Here are a few pointers that could help you make a rough estimate of the actual cost of buying a house with a help of a home loan.
Many consider owning a home to be one of the biggest financial goals of a lifetime. A home not just gives shelter over our heads but also builds our identity and is something we plan to leave for our next generations in a bid to secure their future. In fact, according to BankBazaar’s Aspiration Index 2021 report, homeownership is the top wealth goal for most of the respondents with an impressive ‘Importance’ score of 90.7, despite the pandemic majorly affecting most of the facets of our lives in the last couple of years.
The survey report also states the home ownership goal’s ‘readiness gap’ — the difference between the importance and the readiness respondents assign to any goal — is above-average at 6.3, indicating that many still feel they have some distance to cover to be able to buy a house.
Needless to say, buying a home isn’t cheap. At times, the cost of owning a home could be as high as 10-15 times your current annual household income if not more, especially if you plan to buy a property in a big city where real estate prices are very high. Understandably, most people, thus, take the help of a home loan to finance their home purchase which they repay with interest over a period of up to 30 years. Plus, there could be several other significant expenses that you might have to pay out of own resources. As such, it makes a lot of sense to be aware of these expenses while planning something as important as buying a home. Here are a few pointers that could help you make a rough estimate of the actual cost of buying a house with a help of a home loan.
Home loans typically finance up to 90% of a property’s value; meaning the remaining 10% needs to be borne out of pocket. However, if your home loan is, say, above Rs 75 lakh, your lender may only approve up to 75% of the loan amount and the remaining 25% need to be paid as a down payment. For example, if your property is valued at Rs 30 lakh, your down payment requirement could be 10% of that amount, i.e. Rs 3 lakh. But if your property is valued at Rs 1 crore, you might have to shell out 25%, i.e. Rs 25 lakh in down payment.
Home loan interest
This is usually the biggest expense related to homeownership, despite most banks reducing their home loan interest rates to multi-decade lows in the last few years. The applicable home loan interest rate is ascertained by the lender depending on multiple factors, like the borrower’s age, gender, income, credit score, property value, loan-to-value (LTV) ratio, etc. Just to give you an idea, let’s suppose you’re a 30-year-old individual with a credit score of over 800 planning to buy a house worth Rs 30 lakh. Your LTV is 90%, so your home loan amount is Rs 27 lakh.
If your lender approves the loan at 6.75% p.a. for a 30-year term, your EMIs would be Rs 17,512 for 30 years (assuming constant interest rate throughout the loan tenure) amounting to the total interest payable at Rs 36.04 lakh and total repayment amount at Rs 63.04 lakh. If the same individual plans to buy a home worth Rs 1 crore, his loan amount could be Rs 75 lakh, and at an interest of 7% p.a. for 30 years, his EMIs could be Rs 49,897, total interest Rs 1.04 crore, and total repayment amount Rs 1.8 crore.
As such, it’s important to have a high credit score to get the best available rates and sufficient repayment capacity to be able to repay the loan in full on time without disturbing other critical financial goals. It’s also helpful if borrowers could utilise any occasional windfalls to part-prepay a loan from time to time (there are no penalties to part-prepay a floating rate home loan) to drastically cut down the total interest payable and become debt-free sooner.
Other charges associated with home loans
Some additional charges are needed to be paid to the lenders under a home loan, such as loan processing fees, documentation charges, legal opinion charges, property valuation fees, etc. A loan processing fee is a non-refundable amount paid to the lender constituting a small percentage of the loan. Some lenders may club documentation, legal opinion, and valuation fee together under the processing fee, while some may charge them separately.
Memorandum of Deposit of the Title Deed (MODT) charges
The lender holds the title deed of the property during the tenure of the home loan until all dues are fully cleared. Lenders charge a fee for holding the title deed called MODT charges, which usually range 0.1% to 0.3% of the home loan amount and may vary from state to state. The processing fees, legal opinion charges, and MODT charges are typically less than 1% of the loan and are often waived off, capped, or discounted.
Stamp Duty and Registration charges
State governments levy stamp duty and registration charges on every property transaction. These charges vary according to the location, price and size of the property among other factors. Stamp duty and registration charges together add up to almost 3% to 6% of the property’s value. If the property is purchased through a broker, the buyer has to pay the brokerage and legal fees, which could be 1% to 2% of the total value of the property. So, assuming registration and stamp duty charges at 6% and brokerage at 1% (total 7%), these could amount to Rs 2.1 lakh for a Rs 30 lakh property, and Rs 7 lakh for a Rs 1 crore property.
Apart from these, a homebuyer may also need to pay several other charges to the developer, including electricity and water charges, floor rise, municipal taxes, annual maintenance of society, and clubhouse charges (if any), which add up to a substantial amount. The developer may also charge separately for amenities like a swimming pool, gym, clubhouse membership, shaded parking, etc. Also, under construction properties involve a GST payment. Then there are the monthly maintenance charges that need to be paid over and above the EMIs which are determined based on the super built-up area of the property and the amenities and location of the apartment society. Then comes the cost of furnishing the house that could also run into lakhs depending on your preferences and budget. You may also need to pay a sizable amount to movers and packers while shifting to the new house.
So, how much do these charges add up to?
Let’s look at this table to find out the total cost of two ready-to-move-in properties (so, no GST), one priced at Rs 30 lakh and another at Rs 1 crore bought on a loan for 30 years without making any part-prepayments. Remember, these are just indicative figures and the actual costs may greatly vary depending on the type, size and location of the property.
As such, a Rs 30 lakh property on a home loan could cost almost Rs 80 lakh in 30 years, while a Rs 1 crore property could cost Rs 2.38 crore during the same period. Do note, eligible first-time owners of affordable houses could also enjoy interest subsidies under the Pradhan Mantri Awas Yojana that could further reduce the costs.
In conclusion, aspiring homeowners must plan well before taking the plunge and ensure they have adequate repayment capacity. They should also ensure their credit scores are over 750 throughout the loan tenure to avoid additional interest burden. Finally, they must carefully evaluate the affordability of their EMIs factoring in other key goals and liabilities as any laxity could hurt their finances.
(The writer is CEO, BankBazaar.com)