Looking for a home loan in this market? 3 factors you must surely assess
December 8, 2020 10:55 AM
Given the current market conditions and with the ongoing pandemic casting a shadow over the income uncertainties, how you would go about financing a home is probably one of the biggest financial decisions you will make right now.
While comparing home loans, it is very important to also compare insurance offerings by each lender.
Buying a home is a dream, and when you are seeking a dream, you are adventurous yet careful. Given the current market conditions and with the ongoing pandemic casting a shadow over the income uncertainties, how you would go about financing a home is probably one of the biggest financial decisions you will make right now.
That said, the lender you choose for your home loan becomes extremely critical, and so does the different conditions that come with it, when choosing your lending partner. So, before committing to a loan program that fits your requirement, you may definitely want to shop around to assess. Some people have deeper financial instincts and understanding, so they know what they want. Yet, most of us need a little more convincing and need to check the options available to make an informed choice.
Here are three factors you must assess, before you venture out to finance your dream home.
Longer the Tenure, Better the Financial Comfort
While opting for a home loan, choosing the right tenure is an important decision and one of the components that decide how fat your monthly EMI is going to be. There is no single formula that suits all and thus every individual while availing a home loan should decide on its tenure that best fits their repayment capacities. Depending on the home loan and other various factors, the bank will fix the home loan tenure that will typically range between 5 and 30 years. But it is always recommended to plan the financial status first and then decide on the tenure. In either case, going for a shorter tenure will pay off your home loan faster but if you choose a home loan where you can opt for a longer tenure will keep you at lesser stress.
For instance, Mohit needs a home loan of Rs 50 lakh and is looking for an affordable monthly EMI. The bank offered him an interest rate of 9.5%. Now, it’s time to choose the loan tenure as it will decide the monthly EMIs. A loan of Rs 50 lakh at 9.5% for a tenure of 8 years will have a monthly EMI of approx. Rs 74,000. However, if the tenure gets increased to 20 years, the monthly EMI will be only Rs 46,000. Choosing a longer tenure seems to be more affordable for Mohit’s monthly budget.
LTV ratio: Be in Acceptable Limits
Loan to Value (LTV) ratio is an evaluation that lenders use while assessing the risks associated with a loan opportunity. It is the ratio between the loan amount and the value of the underlying asset. Ultimately, the higher the LTV ratio for your home loan, the riskier your home loan appears to your lenders.
LTV Percentage – Total loan amount being sanctioned/value of the asset*100
For instance, you want to buy a house worth Rs 3 cr and you have Rs 60 lakh in your account that can be used as a down payment. As per the RBI guidelines for the loans above Rs 75 lakh, the required LTV ratio is 75 percent, which means you would get a loan of Rs 2.25 cr. Hence, it is important to note that if the appraisal is less than the required loan amount the borrower has to increase the down payment or ask your bank to increase the LTV by obtaining mortgage insurance. For a home loan amount that has an LTV of 80% and more, home loan insurance is required which is provided by the lender.
On the other hand, if you choose lower LTV, you will need to arrange for higher payment upfront. But there is the flexibility to reduce EMIs by negotiating on the interest rate and tenure.
Insure your Home Finance: Protect & Be Secured
Unfortunate incidents can sometimes fail the borrower to fully repay the home loan amount where the lender may lose a lot of money and especially if the borrower is the sole breadwinner of the family. Hence, in situations like these that you need to prepare beforehand to protect your family and loved ones. In that case, a home loan insurance plays an important role as it ensures the payment of the home loan if there is any failure to do so. It can be availed while procuring the home loan and is usually available with the financial institution from which you are availing the loan often bundled with a home loan.
So, while comparing home loans, it is very important to also compare insurance offerings by each lender. Home loan insurance plays an important role that can be used in times of need to pay the outstanding loan amount. Also, with home loan insurance the house remains entitled to the borrower even if he or she fails to repay.
(By Atul Monga, Co-founder & CEO, BASIC Home Loan)