Buying a house is one of the biggest financial decisions of life. Therefore, when you decide on buying one, make sure you understand its long-term implications and calculate your long-term liability right.
Do your math
The kind of home you can buy depends on a number of factors. A salaried person has to take into account his total income, monthly expenses and the instalment one can afford. A person who earns Rs 50,000 and bears the responsibility of family members may not be able to save much for repayments. On the other hand, a person earning Rs 30,000, living with parents and without any major expenditure can set aside a part of his income for repayment of the home loan.
Similarly, a couple with double income who decide to buy a home together will also be well placed to repay the loan. It is equally important to ascertain your industry’s condition and job prospects. If you feel your industry is in a volatile phase, do not take on a major home loan liability. These are basic calculations that an individual must do before going in for a house loan.
Loan consolidation
Oftentimes when people decide to buy a home, they already have another liability, such as an auto loan. To be able to serve an EMI of around Rs 60,000 a month, one should have a net income of at least Rs 1 lakh. However, if a car loan is also being repaid, finances could take a hit. Together, the home and auto loans would take up 70% of the income. In such a circumstance, consolidation of loans is a good option. Nobody likes to pay two EMIs simultaneously.
Loan consolidation reduces the amount payable per month, resulting in a single monthly payment instead of multiple payments.
By consolidating auto and home loans, you not only reduce the instalments per month but also cut the rate of interest. This will save you some money.
Repay every few years
The longer the repayment lasts, the higher the rate of interest. Plan to save some money every few years or scout for additional income options when you apply for a home loan. Let’s assume that you are planning a loan repayment of 20 years. Here, saving and repaying a decent lump sum every five years will reduce the rate of interest and help you settle the loan earlier than the 20-year tenure. If needed, cut down on discretionary expenses for a few years.
The average home loan tenure of Indians is seven years. This shows Indians do not usually go for long-term tenures.
Contingency fund
Unforeseen events and exigencies can happen to anybody. One needs to be very careful and tread with a Plan B. Some people buy a house and do not immediately realise the liabilities it will bring. They end up forfeiting the buy, which hurts their credit score.
Be very careful about not defaulting on repayments. work upon your transactions diligently as credit score plays an important role in helping you get a loan. It is advisable to have 3-4 months’ EMI in hand so that you do not default and are able to maintain your credit rating even as you search for another job.
In such circumstances, emergency funds come in handy. These funds can come in the form of life insurance deposits, fixed deposits or mutual funds that you have invested in.
The writer is CEO, Destimoney Advisors
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