Buying a house is one of the biggest financial decisions that one makes in their lifetime. It’s important therefore not to rush through the decision making process. By being aware of the following mistakes that people often make while taking a home loan, you can make better choices:
Overstretching one’s budget
Maybe it’s got to do with the Joneses effect; people often jump the bandwagon to buy a house without being financially prepared for it. Most banks ask for a minimum down payment of 20% on the home cost. However, that doesn’t mean you shouldn’t save more. Ideally, work towards accumulating 40% or more – which will only lower your financial obligations. Till you hit the target, keep saving.
Housing finance companies stretch loan tenure to reduce EMI for its customers. Some tenure is as long as 30 years. However, going for tenure more than 15 years doesn’t make financial sense.
For instance, EMI for Rs 50 lakh loan at 7 per cent is Rs 58,054 for a 10-year loan, 44,941 for a 15-year loan and Rs 38,765 for a 20-year loan. It reduces only to Rs 35,339 and Rs 33,265 for 25 and 30 years respectively. For every five extra years of loan taken, EMI falls sub-optimally beyond 15 years.
Not the least, ensure your home loan EMI is not more than 35% of your take-home salary.
Floating rate loans are usually cheaper than fixed interest rates (partially fixed that is) and that is because you take the full risk of the fluctuations in the interest rate in the economy. So, be prepared for the extension of loan tenures – if interest rates move up.
Every now and then, lenders lure borrowers with seemingly jaw-dropping low-interest rates on the loan. Often, it is only for the initial years and later the rates are jacked-up or linked to market-linked rates. Or it might be applicable only for small loans or women borrowers.
So, dig deeper and check if the interest rates are really low for you. Moreover, you need to factor-in other costs – processing and administrative fees, legal fees, conversion charges, prepayment fees and so on. It could effectively increase the borrowing rates for you.
Floating rate interest loans are usually cheaper than fixed rates (partially fixed that is) and that is because you take the full risk of the fluctuations in the interest rate in the economy. So, be prepared for the extension of loan tenures – if interest rates move up.
Check Out Fixed vs Floating Interest Rate
Not providing for a contingency
Before you sign up for a home loan, prop up your contingency fund. If the usual thumb rule is to have up to six months of monthly expenses, hike it to up to 12 months. If you haven’t taken a life or health insurance, ensure you do so. Life insurance will ensure your near and dear ones are not burdened with debt in case of loss of life. Any medical emergency can also drain funds and make you financially vulnerable. So, also take adequate health insurance.
Moreover, in these times of pandemic, exercise caution and wait for things to stabilize before making long-term financial commitments.
Overlook credit score
Most banks lend based on your credit score. Higher the credit score, lower are the interest rates.
So, go through your credit report and check for any discrepancy and rectify it at the earliest with the credit rating agency. If your debt levels (say personal and car loans) are high, repay it. Keep overall credit levels below 30% at all times. Doing all this will improve your credit score over a period of time. Also, ensure you don’t skip on due dates for a credit card or EMI payments that could reflect badly on your credit score.
Not negotiating enough
There is always a bit of space to bargain with the lenders, especially if you have a good credit score. They are willing to slash interest rates by a few basis points or even waive processing or other fees. So, don’t hesitate to ask for a discount on these loans.
Similarly, consider doing a balance transfer down the line whereby you transfer your existing home loan with a high-interest rate to another bank with a lower interest rate.
Check the affordability of the house from your perspective. Do the necessary due diligence and play it safe in these times.