu Business Line : Before you borrow to buy that dream house…

Manish and Neha Behl are a working couple in their early thirties. Manish is a software engineer with an MNC, drawing Rs 35,000 per month while media professional Neha takes home Rs 25,000 after tax. After spending years in a rented apartment, Manish and Neha have zeroed in on a three-bedroom house costing Rs 50 lakh. Though they are happy to see their long-cherished dream of owning a house within reach what is worrying them is the size of the outlay. Manish and Neha are not alone. They are part of a young breed of professionals who want to own a house but are not sure of the nitty-gritty of the deal.

Buying a house is an important financial decision and should be made with care. Here are a few points that first-time borrowers should consider:

How much home loan should I go for?

According to financial planners, a host of factors play a role in deciding the amount of loan: The repaying capacity, existing liabilities, current cash flows, the liquidity situation and the current assets of an individual. Besides, it is wise for a borrower to also consider the cost of the loan and the impact on his cash flows if interest rates rise in future. The opportunity cost of the loan is another factor a borrower should not overlook.

Explains Amar Pandit, a Mumbai-based Certified Financial Planner, “The loan amount should depend on the market situation. A few years ago, it would have been prudent to borrow as much as one could at low fixed-interest rates of 7.5 per cent. The tax benefit on the interest deduction would further subsidise the loan and bring down the overall cost based on one’s income slab.

“However, today, at a 12.5 per cent interest rate, one needs to evaluate whether one should borrow to the maximum or make a higher down payment. Even at 12.5 per cent, the overall cost of the loan for someone in the 30 per cent tax bracket is around 9 per cent and if a person is able to earn much more than 9 per cent through investments, then he can look at borrowing more.”

What proportion of the salary can be set apart for the EMI (equated monthly instalment)?

The EMI on home loans should generally not exceed 30 per cent of one’s take-home salary. This is based on the simple premise that an individual should have sufficient funds for his monthly expenses as well as saving for future goals.

“We live in an era of increased consumerism and instant gratification so there are situations where one has other debts, such as car loan, education debts, personal loan and so on.

It is prudent that the overall EMI does not cross around 40-45 per cent of the income so one can live comfortably and at the same time save for future goals. One must save around 25 per cent of what one earns towards various goals,” adds Pandit.

How should I plan the loan with my working spouse?

If both work, a couple can club incomes to go for higher loan amounts. Banks or financial institutions allow clubbing of the spouse’s income to work out the loan eligibility amount. Thus, the spouse becomes the co-borrower. The couple then should plan their income on the basis of their respective income and tax slabs.

Besides, they should work out the total interest costs. If the interest payout is more than Rs 1.5 lakh, then they need to ensure that the entire interest is being utilised as a deduction.

Am I eligible to borrow?

To get a home loan, the prospective borrower needs to meet the stringent eligibility criteria set by the lenders.

The two main criteria are age and income. In order to seek a loan from any financial institution, an individual needs to be at least 21 years old. Besides age, what counts is the income of the borrower. The loan is given to a person who is either salaried or a businessman.

What are the costs I need to consider, besides the price of the house?

One must be ready to shell out money for various other costs associated with the purchase of a house. Initiation fee, valuation fee, transfer costs, registration costs and insurance need to be taken into account.

What to check out

Once an individual decides the amount of loan and the monthly repayment, he/she should check the following points with the lender:

Prepayment option: With the increase in the age of the borrower, his income is bound to rise. If the EMI remains the same, he can pay back the loan before the maturity period and be freed of debt.

A borrower, therefore, should ask his lender about the pre-payment option at the time of obtaining the loan.

He should make sure the lender allows this option without imposing a penalty on it.

Processing and other fees: Lenders charge various fees for processing, legal opinion and valuation. It is prudent for borrowers to check out the fee details before approaching the lender.

Flexibility to change: In a scenario of volatile interest rates, it makes sense for the borrower to switch from floating to fixed-rate loans and vice-versa.

While applying for a loan, a borrower must check whether the lender provides the option of swapping between the two during the loan tenure. The flexibility can prove handy to the borrower.

Documents of proof: Before sanctioning the loan amount, lenders would want to satisfy themselves on two counts — the income and the stage of development of the property — and ask for proof for both.

A borrower should be aware of the various documents required by the lender as proof (such as IT returns, salary slip) and keep them ready).

Home loan agreement copy: This is the most important document, containing various terms and conditions laid down by the bank.

Before signing on the dotted line, borrowers must ask for a copy of the home loan agreement and go through all its clauses and conditions thoroughly before entering into the agreement.

(The author is a Faridabad-based personal finance writer)

More Stories on : Insight | Housing Finance | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page