- by Brijesh Parnami, CEO, Destimoney Advisors
Owning a house and finally moving out of the rented apartment bracket is a dream cherished by millions of Indians. However, buying a house is much more than securing a home loan. Some impetuous young people make reckless decisions while planning a home buy, and end up with the loose end of the stick. Yet others do not factor in the possibility of exigencies and unforeseen events that may pose a hurdle to their goal of repaying the loan.
When you decide on buying a home, make sure you know the long-term implications of your move and your calculations about your long-term liability are right.
Make your calculations: What kind of home you can buy, which area you can afford, whether you can afford one right now or not depends on a number of factors. Any salaried person has to first take account of his total income, basic monthly expenses, and the amount of installments one can afford. How much a person can save depends on how much you are earning, and your overall financial condition? A person earning 50,000, and bearing the responsibility of a few family members may not be able to save much for repaying a home loan; on the other hand a person earning 30,000, and living with his/her parents (without himself paying lodging rent) with no major expenditure other than travel and luxury, can still afford to set aside a part of his/her regular income to repayment of home loan. Similarly, a couple with two incomes who together decide to buy a home will also be better placed to repay the home loan. Also important is to ascertain the condition in your industry and job. If you feel your industry is in a volatile phase, with increasing pink slips, and a possibility that you might lose your job in the near future, do not acquire a major loan repayment liability in such a situation. If you plan to have kids, their education, insurance premium, and all other liabilities you will acquire have to be taken into account.
This is very basic calculation which an individual must be able to do before going for a house loan. A rough calculation also makes it easier to plan your expenses well, and think about the long term.
Consolidation of Loans: Often when many people decide to buy a home, they are already having another liability. For example an auto loan, which would now run parallel to the home loan. To be able to take up an EMI of around Rs 60,000 a month, a person should have a net income of at least 1 lakh. However, if a car loan is also being repaid at the same time, finances could be disturbed. Together, the home loan and the auto loan would end up eating up to 70 per cent of the income. In such circumstances, consolidation of loans is a good option. Nobody likes to pay two EMIs simultaneously, a loan consolidation reduces the amount payable per month resulting in a single monthly payment instead of multiple payments.
By consolidating auto loan and home loan, we not only reduces the installments per month but also reduces the rate of interest as compared to what you would be paying on multiple repayments. This will technically save you some money.
Repay a lump some amount every few years: The longer the loan repayment lasts, the higher the rate of interest you have to pay. Always plan to save some money every few years or scout for additional income options when you apply for a home loan. Let’s assume for example that you are planning a loan repayment of 20 years; saving and repaying a decent lump some every five years, would reduce the rate of interest for you and help you settle the loan earlier than the 20 year planned tenure. If needed, cut down on some frivolous expenses for a few years that may help you save extra money.
Average home loan tenure of Indians is approximately 7 years. This shows Indians usually do not go for long term tenures because longer the tenure higher the rate of interest you pay.
Have contingency funds:
Unforeseen events and exigencies can happen to anybody. One needs to be very careful and tread with a planning or Plan B. Some people buy a house, and do not immediately realize the liabilities it will bring. They end up forfeiting the buy, and this harms their credit score.
You need to be very careful about not defaulting on any payments; work upon your transactions diligently, credit score plays an important role in terms of helping you get a loan.
Sometimes an unfortunate event may cause a person to lose his/her job. Therefore, it is always advisable to have 3-4 months of EMI in hand so that you do not default and are able to maintain your credit rating, even as you search for another job. In such circumstances, emergency funds come in handy. These emergency funds can come in the form of life insurance deposits, FDs, or mutual funds that you have invested in.
Any specific investment options that can help build