In cricket, the first thing you do is guard your wicket. In personal finance, you chalk out ways to guard self and your family from any eventuality by creating a safety net, taking health insurance and life cover. Once you have done this, you would like to fulfill some of your dreams e.g., owning your own home (in case you have not inherited one), your car, your dream gadgets etc. Gone are the days when fathers used to save to buy own home after retirement. Nowadays most of these are financed by loan payable in equated monthly installments (EMIs).
HOME LOAN
Once when I had been to Bengaluru, I visited my niece’s house. While I was finishing my cup of filter coffee, her husband shared the idea of buying a flat in Bengaluru. He added that every year the house rent was going up and in last 4 years they have changed their house twice. “That’s great,” I supported his idea and added, selecting the location based on facilities and conveniences are important but more than that what is to be looked at is how you finance.
“Mama! Why don’t you give some free advice,” Neha, my niece smiled and joined the conversation. “Nothing is free my dear. You can offer me another cup of coffee without milk and sugar”, I set my terms and started - Choice of the flat is yours but let me focus on financing part.
MARGIN
“You must be ready to put some money on the table, i.e. MARGIN. If you have seen a property worth Rs. 100 lakh (and lender has agreed to finance) then in most cases you have to pay a margin of 20% i.e., Rs 20 lakh upfront (this may vary). However, you should first work out on two “How Much”- “How Much you should borrow” and “How much EMI you can pay to repay the loan”
(EMI or equated monthly installments are monthly payments one has to make to the lender, and that includes both interest and principal. The amount will depend on how much loan you take, tenor of the loan and interest rate.)
How Much Home Loan & How Much EMI
“Though there is nothing carved in stone, generally one should not borrow more than 5 times of their take-home annual income. But that’s not everything. You should also watch that your EMI obligation does not go beyond 40-50% of you monthly take home (though this is not very conservative)”.
Fixed rate Interest
I continued. “Suppose your annual take home salary is Rs 24 lakh , you may borrow up to Rs 1.20 crore. If your monthly take home is Rs 2 lakh, your total EMI obligation can be 50% or Rs 1 lakh. But you already have two cars. Right?” They nodded. “Say your existing EMI obligation on those is Rs 20000, which means for home loan you can pay only Rs 80,000 per month and that will be borrowing to the limit.”
So let us do some calculation:
It will be better if Neha & her husband Saurabh keep their EMI obligation within 30/35%. This is because in case Saurabh goes for higher studies for one year, as he has plans, it will put too much pressure to maintain the EMI obligations.
Joint Ownership
Joint Ownership indicates that the property is jointly owned by two individuals. In most cases, these individuals are spouses. In the case of joint ownership, the financial responsibility of loan repayment is equal for both applicants.
Floating Interest rate: A floating interest rate is one type of interest rate offered by lenders where the rate of interest being charged is sensitive to market conditions. If you choose a floating interest rate for your home loan repayment, then your interest rate can both increase and decrease at specific intervals, along with the market conditions. These loans are linked to the lender’s benchmark rate. If there is a change in the benchmark rate, the interest rate on the loan also changes proportionately.
The interest rate on such loans is reset at specified intervals. It could be calendar periods like every quarter or half of a financial year or it could be unique. It is usually the tenure of the loan that gets re-adjusted to account for the changed interest rate. If the rate increases, your remaining loan tenure would be extended and vice-versa. This is done to avoid frequent revisions to your EMI which could impact your cash flow.
You should opt for a floating rate home loan in the following circumstances:
If you are expecting interest rates in general to fall over time, opting for a floating rate loan in such a scenario will result in the interest rate applicable to your loan falling too, thereby reducing the cost of your loan.
You need not worry too much about making a wrong decision regarding your housing loan. Remember, you also have the option to switch between fixed rates and floating rate housing loan at any point in time; lenders would usually levy a nominal fee for this facility.
Pre EMI
Sometimes lenders disburse loans in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed. This interest is called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement upto the date of commencement of EMI.
Foreclosure
If you can pay off your loan amount in full before the end of your tenor, then it is called foreclosure. In foreclosure, you will pay the remaining loan amount in a single go and not in EMIs. Generally if you are paying from your own savings, no penal charges will be applicable. However if you want to transfer the loan to anew lender, there may be some charges.
Offer Letter and The Fine Prints
After you select the house and lender approves the loan, the lender will issue an offer letter/sanction letter. You need to go through that diligently as there will be small points like processing charges, loan amount, disbursing terms, interest rate, fixed or floating, if floating the benchmark and resetting period, in case of delayed payment the penalty, terms for foreclosure etc. Once you sign the legal document, the terms and conditions will be binding on you.
The Final Reminder: Once you occupy you may host a house warming party but don’t forget that the house becomes yours only when you pay the loan.
By Binodgopal Mukherjee
(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)