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Let’s get a few things out of the way first. No matter the amount of emotional packaging done while marketing the loan, it is after all what it is- credit/borrowed money. Hence, it is something that you will have to pay back at pre-agreed terms and there won’t be an emotional packaging on the EMIs for sure. So, let us be practical and opt for the one that fits our bill the best.
Listed below are a few mistakes you must be wary of when opting for a home loan-
Opting for the maximum loan
Yes, it is true that banks can finance a large part of your loan but is that necessary? Here’s an example you must consider. Assuming that you are borrowing Rs 25 Lakh from a bank at an interest rate of 8.5% for a loan tenure of 20 years, your EMI comes out to be ~Rs 21,670. Now, if you are paying this EMI for 20 years, you are effectively paying ~Rs 52 Lakh in all. The principal amount being Rs 25 Lakh, the rest of it is interest; which is actually higher than the amount you set out to borrow in the first place.
The point we are trying to make here is that you might want to look at maximizing the down-payment (if possible) and minimizing the loan amount in order to reduce the interest you pay.
Seeking negative amortization
As the aspirations of young professionals keep soaring, these types of loans are targeted at them. The concept is to keep the EMI lower while recovering the interest part of the loan in the initial few years while creating a myth of lower repayments. But as time progresses the repayment amounts keep increasing and that might or might not be in tandem with your income growth. The same can happen with a floating rate of interest where the interest rate goes up but the EMI hasn’t increased accordingly.
Ask for the amortization schedule when opting for the loan and figure if this component is a part of it.
Assuming a growing income
So, you have been consistent with the 18% increment for the past 8 years and you take up a loan assuming the same growth of salary/income. However, that is not a given, is it? Many unforeseen situations might lead the income to go below what you had planned for. Add to this, the schemes run by the banks in order to attract consumers to lower interest rates. It might just result in you loaning out an amount much higher than your repayment capacity.
Assume the worst when you are creating your loan schedule- lowest salary and lower growth. This way, if the increments go as per plan, you might be able to repay the loan faster.
Considering top-up loans
Another marketing strategy that targets house owners to offer them top-up loans in order to spend on the house aesthetics. A borrower thinks that an additional 3 Lakh to an already sanctioned 30 Lakh loan won’t make so much of a difference but that’s a fallacy. These are much like credit card bills and very high-cost debts.
Instead, do up your home slowly with time and spend as much as you can afford.
There is enough and more information available today at your fingertips that can help you make informed decisions. So, let us be prudent and not repeat the mistakes that perhaps your predecessor borrowers made. Let us invest in a manner that does not make us regret the decision in the future.
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