Check, plan, build

Since housing loan has a long tenure and is the highest contributor to your EMI outflow, prepare a budget before committing yourself to it.

VIJAYAWADA, ANDHRA PRADESH, SATURDAY, 02-02-2013.
Representatives of construction companies and bank officials explaining the people on different housing projects during the ongoing Home Loan Mela, being organised by Andhra Bank, in Vijayawada on Saturday. PHOTO: V_RAJU

The prudence of taking a loan lies in the fact that the repayment capacity should be clearly defined at the time of applying for the loan itself. Before reaching out for that loan application such deliberations are very critical and essential which surely can have a bearing on the long-term financial health.

Housing loans having the longest of tenures, and being the largest in quantum and highest contributor to the EMI outflow, it is highly recommended to prepare a budget before committing oneself to it.

All banks and HFIs provide a facility on their respective websites for the prospective borrowers to check their loan eligibility which would offer two bits of information: (1) quantum of loan eligibility; (2) EMI.

For instance, for a person whose monthly income is Rs.50,000 his loan eligibility for a period of 15 years of repayment tenure would be Rs.18 lakh with an EMI of Rs.20,000. If the repayment tenure is increased by 5 years to 20 years, the quantum of loan increases to about Rs.21 lakh. The decision of choosing the tenure would then depend on the current age (younger the better to choose longer tenures) and the repayment capacity (current financial commitments and stability of income flow over longer period of time).

Browsing for information

Browsing for such information from the lenders’ websites would be very handy for borrowers to plan their finances in advance which also gives them clarity about what the lender expects out of them based on the prevailing income levels.

From the point of view of financially planning across various needs of life, about 40% of the income can be set aside for loan purposes and rest could be planned for mandatory living expenses and investments.

Insurance

Given the uncertainty of life it is further recommended that the loan is insured in full for the entire loan tenure. Insuring the loan would mean paying an one-time premium (single premium plans) to an insurance company that insures the entire quantum of loan and indemnifies the lender against the untimely death of the borrower during the course of the loan repayment by taking responsibility of clearing the pending outstanding amounts without disturbing the ownership of the property which can easily pass on to the surviving family members.

A home loan commitment should be treated like a package which should consist of loan amount capability and EMI affordability along with having a good understanding of the future financial challenges.