Many of the world’s business tycoons found their beginnings dabbling in reality. And with rising property rates and growing population in metro cities, investing in property is, most often than not, a financial sound decision. The only problem is buying a piece of land or an apartment is financially out of reach for the most of us. This is where home loans come in handy!
Home loans offer an easy way to finance your investment in property. They give you the liberty to pay some amount out of your pocket while the rest of the cost is provided by the bank or non-banking financial institute. Add to that lower interest rates and long payback tenures and you get the perfect instrument to make your investment dreams come true!
But before you take the dive and opt for a property loan, here are some things to keep in mind that will ensure your loan experience is a smooth one!
Top on the list is to take an EMI you can afford!
One of the main aspects of a property loan is the EMI you stand to pay. Remember that it’s going to put a dent in your monthly income for the next 10 to 15 years and so you shouldn’t over stretch yourself! Some fall prey to a large EMI, thinking their increasing salary should be able to cover it in the coming years. Some may think the larger the EMI, the lesser the tenure and the lesser financial burden of the loan. These thoughts could result in you defaulting on your loan! Rather it’s better to follow this golden rule, never let your EMI exceed 40% of your income. If in future you do earn more, you can pre-pay your amount through the payment of additional funds.
Tip two, give some thought to down payments:
No lender will foot the entire cost of your property, you will have to contribute some amount towards the purchase of the property. Some lenders will provide you up to 90% of the amount you need. But if you have enough funds available, go in for a larger down payment, this will help reduce the financial burden of your loan in the future.
Tenure of the loan:
Now it’s time to decide the tenure of your loan. Opting for a longer tenure might give you a small EMI but you’ll end up paying more interest over the years, choosing a tenure that’s too short will bump up the EMI and you might not be able to handle the financial strain. One expert says that it’s wise to go in for a long tenure because over time your salary is bound to increase, in which case you can make additional payments and pre-pay the loan amount thus cutting down the tenure of the loan.
Tip 4; choose the right type of interest rate:
With property loan, most lenders will provide you two options of interest rates, fixed and floating. Fixedinterest rate, as the name suggests means your interest rate will be fixed and will be protected from market fluctuations and RBI amendments. On the other hand, floating interest rates fluctuate based on market standings and government policies. Meaning, if the market is on the rise then there is a chance your interest rate will drop. Further, if government policies call for lower or higher interest rates, you stand to benefit or suffer from the same. There is a third options some lenders offer, semi-fixed, wherein for the first few years your interest rate will be fixed, following which it will take up the floating interest rate. Before fixing on either one, it’s ideal practice to monitor economic signs such as inflation and interest rate movements. Also keep track of the RBI’s policies, this will allow you to gain insights into the future norms of the interest rate cycle. But most importantly, analyze your personal needs and only then decide which best suits you.
Next, learn about charges & penalties involved:
There are many charges involved with a property loan such as legal verification charges, stamp duty, processing fees, switching fees (in case you transfer your loan or change your EMI or interest type), defaulter penalties, etc. Before fixing on the loan, ask the lender for a written list of charges.
Next tip, take on an insurance plan:
In case of your untimely demise, disability, loss of job or some critical illness; an insurance policy will ensure your loved ones are safeguarded from the financial burden of the loan whilst also keeping the property in your name.
Last tip, make use of the tax benefits:
Ask your financial advisor about the tax benefits for property loans under section 80C and 10D of the Income Tax Act, 1961. These sections will help you get tax deductions from your annual income and give you a way to save a substantial amount of money!
These are just some pointers to help you smoothen your property loan journey! Speak with a financial advisor before fixing on a loan.All the best!