Summary of this article
Avoid borrowing beyond repayment capacity
Understand all home loan charges
Insurance protects families from loan burden
A home loan is one of the most prominent financial decisions and responsibilities that one can undertake. While lenders assess the eligibility and repayment ability before approving a loan, borrowers often make decisions that can affect their repayment journey in the years ahead. Understanding and avoiding such mistakes can help homebuyers make better financial decisions while ensuring a smoother repayment journey.
“In India, everyone takes pride in having a home, even if it’s financed through a home loan, characterised as a long-term financial commitment. Despite its numerous benefits, including the tax deductions, many rush through the decision-making and make structural errors that smite them for years,” says Nakul Saxena, Business Head, Home Loans, Kotak Mahindra Bank.
Overstretching the Loan Eligibility
One of the most common mistakes that borrowers make is seeking the maximum amount the lender is offering. The higher amount may seem attractive at first, but it does not mean that the borrower can manage the repayments easily. Lenders calculate eligibility based on the current income and financial obligations of the person; however, they may not account for future expenses such as children’s education, healthcare needs, lifestyle upgrades, or even unexpected emergencies. Borrowers should assess their long-term financial goals and maintain a comfortable ratio between their EMIs and income rather than stretching their finances.
“One must also add the overall debt obligations, such as the car loan, personal loans, and credit card payments and see if the sum passes more than 50 per cent of the income. Remember, these are all subject to the credit policy, hence anything above that can compromise your financial stability. In the case of younger borrowers who may find solace in their bright future ahead, a bigger burden, earlier on, can always pressurise your cash flows, limiting your spending powers,” adds Saxena.
Under-Utilising the Higher Eligibility
On the other side of the spectrum are borrowers who make the mistake of exhausting their savings while trying to repay the whole amount as soon as possible. While reducing debt wisely is a prudent approach, depleting savings can leave individuals and families financially vulnerable. Maintaining enough liquidity is important for emergencies, investments, and other life goals.
“Many borrowers prefer to tap into their savings or liquidate investments for a higher initial sum instead of utilising a low-interest rate, value-added offering like a home loan, which is actually considered a ‘one-way bet’ by Buffett. Home loans are, by design, meant to spread a high cost over a period of time, using an equitable monthly deduction format and a transparent interest rate regime. Underfunding the home purchase or using a costlier option like a personal loan to meet the shortfall would create an additional burden on the borrower,” advises Saxena.
Not Seeking Complete Clarity on All Charges
Many borrowers focus only on the interest rates and EMIs while ignoring other costs that are associated with home loans. Extra charges like processing fees, legal charges, technical evaluation fees, documentation costs, and penal interest for delayed payments can impact the overall borrowing costs. Before borrowers finalise and go ahead with the loan offer, they should seek complete transparency and understand the terms. “Every loan taker must insist on a detailed schedule of all fees from lenders and compare the annualised cost of borrowing. Most importantly, many banks charge extra for prepayment, hence these details must be understood well,” says Nakul.
Opting for an Unnecessarily Shorter Tenure
In order to finish the repayment journey quickly with lower interest rates, many borrowers opt for a shorter tenure, without considering how it can impact their monthly cash flow. Higher EMIs can strain finances and limit the ability to save and invest. Borrowers should choose a repayment period that is practical and suits their financial flexibility.
“A home is an asset with a high appreciation prospect in the long run. The recommended strategy is to select a longer tenure to pay manageable EMIs. If a borrower has access to surplus funds, it can be used selectively to reduce the overall interest costs without penalties,” adds Saxena.
Skipping a Dedicated Home Loan Insurance
What most borrowers are unaware of is home loan insurance. Some borrowers also view it as an additional expense. However, it is an important financial safeguard. If an event occurs where the borrower is faced with untimely death, disability, or other covered clauses, the insurance can help settle the outstanding loan amount, which would protect the family members from the financial stress.
“A dedicated home loan insurance is an ideal tool to protect the next of kin of the borrowers in any eventuality. Such loans are designed to align the coverage, in line with the outstanding loan, ensuring the protection throughout the loan duration. But many rely on their term insurance to cover their home loan liability. With a reasonable premium, these home loan insurance covers must be taken to protect the borrowers from depending on costlier general covers,” adds Nakul.
The Indian housing market has grown significantly in recent years, and many families have achieved homeownership, but their borrowing decisions remain mistake-ridden. By avoiding such minuscule mistakes, homeowners can make much smarter financial decisions.
