One of the first things, as a couple, you want is your own space. Certified financial planner Saurabh Mittal points out the key things to consider when you’re planning to buy your first home
Buying a home is one of the most important milestones in one’s life. There are so many factors that may affect one’s decision. Right from the location to the size of the property; people deliberate on all the options and want to be doubly sure to make the right decisions. Here’s what you need to know:
How much can you afford?
Ideally if you are looking for a loan to buy a property, you need to arrange for margin or down payment. Typically, banks lend maximum up to 80 per cent of the property value, so you should have a ready arrangement to make the balance payment. There are many EMI calculators available on the net; your EMI should ideally not be more than 30 per cent of your monthly income; however, depending on various factors, banks may lend you an amount with EMI up to 60 per cent of your income.
Once you have finalised the property, the next step is to be sure about the paperwork. Banks do their due diligence of property paperwork before granting a loan, but it makes sense to keep a check on property papers and bank agreements yourself. Take advice from a good property lawyer and get the papers audited by him before taking the plunge. Bank agreements have many clauses and it is beneficial to understand them. You should know all the terms and conditions right from processing fees to any other charges.
Fixed or Floating
Loans are available at a rate of interest fixed for the entire tenure of the loan or at the floating rate. It is advisable to take a floating rate of interest; you’ll benefit as and when interest rates go down. An important thing to remember is that floating rate of interest is derived by adding a margin to ‘base rate’ of the bank; make sure that this margin is fixed throughout the tenure of the loan. Base rate is the minimum rate of interest that a bank is allowed to charge from its customers, you can compare the historic data of various banks to know which bank has been offering favourable rates in the past.
What kind of loan?
It’s important to go for an overdraft (OD) kind of loan, rather than a plain home loan. Lots of banks are offering this facility. In an OD account, the EMI is charged to the account and you have to keep crediting the account for the payment. The advantage is that here you can make good use of the liquid money you have. Instead of keeping your money in a normal saving account where you cannot earn more than 4-6 per cent of taxable interest, money lying in this account will save you the interest charged to you at the rate of 8-10 per cent.
Which institution to take loan from?
The first natural choice is to approach your routine bank. But it is advisable to approach PSU banks for the loan. PSUs may not be as efficient as private banks, but they have favourable terms and conditions. Also avoid non-bank financial companies as they would not be able to provide OD facility.
While taking a loan, what also comes along is a proposal to buy a life insurance through the lender. Please remember that there is no compulsion on your part to buy this insurance. Read all the terms and conditions thoroughly and compare it with the other available products in the market. Chances are high that you would get a better term insurance outside.
There are several tax benefits available on taking a home loan. Interest paid up to Rs 1,50,000 is deductible from taxable Income U/S 24(b). Principal repayment is deductible up to Rs 1,00,000 U/S 80C. These can be accounted for while planning for the EMI cash flow.
(The writer is also the founder partner of Circle Wealth Advisors, Mumbai)