In India, taking a home loan is one of the preferable ways you can afford a home for your family, in your 30s or early 40s. Essentially, you receive a significant amount of money as loan amount and commit to paying it all back to the lender in the form of EMIs or Equated Monthly Instalments.
These instalments can reach up to 60 to 65 percent of your monthly income, for a repayment period that can be as long as 30 years. In other words, you agree to take a substantial and long-term obligation. Therefore, it is crucial that you make the right decision that doesn’t end up hurting you in future. To help, here are a few pointers that you must consider before availing a home loan.
1. Determine Your Eligibility for the Home Loan
Before you start looking for a home loan, you must determine your total eligibility. You can use a Home Loan EMI calculator to help you in this assessment. Doing so will help you assess your repaying capacity, which in turn, is the culmination of factors such as your monthly surplus income minus the expenses, assets, spouse’s income, liabilities and stability of income.
Most banks like to make sure that you’d be able to repay the loan on time. Therefore, the higher the monthly surplus income, the higher will be the loan amount that you can avail. In most cases, the bank assumes that approximately 50 percent of your monthly surplus income is available for the loan repayment.
Also, the tenure, interest rate and your age will also help determine the loan amount. Often, banks put an upper limit on the age of home loan applicants, which may affect their eligibility. Therefore, you need to strike the right balance between your loan requirements and your income constraints.
To do that, you need to ask yourself, what maximum EMI would you be able to pay every month comfortably? Ideally, you must not look to agree with paying an amount exceeding 60 to 65 percent of your net post-tax pay. Also, you need to determine your loan eligibility for multiple loan tenures, based on your age and this EMI.
Ideally, you should opt for the shortest loan repayment tenure that aligns with your requirements. That said, you should also note that the home loan amount cannot exceed 75 to 80 percent of the market value of your property. Thus, you must separately arrange for the balance amount or margin money.
2. Understand the Home Loan Prepayment and Foreclosure Charges
While it is common for home loans to be sanctioned for a period of up to 30 years, rarely do individuals run the loan for the entirety of the period. Most loan buyers strive to pay off the home loan at the earliest. It is seen that the average period taken by individuals to fully pay off their loan is approximately 8 years.
This becomes possible when an individual makes a partial or even a full prepayment of the loan, whenever they have surplus income in the form of annual incentives or proceeds from an investment policy. Thus, it becomes crucial that you select a bank, which facilitates loan prepayment without any additional charges or hassles.
In accordance with the recent RBI directives, reputable banks such as Axis Bank do not levy any prepayment charges or penalty on floating rate home loans. On the other hand, banks may charge 1 to 3 percent of the loan amount as prepayment penalty on fixed rate home loans. Therefore, you must look out for this feature before zeroing on a bank and a home loan amount.
3. Check the Approval Status of Your Residential Property
Another vital piece of information that can affect your home loan eligibility and the loan amount is the approval status for the specific residential property, especially if the property is part of a high-rise residential tower.
Most builders sell their projects under the following payment plan schemes:
- Time Linked Plans (TLP)
- Construction Linked Plans (CLP)
- Subvention Schemes (80:20, 10:10:80, 10:80:10 and others)
In most cases, thus, banks consider the projects under CLP for funding, while the approval for TLP and subvention schemes take a more complex approach.
When we talk about the total cost of the flat, it may include multiple heads such as the basis price, PLC (Preferential Location Charges), EDC (External Development Charges), IDC (Internal Development Charges), parking, club membership fees, electrification charges, security deposit, stamp duty, registration charges, maintenance charges and service tax.
Typically, banks would fund up to 75 to 80 percent of the eligible cost and which doesn’t include any or most of the heads listed above.
Get Your Dream Home with Easy Home Loan Options
Buying the home of your dreams has become much easier nowadays, thanks to the easy access to home loans. These financial schemes help you accumulate a significant amount within a short period, thus freeing you from the stress of having to work and save up an appropriate corpus.
Home loan plans from reputable banks not only offer an extended loan repayment tenure with easy EMI options and floating/fixed interest rates, but also allow you to pre-pay your loan before time, at no extra cost. Therefore, you can maximise your loan amount eligibility while minimising the EMI payable.
Just make sure that you don’t commit to an impractical, long loan tenure because then you will have to incur a significant financial set back in the form of additional interest on loan repayment. Instead, go for an optimal loan period and easily payable EMIs.