The perfect home loan strategy: A good foundation for an ideal home

It is not easy for the young generation to procure a home loan from a bank to be able to buy his or her dream home.

India’s real estate market is one of the fastest-growing sectors fuelling economic expansion. In India, homeownership symbolises financial independence, stability, and a foundation for the future.

This has led to a surge in demand for home loans, as financing has become very accessible. As per the Financial Stability Report by the Reserve Bank of India, retail loans expanded at a compounded annual growth rate of 25.5 percent from September 2021 to September 2023. Retail loans have fuelled credit growth, particularly due to a surge in demand for home loans.

The real estate market in the country has changed significantly, with a surge in young generations such as millennials and Gen Z actively looking to invest in properties. A recent Magicbricks report showed that young adults (millennials and Gen Z) accounted for over half (53 percent) of home loan demand. For millennials and Gen Z, owning a home represents self-reliance.

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However, the ever-evolving landscape of the Indian property market presents both challenges and opportunities for millennials and Gen Z who dream of owning a home. It is not easy for the young generation to procure a home loan from a bank.

The biggest reason for this is a weak credit score. This is largely because bills - namely credit cards - have not been paid on time. Perhaps overspending is the cause.

Even a few missed payments on credit cards can badly affect your credit score. A weak credit score results in either rejection of loan applications or the addition of a premium to the benchmark interest rate.

This is a typical example of the pitfalls associated with a poorly prepared strategy by someone applying for a home loan. To avoid such a situation, one needs to consider the following steps:

Due diligence

Finish all the verification processes and ensure that all the paperwork concerning the property is complete and accurate. Also, check for any outstanding litigation on the property or dues such as building society payments and electricity bills that could either potentially block the loan or increase the cost of purchase.

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Budgeting with precision

Track your income and expenses meticulously to identify areas for reduced impulsive spending. Budgeting apps or spreadsheets can help streamline this process and empower informed financial decisions.

Every rupee saved is a vital brick in your financial planning. It is advisable to keep some additional liquid cash to cater to sudden unexpected expenses. For instance, you might have to reduce your eating-out expenses and cancel one or two OTT app subscriptions.

Start to save early in your working career. This way, you will have time on your side and benefit from the power of compounding.

Debt management

Make sure you pay off your high-interest-bearing loans such as personal loans and credit card loans. Keep equated monthly instalments well within your comfort zone of repayment and make part prepayments whenever you have additional cash to accelerate the repayment of your loan.

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Homebuyer assistance

Numerous government programmes and lenders offer down-payment assistance specifically for first-time homebuyers. Researching these options can significantly reduce the upfront financial burden associated with homeownership.

Additionally, exploring creative strategies like co-living arrangements or renting out a spare room can accelerate down-payment savings.

Ideal location, loan size

Do not think of buying a palace-like house as your first home. Be modest, go for a moderately sized home for a reasonable price.

The objective of your first home loan is to make a down payment and regular equated monthly instalments. Explore affordable neighbourhoods that are easy on the pocket.

These options offer long-term value and the satisfaction of creating a personalised home. Consider areas with promising infrastructure development for added investment value.

With time, not only is the property value likely to improve, but it will become possible to foreclose the loan after a few years and sell the property to buy something that is your dream home.

End note

A strong credit score provides easier access to loans and favourable loan terms and interest rates. Make bill payments on time, maintain low credit card balances, and utilise free credit monitoring services to identify and rectify any errors.

Despite economic challenges, persistence, clarity, and a strategic financial approach can turn this dream into reality.

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Also, while it is always a good time to buy a property for self-use, buying it for investment and on loan is different.