Rakesh Kumar, a railway employee in his mid-50s, never had to worry about buying a house. He had a transferable job and hence, his employer took care of his accommodation. Now that he was nearing his retirement, it was important for him to buy a flat. To his surprise, his loan application was rejected by several banks on the grounds that the majority of his loan tenure would fall in his post-retirement life.
Most of us tend to save for the down payment of a home loan after taking care of other financial goals such as children’s education and marriage. However, most people don’t take into consideration the fact that bankers may hesitate to approve loans once we cross 50, owing to our limited source of income.
Here are some of the important factors that you must take into account if you are thinking of buying a house after 50 years of age by taking a bank loan.
Your income is one of the most important criteria to judge your loan application. The possibility of loan approval increases if your pension is large enough to accommodate home loan EMIs. Usually, lenders prefer EMIs to be less than 40–50% of your monthly income. Also, EMI outgo on any existing loans will be subtracted from the total income while evaluating your loan repayment capacity. Consider including your spouse or working children as co-applicants of loan if your pension is not large enough to support EMIs.
Your credit score plays an important role in your loan approval process. A lower credit score can dampen your chance for securing a loan. Avoid applying for loans with too many lenders at the same time; this may reflect negatively in your credit score.
You can offset the disadvantage of your age by using your existing investments as collaterals for your home loan. Investments made in bank fixed deposits, mutual funds, NSC, KVP etc improve your loan eligibility, as the lender will have something to fall back on in case you fail to pay back the loan.
This is the amount that you will shell out of your own pocket to avail the home loan. Usually, lenders require you to pay 10–25% of your property value as down payment. They also consider age and repayment capacity to fix the down payment amount. Opt for a higher down payment, depending on your affordability. This may result in lower EMIs.
Type of loan
Based on the interest rate, there are two types of home loans — floating and fixed-rate. The interest rate for fixed-rate home loans remains the same during the entire tenure of a loan, while the interest rate for floating-rate loans varies according to the MCLR set by the bank. Although the floating-rate home loans work in your favour in case of a declining interest rate regime, the reverse is true during a rising interest rate regime. Some lenders have come up with a mixed variant where the interest rate is fixed for a predetermined period, following which it becomes a floating one.
As your income in your post-retirement life will remain somewhat fixed, an increase in EMIs due to an increase in interest rate may adversely affect your monthly budget. Therefore, opt for a fixed-rate loan to ensure a certainty in your cash outflow in your post-retirement life.
Generally, the tenure of home loans can be as high as 30 years. However, as lenders expect borrowers to complete the loan repayment before reaching 65-70 years of age, you may not be able to avail such lengthy tenures. Opt for a loan with a short tenure to reduce your interest payout. However, keep your cash flows in mind as a short-tenure loan will result in higher EMIs.
This penalty is levied when you pay the entire outstanding loan balance or a part of it before the completion of your loan tenure. However, this penalty is only applicable in case of fixed-rate home loans. Opt for prepayment of home loans (if your finances permit) as it results in reduced interest cost as well as a reduced EMI/loan tenure. However, do not use your retirement savings to prepay your home loans.
To sum it up, your monthly income, credit score, post-retirement income in the form of pension or annuities, and existing investments or properties will play a major role during the loan approval process. The other factors discussed will help you to bring down the interest cost of your loan and optimise your cash flows in your post-retirement life.
The writer is CEO & co-founder, Paisabazaar.com