Don't go overboard on home loans
For many people, home loans are an attractive borrowing tool. After all, the interest and the principal repayment is tax deductible, subject to the limitations. The rates are usually lower than those on other types of loans and they're comparatively easy to obtain based on the strength of your financial documents and other factors. But there can be a downside, and you should know what it is.
With a home loan, you can borrow up to 80-90% of the agreement value of your home property. For example, if your home property is valued at Rs. 70 lakhs , you can borrow up to Rs. 56 lakhs as 80% loan. Many banks/financial institutions also take into account the stamp duty charges, registration, etc.
Home loans should not be used lightly. Keep in mind that you're putting your home up as a security on the loan. If you fall behind on the payments, you could lose your home through foreclosure, where the lender takes ownership of the property and sells it in an attempt to recover the money they lent you.
Lenders may be more liberal because they view home loans as relatively safe. You can’t disappear with your house or hide it if you default on your loan, so the lender has a good chance of collecting the security. Also, you are likely to make your payments a priority if your home is on the line of credit. The asset management, standards of loan assessment and loan disbursement of our banks and financial institutions are of very high standards. They keep a good safety margin backed by the security.
Another common pitfall of home loans is that scammers have found plenty of ways to cheat homeowners out of their most valuable asset. Be sure that you know who you’re doing business with. If something smells fishy (like a high-pressure sales pitch or an inability to put things in writing), then take a step back and make sure the deal is legitimate.
Finding the best home loan can save you thousands of Rupees – at least. In order to get the best loan, I recommend that you:
-Shop around. Try a variety of sources (banks, financial institutions, etc.)
-Manage your credit score and make sure your credit reports are accurate.
-Ask your network of friends and family who they recommend.
-Compare your offers to those found on websites and advertisements.
-Read all the fine prints of the terms and conditions of the offer.
-Check the clauses and charges like processing fee, pre-payment, rate of interest (fixed or floating), etc. OR
-Hire a good financial planner.
To make the deal work out in your best interest, make sure that it is the right deal in the first place. Plan out your budget ahead of time. Make sure that taking the loan will not overburden you.
Review and consider insurance to cover the payments if something happens. One is the insurance coverage for home itself, to cover it from the risk of fire and allied perils, earthquake, etc. and the other is the life insurance cover and disability insurance for the borrower, so that the burden is not passed on to the family members. For life insurance, you have to go only for the least premium insurance like mortgage redemption or term insurance. If you’re going to include it in your program, try to pay the regular premiums and not upfront single premium.
|
One thing at the end is that please don’t go overboard. Go for the amount of loan that you can afford to repay. Going for a high value apartment or bungalow that might be more than what is actually required may put you in a sort of tight spot. EMIs would be higher and it would be coupled with high maintenance charges of the property which many of us tend to ignore. Not necessarily all the jobs are secure all the time. Many people go for home loans immediately as soon as they get an appointment letter with a good salary package without paying any heed to the job security. During the boom period property market also shoots up and prices goes up at rocket speed. The borrower also does not care, because to him it hardly matters if the EMI increases by Rs. 5000 or Rs. 10000. Everything looks fine and smooth going, until one fine morning when the news starts flashing of the stock market going burst because of global meltdown. Companies all over are slashing salaries, cutting down the work-force, pink slips are distributed on a large scale. Our home loan borrower is in a fix. How would he pay the EMIs? He thinks that worst to worst he would sell the property and square of the loan. But alas! the property market too plummeted simultaneously and there are hardly any buyers for a good price so that he can repay the loan. The borrower starts defaulting on EMIs and it cumulates to such an extent that the bank is forced to attach the property. They might also go the extent of invoking your and the guarantors’ personal guarantee. Your home is not your home till it is free from all the debts. Also home is not the only goal of your life. Cost of living is increasing day by day. You may need to save and plan simultaneously for the other important goals of your life as well like Retirement, Children regular and higher education, their marriage, other financial liabilities repayment, insurance requirement, Contingency reserve incase of emergency, old age medical expenses, maybe holidaying (domestic or abroad) with your spouse, estate planning, etc. | |
|
The author of this article is Atul Mishra, a Certified Financial Planner & Chartered Wealth Manager, and can be reached at atulnmishra@gmail.com |
|
|
|
