All About Home Loan Needs
You might have already decided to buy a house through a loan, but before you apply you must answer certain questions:
Can you afford a home loan?
You need to consider the amount of money that you earn as well as the stability of your income. Many people choose to take a more expensive home upfront as they think that their income will increase as a result of their income growth and career progress. Finance companies would normally give you a loan to the extent that your monthly repayments are less than 35-50% of your gross monthly salary.Lenders also take into account the liabilities of the person before sanctioning a loan. While they consider other loan repayments, they also look at the income from other sources to assess how much money would be available to repay the loan.
How much must you leverage?
Once you have decided the property you have to buy, you should also decide how much of the cost can be funded by a loan.
Normally leading Housing Finance Companies in India like HDFC Bank, SBI, ICICI Bank, Indiabulls, Reliance Consumer Finance, Bank of Baroda, etc. will loan you about 80-85% of the property value. You need to make a minimum down payment of 15-20% of the property value. Please also remember that you have to bear the following fixed costs normally before your loan is disbursed:
- Processing and administrative fee (1.5-2% both included)
- Legal fees
- Stamp duty charges ( for resold property)
- Property insurance premium
- Accident insurance premium
Make sure that you have an asset base that is easily converted into cash (e.g. cash in a Bank FD etc.) to cover all charges including down payment.
As the value of the loan amount increases, the home loan interest rate usually charged increases. You may think of taking a smaller loan by funding the large down payment, by withdrawals from other investments. If your investments are in Fixed Deposits that are giving you about 7.4% p.a. after tax and the effective post tax cost of you Home Loan is 10% then this is a good idea. However, if you expect to make over 20% p.a. (about 13.5% post tax) by investing in shares or business, then you must borrow as much as you can on the Home Loan and not withdraw money from your other investments.
If you have identified other profitable avenues of savings that are expected to give you 15-20% returns p.a, you can use the Home Loan as a way of getting a cheap loan. In this case, borrow up to the limit of 80-85% of the property value rather than withdraw cash from the other savings to make the down payment on the loan.
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