Summary of this article
Keep EMIs within 30–40% of net monthly income
Consider existing debts and future financial commitments
Balance loan tenure, liquidity and total interest costs
Buying a home is often seen as one of the biggest financial milestones in a person’s life, and in India, it is seen as a sign of security and stability. However, most people need to fund their purchase with the help of loans. While the focus is usually on finding the right property and securing an attractive rate of interest, the larger question remains whether the loan fits comfortably within the borrower’s financial situation.
Here are some things that first-time homebuyers should note when they are buying a property.
Don’t Seek Higher Loans
One of the first things prospective homeowners should assess is their financial standing. A home loan is not isolated from its pre-existing finances; it is an addition. Household expenses, existing investments, future goals, and unexpected costs shape how comfortable a borrower feels. A property loan that looks affordable on paper can become difficult to manage when interest rates are added to the pre-existing finances. Most buyers tend to over-borrow, believing that right now they can have a piece of premium housing. However, the extra amount they borrow might be the reason their tenure or interest increases.
Says Nakul Saxena, business head, home loans, Kotak Mahindra Bank: “It is tempting to stretch the budget to go for a premium property or a bigger space, but the move comes with its own flipside; overstretching the loan eligibility can land you in a fragile financial situation. While the banks assess the maximum loan potential based on income, credit score, and repayment capacity, borrowers must limit the equated monthly instalment (EMI) outgo to 30-40 per cent of the net monthly income. One must also add the overall debt obligations, such as a car loan, personal loans, and credit card payments and see if the sum exceeds 50 per cent of one’s income. Remember, these are all subject to the credit policy; hence, anything above that can compromise your financial stability.”
Under-Utilising The Higher Eligibility
The initial contribution one makes towards the property also deserves well-planned consideration. Buyers need to account not only for the amount that they intend to borrow, but also for the expenses that are related to purchasing a property, such as the registration costs, stamp duty, furnishing, maintenance, and other miscellaneous transactions.
Says Saxena: “Many first-time homebuyers end up under-utilising their eligibility, only to keep the liability limited, or out of sheer caution. 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. 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.”
Looking Beyond The Interest Rates
Buyers should also factor in the stability of their future income. A borrower may be able to manage repayment comfortably when they seek a loan. Circumstances change over a long repayment period. Career breaks, changes in employment, family responsibilities, or sudden and major expenses. Maintaining adequate liquidity alongside property purchases can, therefore, provide an important financial cushion to individuals.
Is Shorter Tenure A Better Option
Many first-time or young borrowers believe that having a short-term tenure can close the loan faster and that high interest rates won’t be levied on them. However, this is a mistake that most people make. Buyers who have a floating rate of interest must ensure they have enough financial cushions to sustain the changes. Homeownership can offer stability and long-term asset ownership, but it can also reduce financial flexibility.
Adds Saxena: “Since 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 to selectively reduce the overall interest costs without penalties.”
A home loan should be viewed as a part of the larger financial picture for families and the borrowers rather than just a simple mechanism for purchasing property. The right borrowing decision is not necessarily the one that allows a buyer to purchase the most expensive house possible, but the one that wouldn’t cause financial stress in the future.
