POINT TO KEEP IN MIND WHILE TAKING HOUSING LOAN : It is everybody’s dream to own a house for a shelter and as an investment. In most of the cases, a house is the biggest investment of a middle-class person which constitutes around 75% of their investment. As an investment, a house offers rental income plus capital appreciation. There are certain other benefits as well, which include tax exemption up to Rs 2.00 Lakh. But there are other factors too, that need to be considered before buying a house on finance.
1. Long repayment tenor: A home loan is offered for a tenor of up to 30 years or till the age of 70 years. Millennials tend to borrow for a longer period due to the low amount of EMI. However, longer the period, higher will be total interest charged.
|Loan amount (In Lakh)||RoI||Period||EMI (In Rs)||Interest (In Lakh)||Total (In Lakh)|
You can see from the above table that you end up paying Rs. 11.86 Lakh more if the tenor is increased from 10 years to 30 years. Lending for a higher period works in the bank’s favour as it gives the benefit of compounding to the bank. So, you should explore the possibilities of choosing minimum tenor.
2. Part-payment clause: You must check with the lending institution whether they are giving you the option of part payment as it is vital for your financial health and be thoroughly aware of the terms related to it. All home loans are mostly on reducing basis which means you will be charged interest only on the outstanding amount at any point of time. Any sudden bonus, investment returns or any windfall gains may be utilised to reduce your liability and thereby spending less on interest.
3. Insurance of the property & borrower: Normally bank gets your property insured for fire, terrorism, earthquake, etc but it is highly advisable to demand a copy of that insurance and go through the policy terms & conditions. Banks insure your property as per their policy not as per your requirement. Insurance is a necessary thing to protect against any sudden wear & tear of the house. Secondly, banks are also offering loan amount insurance from their partner insurance companies which means entire home loan liability will be paid by the insurance company if the borrower dies or gets physically disabled. This is needed to protect your family against any eventuality as home loan is a big amount of liability which may be difficult to be repaid by your family or at the worst, your dream home might get sold for recovery of the loan. Hence, I believe that this insurance should be a part of your financial planning.
4. Floating rate of interest: Banks/LIs offer home loan on fixed & floating rates. Floating rate means the rate will change as & when changed by the bank. Fixed-rate means, rate of interest will be fixed for 3 years and no benefits will be admissible to you if rates go down or you will also be unaffected by any upward revision of rate. But the catch is that home loan rates often don’t go up and keeping in mind the government’s focus on the housing sector, it is unlikely that rates will go up. However, if you choose a fixed rate, you are deprived of the benefit of lower interest going forward & also in most cases fixed rate is offered by adding a premium to floating rate ab-initio.
5. Avoiding cross-selling by bank: Banks tend to cross-sell to all customers but home loan borrowers’ group is always on focus as they have already established a long term relationship with the bank. Banks often offer top-up loan, credit cards, cheap personal loans, insurance. You must refrain from accepting such offers as it may result in a debt trap.
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