September, 2018
Here are some aspects of home loan repayment which you must take into account to ensure that the repayment terms don’t put any additional burden on your finances.
Buying a house is one of the most significant investments that anyone makes in one’s lifetime for securing one’s foreseeable future. If one plans to avail a home loan for financing one’s ‘dream home’, it becomes extremely important to choose the best loan repayment option to ensure that the home loan doesn’t become a burden with unmanageable EMIs at any point. One needs to carefully compare and contrast not just the interest rates, but also other terms associated with it, such as tenure, loan eligibility and type of interest rate as well as the penalties, if any. All these factors together can impact the total cost of a loan and in turn any borrower’s long-term financial goals and health.Here are some aspects of home loan repayment which you must take into account to ensure that the repayment terms don’t put any additional burden on your finances:
Choosing between fixed and floating interest rate
Availing a home loan often leaves one perplexed when it comes to choosing the type of interest rate. One can opt for fixed rate loans in which case interest rate remains constant during the loan tenure or for floating rate loans where interest rate changes as per changes in the benchmark MCLR rate announced by banks on a regular basis. Banks nowadays are more comfortable offering semi-fixed interest rate loans as opposed to fixed rate loans in which the rate of interest remains fixed for a specified time period, post which it becomes a floating rate loan.
The primary benefit of taking a fixed rate or semi-fixed loan is that it clearly defines one’s loan obligations and the EMI burden as it is unaffected by movement in market rates. Rates on semi-fixed rate loans are the same as that on floating rate loans. However, fixed rates are usually 0.5-1% higher than floating interest rates. Fixed rate or semi fixed rate loans are primarily advisable in a rising interest rate cycle scenario. In contrast, if one wants to make a choice adaptable to the interest rate movements in the economy, it is best to opt for a variable/floating interest rate. These loans become especially attractive in a falling interest rates cycle scenario and the best part is that these loans do not carry prepayment charges, as directed by the RBI.
If one opts for a floating rate loan, it is important to check and compare the past movements in MCLR rates of various banks in response to changes in market repo rate as well as the interest rate reset frequency to pick a bank that is prompt in passing on the benefits of interest rate revisions to their borrowers. If one opts for semi- fixed rate loan, it is important to check the benchmark rate and other terms applicable on the loans when it converts from a fixed rate loan to floating rate loan to ensure that it doesn’t pinch on their pockets at a later date.
The primary benefit of taking a fixed rate or semi-fixed loan is that it clearly defines one’s loan obligations and the EMI burden as it is unaffected by movement in market rates. Rates on semi-fixed rate loans are the same as that on floating rate loans. However, fixed rates are usually 0.5-1% higher than floating interest rates. Fixed rate or semi fixed rate loans are primarily advisable in a rising interest rate cycle scenario. In contrast, if one wants to make a choice adaptable to the interest rate movements in the economy, it is best to opt for a variable/floating interest rate. These loans become especially attractive in a falling interest rates cycle scenario and the best part is that these loans do not carry prepayment charges, as directed by the RBI.
If one opts for a floating rate loan, it is important to check and compare the past movements in MCLR rates of various banks in response to changes in market repo rate as well as the interest rate reset frequency to pick a bank that is prompt in passing on the benefits of interest rate revisions to their borrowers. If one opts for semi- fixed rate loan, it is important to check the benchmark rate and other terms applicable on the loans when it converts from a fixed rate loan to floating rate loan to ensure that it doesn’t pinch on their pockets at a later date.
Choosing the right loan tenure and EMI to repay
EMI is the monthly amount you pay to repay your home loan and is a function of many factors that includes your age, salary and loan amount eligibility. Home loan tenures usually range from 10 to 30 years, but the tenure must be chosen on the basis of one’s age and repayment capacity.
One’s age determines the prospects and the length of one’s career and its growth graph, which in turn determines their repayment capacity. While someone in their 20s or 30s can opt for a 20-25 year long loan, someone in their 50s or nearing retirement will not get a loan of more than 10-15 years. In case the EMI goes up and lack of funds forces one to seek extension for repayment, the loan tenure can extend beyond one’s retirement which poses a risky financial situation for the borrower as well as the lender.
The second important factor is determining one’s repayment capacity on one’s home loan which is a function of net monthly income or net take home salary. The maximum loan that one is eligible for is up to 90% of one’s property value with a maximum EMI to be capped at 65% of one’s monthly income. A shorter home loan tenure amounts to a high EMI while a longer tenure results in a lower EMI. In case of an unexpected need for funds such as paying off medical bills, education fees etc., one can find it difficult to pay off their EMI and hence, one is better off by choosing a lower EMI and longer loan tenure. In some cases, there is no option, but to opt for a longer tenure loan to ensure that one gets the required loan amount.
Additionally, the return on the investment depends on whether one is availing the loan for buying the house or for making a sale for profit. One is guaranteed better returns on a shorter loan tenure if one’s aim is to secure profit by selling the house. Those with fluctuating monthly income can opt for a home loan overdraft scheme which allows them to deposit or repay any surplus amount they have into their home loan current account and pay interest only on the amount utilised during a period. Overdraft schemes are fairly economical for salaried employees earning high bonuses or self-employed with fluctuating cash flows requirements during the year.
One’s age determines the prospects and the length of one’s career and its growth graph, which in turn determines their repayment capacity. While someone in their 20s or 30s can opt for a 20-25 year long loan, someone in their 50s or nearing retirement will not get a loan of more than 10-15 years. In case the EMI goes up and lack of funds forces one to seek extension for repayment, the loan tenure can extend beyond one’s retirement which poses a risky financial situation for the borrower as well as the lender.
The second important factor is determining one’s repayment capacity on one’s home loan which is a function of net monthly income or net take home salary. The maximum loan that one is eligible for is up to 90% of one’s property value with a maximum EMI to be capped at 65% of one’s monthly income. A shorter home loan tenure amounts to a high EMI while a longer tenure results in a lower EMI. In case of an unexpected need for funds such as paying off medical bills, education fees etc., one can find it difficult to pay off their EMI and hence, one is better off by choosing a lower EMI and longer loan tenure. In some cases, there is no option, but to opt for a longer tenure loan to ensure that one gets the required loan amount.
Additionally, the return on the investment depends on whether one is availing the loan for buying the house or for making a sale for profit. One is guaranteed better returns on a shorter loan tenure if one’s aim is to secure profit by selling the house. Those with fluctuating monthly income can opt for a home loan overdraft scheme which allows them to deposit or repay any surplus amount they have into their home loan current account and pay interest only on the amount utilised during a period. Overdraft schemes are fairly economical for salaried employees earning high bonuses or self-employed with fluctuating cash flows requirements during the year.
Choosing an apt mode for loan repayment
Last but not the least, to ensure that repayments are done in a timely and convenient manner very month, opt for repayment through ECS linked to one’s salary/personal account or one’s primary business current account. Setting up auto ECS debit instructions ensures timely payments of one’s loan EMI without the hassles of remembering the due dates, avoids the issuance of multiple cheques or cheque bounces due to signature mismatches and reduces the possibility of charges for late payment.
Also read: HOME FINANCING OPTIONS FOR NRI BUYERS
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Source: financialexpress.com
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