Buying a home in India has been considered an essential life milestone and one of the most significant financial commitments ever. However, this dream can turn into a burden of unmanageable debt in case of a lack of proper planning. The biggest planning that involves is regarding a home loan, as it is a smart way to achieve home ownership. However, it can become a headache if not managed wisely.
Here are a few steps to take before applying for a home loan to avoid falling into a debt trap.
Distinguish Between Eligibility and Affordability
Financial institutions usually approve home loans based on credit score and income stability. However, Atul Monga, Co-Founder and CEO, BASIC Home Loans, feels this does not mean borrowers must opt for the maximum eligible amount.
"Loan repayment capacity goes beyond income and also includes lifestyle costs, emergency corpus and long-term financial goals. Ideally, EMIs should be limited to 35-40% of one’s net monthly income to make sure there are sufficient funds for other financial needs," Monga said.
Take Into Account Invisible Costs
Expenses like stamp duty, registration fees, maintenance charges and costs for interiors or parking are often overlooked, and this can add up to 10-15 per cent of the property’s total cost. If ignored, these expenses may force borrowers to rely on high-interest personal loans or credit cards, eventually leading to increased stress.
Choose The Right Tenure and Interest Type
Choosing the right loan tenure and interest payout type is crucial. A longer tenure can ease monthly EMI burdens but leads to higher interest payout. Conversely, a shorter tenure reduces total interest but can strain monthly finances and budgeting. Hence, it is important to strike a balance that provides flexibility, rather than completely focusing on aggressive repayment. It is equally important to choose between fixed and floating interest rates. In a rate sensitive economy like India’s, floating rates can offer better long-term value.
Have A Contingency Reserve Ready
Before committing to a home loan, it is important for borrowers to set aside an emergency fund that covers at least 6 months of expenses, including monthly bills, house expenses and EMIs. Life’s uncertainties such as medical emergencies or sudden job loss, should not jeopardize one’s ability to maintain homeownership. A well-planned financial strategy can help mitigate unforeseen challenges.
A Few Steps To Consider After Taking Home Loan To Avoid Debt Trap
Stay Informed And Recalibrate When Required
Home loans need to be regularly monitored. Borrowers should keep an eye on interest rate trends and evaluate whether refinancing could help reduce their repayment burden. With rising competition among lenders, those with a good credit score can negotiate better terms or switch to a more favorable loan option.
Consider Loan Prepayment
Any surplus income such as tax refunds, return on investments or annual bonuses can be used to prepay the home loan. Doing so, especially in the early years of the loan, can substantially reduce the overall interest burden and shorten the repayment period.