With the rising number of millennials beginning to take control of their finances early on in their lives, breaking the old age narrative of owning a house in early 40s or 50s has become a common practice.
With the rising number of millennials beginning to take control of their finances early on in their lives, breaking the old age narrative of owning a house in early 40s or 50s has become a common practice. More and more young earners in their late 20s or early 30s have begun prioritizing the goal of purchasing their own house. If you too are a young earner, have a look at the benefits of owning a house and taking a home loan before you turn 35:
Take advantage of step up facility
Lenders have been increasingly focusing on devising strategies to make home loan experience much more convenient for home buyers, by providing customized home loan products and repayment facilities. One such home loan repayment facility specially devised for young home loan borrowers is of ‘step up EMI’, wherein the loan EMI repayment is directly linked to the expected growth in the borrower’s future income. This repayment facility involves a gradual increase in the EMI amount after the initial few years, which is proportional to the assumed/expected rise in borrower’s income in the near future. Lenders usually structure the loan in such a way that the rate of income growth is assumed at a pre-set rate, for instance at 5-7% p.a., and accordingly the EMI would increase proportionately, in a slab of say, 5 years for a loan of 20 years.
Since the scope of income growth is brighter for millennials, as compared to those in their 40s, this type of repayment facility works well with young borrowers. They can avail the twin benefits of owning a house at a young age along with payment of lower EMIs in the initial years of loan tenure. However, while opting for this EMI facility, one must remember that in case the income doesn’t increase as per expectations, the repayment may become difficult with the increase in the EMI amount.
Higher loan eligibility
Individuals in their late 20s or early 30s usually tend to have lesser financial obligations than those in late 30s or early 40s. Since lenders consider borrower’s fixed obligation to income ratio (FOIR) as one of the most vital parameters while adjudging their repayment capacity, a lower FOIR automatically increases one’s home loan eligibility. Your FOIR is the proportion of your monthly income currently being utilized to repay fixed obligations such as loan EMIs and credit card bills. Higher FOIR depicts an imbalance between your monthly income and fixed obligation’s repayments, implying higher chances of defaulting in the future in case a financial exigency or additional expense arises.
Moreover, the farther you are from your retirement, the more number of active work life years you have to conveniently repay the loan. This is why lenders are usually hesitant towards the idea of lending to those nearing retirement, since they have lesser number of working years left.
To further enhance their loan eligibility, borrowers can consider applying along with a co-applicant as this may further increase the loan amount for which they are eligible.
Longer repayment tenure
Working individuals in their late 20s or early 30s stand a higher chance of availing a longer loan repayment tenure, going as high as 30 years. Since most salaried individuals retire by the age of 60, buying a home before turning 30 implies that you have at about 30 years to repay the loan obligations. Buying a house at a young age would also increase the likelihood of completing home loan repayment during work life years itself.
Additionally, the availability of a higher loan tenure ensures that your loan obligation gets distributed over a longer period of time, implying lower EMIs. For instance, if you have taken a loan of Rs 30 lakh at 9% p.a. for a loan tenure of 15 years, your EMI would come out to be Rs 30,428. Whereas, for a loan tenure of 30 years, this EMI would come down to Rs 24,139. Therefore, as opposed to a lower loan tenure with higher EMIs, a longer repayment tenure with lower EMIs would enable the home buyer to make room for other financial commitments and investments to achieve various life goals.
It’s advisable to avail a longer repayment tenure, even if you are financially able enough to bear higher EMIs, and make part prepayments or foreclosure of home loan later on, upon accumulation of funds. Prepayment would, therefore, assist in closing the loan sooner and prevent the need to stretch it till 30 years. However, before you prepay, make sure you check the prepayment/foreclosure charges levied by lender. Although the RBI has mandated all banks not to charge any prepayment fee on floating rate loans, the fixed rate loans may still be chargeable by lenders.
More time for value appreciation
Another vital benefit of being a young home owner is that the earlier one buys a home, the longer time your house has to witness an appreciation in its value. Even though the appreciation in value would depend on various factors such as inflation, geographical location, market’s demand and supply etc, availability of a long period of time increases the chances of value appreciation. Over the long period of time, a well located residential property in our country usually witnesses an annual appreciation of about 10-20%, implying an incremental increase in the investment value of the asset, i.e. your home.
(By Ratan Chaudhary, Associate Director and Head of Home Loans, Paisabazaar.com)