Homes and gardens

Begin the year with financial prudence

Living in one’s own houseis an experience that cannot be explained; it is a matter of pride and achievement. To fulfill this aspiration there are housing finance companies that lay a red carpet to home loan borrowers by luring them with low interest rates, higher loan repayment tenure and such other offers.

Home loan being the longest by way of repayment tenure, biggest in terms of loan amount and largest monthly outflow by way of EMI, it requires some thinking before taking a loan.

The first and foremost decision would be the quantum of loan; second would be the tenure of loan; and the third would be the EMI that follows after taking the loan.

Interconnected

In fact, the first and the third factors are interconnected; higher the loan amount, higher would be the EMI. Most young home loan borrowers who aspire to buy a big house or have lower financial means to sustain a large loan amount would like to keep their EMI outflow low; hence, prefer to increase their repayment tenure.

In pursuit of committing for lower EMI the loan tenures can be stretched to as high as 30 years.

For example: on a home loan amount of ` 25 lakh for a period of 20 years at an interest rate of 8.75% the EMI would be ` ` 22,093; on the same loan amount at the same rate of interest, if the repayment tenure is increased to 25 years and 30 years, the EMI would be ` 20,554 and ` 19,668 respectively. The total repayment and the interest component across different repayment tenures are illustrated in the table.

Not a good idea

The savings of a few thousand rupees each month may seem to be a good idea, but if one considers the total interest component that gets paid for longer duration of loan, the amount looks humongous.

Aspiring borrowers should consider this aspect before choosing longer duration of loan repayment. It would be like being pennywise and pound foolish.

The prudence is in identifying one’s present financial status, age, income stability, family commitments and add a bit of life’s uncertainty while deciding on longer loan tenures.

Financial discipline

Further, one should also maintain utmost financial discipline because every financial transaction done is accounted by CIBIL (an individual borrower’s credibility rating agency). Every financial institution knows the credibility of a borrower at the click of a mouse and obviously higher ratings would be desirable by the lenders.

After taking a home loan one should not splurge on other available borrowings such as swiping of credit cards without adequate backup and taking personal loans and consumer durable loans mindlessly.

Each of the loans would add-up month after month, increasing pressure on living expenses and to manage future events.

With higher loan repayment, commitments to other investing possibilities could take a backseat due to lack of savings.

Insurance

It is also extremely important to insure the home loan at the time of taking the loan itself and also to take adequate term insurance that covers the untimely death of the borrower.

These aspects would surely bring the required financial discipline.


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Printable version | Jul 30, 2021 5:29:45 AM | https://www.thehindu.com/life-and-style/homes-and-gardens/begin-the-year-with-prudence/article25910694.ece

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