Summary of this article
Keep total debt obligations within manageable limits.
Consider liquidity beyond the down payment.
Choose tenure based on repayment capacity.
Buying a home is often seen as one of the biggest financial milestones in a person’s life. For most buyers, purchasing a home also means committing to a loan that could change their financial planning for years. While the focus is usually on finding the right property and securing an attractive interest rate, the larger question remains whether the loan fits comfortably within the borrower’s financial situation.
“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.
Don’t Stretch Your Loan Eligibility Too Far
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 influence and dictate how comfortable a borrower is. 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.
“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 per cent to 40 per cent of the net monthly income. 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,” advises Saxena.
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 registration costs, stamp duty, furnishing, maintenance and other miscellaneous transactions.
“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, 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,” highlights Saxena.
Look 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 an adequate liquidity alongside the property purchases can therefore provide an important financial cushion to individuals.
A Shorter Tenure Isn’t Always the Better Choice
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 most people make. Buyers who have floating interest rates must make sure they have enough financial cushion to sustain the changes. Homeownership can offer stability and long-term asset ownership, but it can also reduce financial flexibility.
“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 selectively to reduce the overall interest costs without penalties,” adds Saxena.
Protecting Your Family From the Loan Burden
For existing home loan borrowers, home loan insurance becomes non-negotiable. It is an ideal tool to protect one’s family in times of need. Such covers provide financial protection by paying off the mortgage of the house in case the borrower passes away or suffers a permanent physical ailment or disability. This way, the family of the borrower stays protected and gets to keep the home in their name.
“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,” states Nakul Saxena.
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.
