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    Don’t take a home loan because interest rates are low; ask yourself these 8 questions first

    Synopsis

    Don’t take a home loan just because interest rates are low, especially in the Covid-induced uncertainty. Before you borrow and take on debt that can later go on to take the form of a debt trap, ask yourself these eight questions.

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    Before taking a big-ticket loan, ensure that you secure all your financial risks.
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    Now that home loans are available at delectably low rates of 6.7% upwards, the house you wanted to buy may just be well within reach. You may not be wrong in wanting to buy it, but in a hurry to avail of these rates, don’t take on a liability that you are not ready for. You could not only make mistakes that could lead to a debt trap and financial insecurity, but also create obstacles for any future loans you might want to take and jeopardise your other financial goals, such as children’s education or retirement. Here are the risks you could unknowingly take and ways you can steer clear of them.

    1. What should you choose first: home or home loan?
    It is probable that in your eagerness to buy a house, you finalise the deal with a broker only to realise that the bank has refused to sanction your loan. What if the seller wants the payment within a certain time frame and you don’t have the money? What if you are unable to furnish the large EMI or even the mandatory down payment that the bank demands? If you need to finance the purchase, it’s important to first find out all the details about the loan.

    So, before you start looking for a house, find the right lender and conduct due diligence, checking on your credit score, the loan size you can avail of, processing fee and other charges the bank levies, and prepayment clause, if any. This will help you calculate exactly how much money you need at hand and the loan amount that you can avail of.

    2. Are you in a stable job?
    The interest rates may be low, but is your job safe? Given the Covid-induced uncertainty, you need to be sure that your sector or industry and, company in particular, are financially stable and that your job and salary are secure. You may not be able to service a large EMI if you are expecting a pay cut or downsizing in the company. Defaulting on an EMI may also impact your credit score. So ensure that you will be able to pay the EMI for the long term before taking a large-ticket home loan.

    3. Did you default on loan EMIs during the lockdown?
    Did you suffer a salary cut or lose your job in the past six months due to the pandemic? Did this result in an EMI default on another loan, say, for your car? Or, perhaps, you failed to pay the minimum due amount on your credit card. After losing your job, were you forced to take a job with a much lower salary? All these developments will impact your credit score and the amount of home loan you can avail of.

    So if you had planned a bigger loan in keeping with your salary, you may have to rejig your calculations and settle for a smaller house as per your loan eligibility and the amount of down payment you can furnish. Similarly, after EMI defaults, check your fresh credit score and loan eligibility before you start looking for a house and calculate the amount of EMI you will be able to service depending on your salary.

    4. Are you ready for financial emergencies?
    Before taking a big-ticket loan, ensure that you secure all your financial risks. Given the current uncertainties, you could run into various crises. For instance, you could run short of the funds that you are saving for down payment in case of market-linked losses. If you lose your job or face a salary cut, you may not be able to service the EMIs and run the risk of default. Besides, sudden death or disability may leave you incapable of repaying the loan.

    Make provision for a sufficient buffer amount as an emergency corpus to tide over a temporary crisis such as a job loss. This should be separate from your regular contingency corpus. Besides, instead of taking a home loan-linked insurance, you should have a term loan that covers the entire home loan amount in case of a sudden demise or disability.

    5. Is your working spouse a co-borrower and co-owner?
    If your wife is earning, it may be a good idea to make her the primary loan applicant since women are offered lower interest rates than men. Besides, having your spouse as a co-owner and co-applicant increases the tax benefit on account of principal and interest repayment. Under Section 24B, both spouses can claim tax benefit of up to Rs 2 lakh each on interest payment in case of a self-occupied house, and under Section 80C, of up to Rs 1.5 lakh each on principal repayment.

    6. Do you have funds for down payment?
    The RBI has directed all banks and NBFCs to approve of a maximum 80% of the property value as home loan, with the remaining 20% to be furnished by the applicant. So if you are buying a house worth Rs 80 lakh, you will have to furnish Rs 16 lakh as down payment to the bank. Some banks ask for a higher percentage of down payment as well. Add miscellaneous expenses such as registration charges, processing fee, stamp duty, etc, and the upfront amount you need to pay will be higher.

    If you had been saving for the down payment and suffered massive losses in market volatility during the pandemic, it is advisable to put the purchase on hold till you have amassed the required amount instead of taking a bigger loan. The bigger the loan, the higher the interest portion you repay, even if the rates are low.

    7. Are you buying a house for investment?
    If you are buying the house for self-occupation and have sufficient funds for down payment and EMIs, this may be the ideal time to make a purchase because of the low interest rates starting from 6.7%. However, low rates should not be the trigger for purchasing a house as an investment.

    The low and stagnant property prices mean that you may not be able to realise the appreciation you are expecting from your investment. Secondly, you may not be able to find buyers for your property at the right time in the depressed realty market and may have to sell it at a loss. This means that if you had linked the investment to a financial goal, you may not be able to achieve it or run short of the required funds. So avoid buying a house as an investment in the current situation, even if the rates are attractive.

    8. Are you taking the right loan?
    Choosing the right type of interest rate will be key in deciding the extent of your long-term repayment. There are various types of rates, including flat rate and floating rate, as well as a combination of the two offered by some banks. You can switch between flat and floating rates for a nominal fee.

    The flat rate is fixed for the loan term and is usually 1-1.25% higher than the floating rate. It should be availed of only if you are certain that the interest rates will rise in the future and want to lock in at the low rate for a short term. The floating rate changes according to market interest rate and should be taken for long-term loans as it is difficult to predict the market volatility over a longer period. So choose the rate suitable for your needs before finalising the loan.

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    5 Comments on this Story

    Pradumna Kamani6 days ago
    To add to point 6: You could also avail up to 50% home down payment assistance from HomeCapital and repay it in 12 no-cost EMIs.
    Senthil Arumugam17 days ago
    As usual question which is always taken into consideration even by an illerate person buying a home on a loan. Please soft more informative things.
    Now everything is down due to Corona an if a person is buying a home at this time , the person has enough stability and is planning to use the low interest.
    sunleo KINGSTON LEO MARIA MICHEAL17 days ago
    So your suggestion is to buy mutual funds?
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