Acquiring a house is a significant milestone that many of us strive to fulfil in our lifetime. It is a substantial investment both financially and emotionally.
Most of us know that we want to own a home but do not really understand the different variables involved in buying a home. In this article, we explain the six crucial aspects that one should be aware of before planning for their first home through a home loan.
Interest rates
As the loan amount is big, home loans are generally for long tenures ranging from a few years to as long as 30 years. Banks provide these loans at a floating rate of interest. It means that the interest rates on your loan could be increased or decreased in the future depending on the rates determined by the Reserve Bank of India. Changes in rate of interest can have a huge impact (favourable or unfavourable) on the Easy Monthly Instalment (EMI) or the tenure of loan or both.
Before committing to a home loan for a long time you must understand that –
- The interest rate will change (increase or decrease) like a wave over the long term.
- You need to have enough room in your income to pay higher EMIs.
Down payment
Plan your down payment smartly and make sure you do not put all the drops of your savings as down payment. Make sure that before taking a home loan, you have a decent emergency fund which is not part of your down payment.
Also make sure that down payment is not funded by taking personal loans or borrowed from friends or family. Down Payment should be self-funded to avoid unnecessary stress on your finances.
READ MORE: How RBI repo rate hikes impact your home loan EMIs? Here’s all you need to know
Tax benefits
Most people think about buying a home just because it can save you some taxes. However, no one understands that the quantum of tax savings is very limited.
There are two components available for tax savings –
- Principal repayments - Qualifies for deduction under section 80C of the income tax act within an overall limit of 1.5 lakhs.
- Interest repayments – Qualifies for a separate and additional deduction of ₹ 2 Lakhs under section 24 of the income tax act.
Tax Deductions need to be planned carefully.
If you want to claim ₹ 2 Lakh each in multiple accounts, two conditions need to be satisfied:
- the person must be a joint owner in the property AND (not OR)
- the person must be co-borrower in the loan.
PSU banks are much better than private sector banks or NBFCs
Although the process will take longer in PSU banks and will require some efforts, it is recommended to take the home loan from PSU banks as against private sector banks or NBFCs.
PSU banks are much more reasonable in increasing and decreasing the rate of interest. Private sector banks are aggressive in hiking the rate of interest and are too lazy to reduce it and many a times demands some fees to reduce the rate of interest.
Home loan insurance
The bank relationship manager or the loan agent will try hard to sell you a home loan Insurance. It may not be a great idea to take home loan insurance for the following reasons -
- These insurances generally charge a one-time premium which is added to the loan amount and leads to increase in EMI.
- Life cover will keep reducing as you keep paying the EMI.
- In case you sell the property and close the loan, life cover vanishes and the premium paid towards home loan insurance goes wasted.
Take appropriate life cover through term insurance and get the policy assigned to your borrower. It would be appropriate to consult your advisor in such cases.
Home size & budget
You may be eligible for a higher loan amount, but it does not mean you apply for it. Ideally, the monthly EMI should not be more than 50% - 60% of your monthly savings (income reduced by household expenses). If your EMI eats up all your income, it could create troubles for you in the future when there is a rise in interest rates or a personal emergency.
Nishant Batra CWM® is Chief Goal Planner of Holistic Prime Wealth.
Disclaimer: The views expressed in this article are of the author, not MintGenie.
