Dev Ashish
You had been waiting for a long time to purchase your first house. For realizing your dream, you had also been saving regularly for the down-payment as well. And then, the year 2020 dawned upon all of us and it seemed as though nothing could go right for us all.
But now, there seems to be a silver lining. At least on one front. Home prices have been more or less stable for the last couple of years (or, if you are lucky, they may even have reduced a bit in some areas). And the icing on top of the welcome development is the fact that home loan rates are now at multi-year lows. Many home loans are being offered at sub-7 percent interest rates (of course, to borrowers with a good credit history).
Your dream house does seem to be within your reach.
Should you take the plunge?
To be fair, it is indeed a very good time to purchase a house using home loans if you look at it from the interest rate perspective. Just to give you a comparative idea of how interest rate reduction allows you to save money, here is the total interest paid for a Rs 50 lakh home loan over a period of 20 years:
-At 9 percent per annum: Total Interest paid Rs 58 lakh
-At 8 percent per annum: Total Interest paid Rs 50 lakh
-At 7 percent per annum: Total Interest paid Rs 43 lakh
So, no doubt, even just a one percentage point reduction in loan rate can mean a lot of savings for you. But let’s not forget that home loan rates are floating interest kinds and hence, when rates move up, the savings on total interest may be less.
Now let’s look at it from two different perspectives. First is your home loan affordability.
Generally, banks only lend to the extent that the sum total of all your monthly EMIs is less than 40 percent of your monthly income.
So, if you earn Rs 1.25 lakh a month, then you can only have Rs 50,000 in monthly EMIs, which is 40 percent of Rs 1.25 lakh. You may feel that you are capable of servicing a bigger EMI with the same salary, but if the lender doesn’t think so, then you need to stay within the 40 percent rule.
So, assuming you don’t have any other loan, you are allowed to have Rs 50,000 as home loan EMI. Now, how much home loan can you get for this EMI? Depends on the loan tenure, it would be as follows (assuming 8 percent interest rate):
-25-year loan tenure: Rs 64-65 lakh
-20-year loan tenure: Rs 59-60 lakh
-15-year loan tenure: Rs 52-53 lakh
Readying the down-payment
It is a sort of assurance that lenders want from you as part of the skin-in-the-game philosophy. So generally, you need to put in 20 percent of the cost as the down payment. That means that you will only get a loan of about 80 percent of the cost.
Extending our previous example, you earn Rs 1.25 lakh per month and plan to take a loan of Rs 50 lakh. To take a loan of Rs 50 lakh, it should form 80 percent of the cost of the house. That is, the cost will be Rs 62.5 lakh. And you need to bring in 12-13 lakh in down-payment.
So, if you don’t have Rs 12.5 lakh for down payment, the lenders won’t give you a loan of Rs 50 lakh. At least this is how the math of home loans work.
And if you are financially fit on all the above factors, then of course go ahead and make the purchase! It’s fair to say that loan rates are low enough and hence, it is justifiable if someone wants to make the purchase now by stretching things a bit.
Side note - Do not end up using all the savings you have for the house down payment. Always keep some money set aside for emergencies.
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