Adding your working spouse or children as co-applicant(s) is the best way to improve your loan eligibility.
Availing a home loan can be as strenuous as find your dream home. And things become much more difficult if the applicant is a retiree. Although some banks have come up with special loan products for retirees and pensioners, most lenders avoid lending to senior citizens due to the inherent risks.
Let’s first start with the two major obstacles faced by retired home loan applicants.
Lower EMI affordability: As with any loan, your income would be the most important factor to evaluate your home loan application. Generally, lenders prefer to lend to those whose fixed monthly obligations including their daily expenditures, house rent, existing EMIs and EMI of their new home loan do not exceed 40–50 percent of their monthly income. As your pension income would just be a small factor of your last drawn salary, the chances of home loan approval for retirees become very slim.
Shorter tenure: Most banks and housing finance companies (HFCs) want their borrowers to repay their home loans by the time they turn 70. Those offering special home loans products for retirees may extend it to the age of 75 years. Thus, the maximum loan tenure would range between 10 to 15 years. The shorter tenure would result in increased EMI, thereby further decreasing your EMI affordability and chances of loan approval.
Here are some tips on improving the chances of your home loan approval.
Add co-applicants to increase your home loan eligibility: Adding your working spouse or children as co-applicant(s) is the best way to improve your loan eligibility. The addition of co-applicant(s) will not only add their monthly income to yours, they would be equally held responsible for the repayment of the loan. These make lenders much more comfortable. Addition of a co-applicant may also help you avail a loan with a longer tenure.
The addition of co-applicant(s) is beneficial on the taxation front too. Each co-applicant can claim income tax deductions for principal and interest repayments under Section 80C and Section 24, respectively. However, the co-applicants have to be the co-owners of the property to avail those benefits. The actual tax benefit of each co-applicant will also depend on the ratio of their contribution to loan repayments.
Avoid multiple applications to conserve your credit score: Your credit score plays an important role in your loan approval process and even increasingly, the interest rate setting process. Avoid loan applications with multiple lenders as this would bring down your credit score. Every time you apply with a lender, the lender will raise a hard enquiry with the credit bureaus, which would then reduce your credit score. With multiple loan applications, there will be multiple hard enquires which may result in a steep reduction of your credit score.
Instead of directly applying with lenders, visit online marketplaces for loans to compare various home loan offers. As the loan enquiries raised through these marketplaces are considered as soft enquiries, they do not reduce your credit score.
Use your high-yield investments as collaterals: The disadvantage of your age can be offset by using your existing high-yield investments or a part of it as collaterals. Doing so increases your home loan eligibility as the lender will have something to fall back apart from the value of your property. Consider your investments in equities or equity mutual funds for such purposes as their returns are generally much higher than the interest charged on home loans.
Opt for lower loan-to-value (LTV) ratio: This ratio describes the proportion of your property value that would be financed by the lender. For example, if the value of your property is Rs 40 lakh and the lender agrees for an LTV ratio of 80%, then your loan amount would be Rs 32 lakh while the rest Rs 8 lakh would be have to be arranged by you. As lower loan tenure would have already reduced your home loan eligibility, opting for a lower LTV ratio would reduce your EMI obligation and therefore, increase your loan eligibility.
Choose the interest rate type according to your interest rate outlook: As far as interest rate types are concerned, home loans come in three varieties — floating, fixed and variable interest rate. Currently, very few lenders offer the fixed rate option. Opt for the fixed interest variety if home loan rates are expected to rise in future. Conversely, opt for the floating rate if the rates are expected to go down in future. Additionally, floating rate home loans will also allow you to prepay your outstanding without paying any prepayment penalties.(The writer is CEO& Co-founder of Paisabazaar.com)