Mumbai: A guide to acquiring the home loan of your choice. 2020 may have dulled the spirits of many home buyers due to unexpected job losses, stagnant or lower incomes, and the need ‘to save more’ becoming a top priority. But as they say, a crisis is a terrible opportunity to waste. With lower spending on travel and entertainment, it’s also been a year of higher savings for many.
As far as home loans are concerned, consumers are increasingly looking for providers that can allow for more flexibility and affordability in making repayments. Here are six points to reflect on, when you consider to opt for a home loan:
1. Rent Vs Buy
The pandemic has made people desire financial security a lot more. They have been spending cautiously and wish to use their money wisely. Living in a home they own, rather than paying rent at a time when jobs are not quite stable, have made consumers think about building their permanent assets. With work from home becoming an almost permanent setting going forward, buying a first home or a bigger one has become a priority for most consumers. The lowest ever home loan interest rates that are being offered currently and the lucrative real estate deals in the market, are encouraging consumers to buy homes rather than pay rent.
Rentals are generally charged at 2-3% of the property value while home loan rates are at about 7%. Until 2-3 years ago, this gap used to be over 6%. In purely mathematical terms, even now, renting an apartment is better than buying if the property appreciates less than 5% per year on an average. However, if laying down roots is a priority and the resale value of the apartment is not the most important criterion, this is the best time to buy in over two decades. The tapering off of property prices, rising incomes (slowly and gradually), and the lowest interest rates India has ever seen make it a great time to buy. Given the plethora of property choices at various price points that Indian consumers now have, the next few years will see strong growth in the housing finance sector led by end consumers.
2. Is your lender bankable?
When availing of a home loan, consumers usually commit to a multi-decadal relationship with the lender. Hence, it’s very important to choose a partner that has a solid foundation, built on years of undisputable brand reputation and a thorough track record. Lower interest rates should not be the only criteria when choosing a lender, as these are floating rates that can gradually go up or down over time. Given that these are 15 – 20 year loans on average, a financially strong player with a reputation for trust will help ensure these vary relatively lesser over the tenure of the loan.
There have been instances where borrowers have seen their rates go up by 200 to 300 basis points due to the re-rating of the lender, who had to pass on higher borrowing costs to their customers. Hence, lending businesses are also seeing a fair amount of consolidation where consumers put a premium on dealing with financially sound, trusted entities. Therefore, while purchasing a home, you should not only evaluate the options from reputed developers but lenders too.
3. Affordability is a big part of the decision-making process
Think about the following points to evaluate if you can comfortably afford
a. Can you manage to pay the down payment for the house immediately? If not, does your lender provide an option to pay it in parts over a period of time?
b. The interest rate will be important to calculate the monthly installments and whether you will be able to pay them comfortably without having to dig into your savings or curb some of your routine monthly expenses.
c. Some lenders have a maximum tenure of 25 years while others go up to 30 years. The longer the tenure, the lower the monthly Instalment cycle. If you’re a 25 or a 30-year-old borrower, you might want to consider a longer tenure loan that allows for lower EMIs and makes your purchase more affordable. The total cost of ownership goes up with increasing the tenure of the loan, but this Is a trade-off that requires mindful consideration.
d. For consumers looking to buy a house with the intention to live in it for a substantial period, check if there is an option to start repayment with lower EMIs and gradually increase the amount over the tenure of the loan. This allows you to buy a house large enough for tomorrow’s needs while keeping current affordability In mind.
e. In the case of a bank offered subvention scheme, the total home cost goes up in exchange for getting relief from not paying EMIs until possession. While no EMIs help with initial affordability, do you want to repay a higher amount in the long run? Finding the right balance between the overall cost of ownership and monthly outflows is critical.
4. Do you have flexibility in repaying the loan?
Very often buyers depend on the sale of an existing property to buy or upgrade to their dream home. While choosing a lender, see if there is flexibility to build one’s payment plan to account for this. Put differently, can you increase or decrease your own contribution depending upon when a major event like an existing property sale happens? This becomes especially important when you cannot be sure of how long It will take to sell the existing property, so built-in adequate flexibility is very valuable.
Additionally, at times when discretionary spending is higher, check for options to pre-plan a break in your EMI, allowing for flexibility in repayment without compromising on your creditworthiness.
5. Choose a good insurance plan
Getting adequate insurance (both life and health) is always critical but much more so when you take on debt. Some points to consider when choosing an insurance cover for a home loan:
a. Are you getting enough to cover so that the loan does not become a burden so big, that if something were to happen to the primary earner of the house, the home will have to get liquidated? Keep In mind that the existing amount of life insurance you have was before the decision to take on more debt. Given that the existing cover is to ensure continuity of lifestyle, a good practice would be to get as much cover as the new loan amount so that the two are mutually exclusive.
b. How much are you having to pay for getting that cover? What are the best options available in the market to keep you and your family more secure and at peace?
6. Post disbursal service
Your interactions with the lender are not limited to just the first few disbursals or repayments. It’s a long journey which warrants strong support and constant communication between the lender and the consumer. Choosing a home loan financier only basis existing schemes or pricing may not be the right thing. A lot has changed in the past few years and the reviews and experiences of recent home loan buyers will present a more accurate assessment of the post disbursal services of the lender.
a. Often, loans are taken to buy under construction homes – where disbursals are to be made in tranches as the construction progresses. Consider how technologically advanced the lender is and how closely coordinated are the developer and the lender so that construction linked payments are not cumbersome. Often a buyer is tasked with coordinating between the two and having been a buyer and borrower myself, I can assure you it’s a time consuming process – something a lot of existing players can improve on.
b. How easy is it to get self-help from the digital ecosystem of your lender– every time you need a loan statement, check your outstanding, apply for a top up? And, most importantly is the user interface easy to use and quick?
These are the most important points that come to mind when acquiring a home loan. In a nutshell – are you being served what’s Most Important to you?
The article is authored by Manish Shah, MD & CEO, Godrej Housing Finance