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Hello everyone and welcome to the ET Wealth Wisdom Podcast
I am Tania Jalil
For many people, buying a home means stretching finances to the limit.
In the latest ET Wealth edition, Sanket Dhanorkar writes about a four-point checklist one must use before taking on the financial burden of a home loan.
Use this checklist to ensure that your home loan does not become a noose
Is there an emergency fund?
Before you even start crunching the numbers, you need to make sure your foundation is in good shape.
Apart from creating an emergency financial buffer, you should also cover your family with term plans and medical insurance.
The emergency fund should be enough to cover all your expenses for the next 12 months. This should also factor in the new EMI commitments on the home loan.
It is to provide immediate financial assistance in case of loss of income due to job loss, accident or prolonged illness.
Having this buffer has proved imperative while repaying large home loans in the last 18 months.
Down payment too high?
Banks ask borrowers to deposit 20% of the value of the property in advance before agreeing to sanction the loan for the remaining amount.
However, you can put in a higher amount if you want.
For a property valued at Rs 90 lakh, the maximum loan sanctioned would be Rs 72 lakh, which means you pay Rs 18 lakh as down payment.
Additionally, you also need to pay a few lakhs towards Stamp Duty and GST – the latter only if going for an under-construction property.
Overall, this outlay is a princely sum for most.
Nevertheless, financial advisors usually suggest going for the maximum possible down payment.
The smaller loan component not only invites lower interest rates and reduces the EMI burden, it also lowers the overall interest expense and allows for faster repayment.
However, borrowers should not forfeit the entire accumulated savings into a down payment.
When considering how much savings you have available for a down payment, don’t forget your retirement and other important life goals.
Don’t take away the money set aside for these goals.
Also take into account any renovation or furnishing expenses for your new home.
Then, after the emergency fund cushion is provided, what’s left can be pledged into a down payment.
Also, a huge down payment will strain your liquidity, so plan accordingly.
How much will EMI cost?
Typically, a bank assumes that about 50% of your monthly disposable income is available for repayment.
No bank will give loan beyond this limit.
This includes your ongoing EMI commitments, if any.
But the lender’s internal EMI limit may not be realistic for everyone.
For example, if you earn Rs 1 lakh every month and spend Rs 60,000, the EMI of Rs 40,000 is not easily available.
You would be living face to face in such a scenario.
If you are buying an under construction property, you can pay the rent along with your EMI.
Make sure you can afford it, even if the bank is willing to give you a bigger loan.
It is okay to increase your budget to an extent – ​​as your income will increase but the EMI will not. But don’t go overboard.
A good way to deal with this problem is to assume that EMI becomes a reality from the very next day itself.
Some borrowers are easily sold on the tax benefits that home loans are allowed under income tax rules.
These deductions, which effectively reduce the cost of the loan over its lifetime, often lure borrowers into hefty EMI commitments.
But these benefits are available only to a certain extent.
When paying off the home loan with higher interest expense, the tax benefits are reduced.
A deduction of up to Rs 2 lakh per annum is allowed for interest payment of a housing loan to an individual.
If the 20 year home loan of Rs 75 lakh is repaid at 7% interest, the interest payable for several years will exceed Rs 2 lakh.
Even if one opts for joint home loan with spouse, where both husband and wife can claim a deduction of Rs 2 lakh annually, the deduction will be much more than the actual interest expense for the initial few years. decreases.
So do not increase the home loan EMI just for the sake of tax benefits.
Goals being compromised?
For many, there is no denying that taking home loan EMIs will temporarily put other financial goals on hold.
You can go many years without saving for your retirement or children’s higher studies.
But that doesn’t mean you should compromise on other goals.
If you can’t make provisions for contributions to other important life goals, try and prioritize among these goals.
Go after them selectively, with non-negotiable goals like higher education.
Alternatively, you can reduce the contribution for a period of time.
Over a few years, as your income grows to give you some breathing room, start contributing honestly towards other goals.
On that note, that’s all for this week.
Come back next week for more money knowledge