A Small home loan means buying a small house, but according to house buyers, a little home loan is big enough.
Is small beautiful when it comes to home loans? So, it seems going by the increase in the number of those opting for home loans of Rs 30,000 or below, going by the AY2019 figures of some banks, which they are yet to put out officially. Of course, buying a small home means borrowing less. But that is not the lone reason. Instead, there are many advantages behind this increasing trend. Not to speak about the Central government's push and incentives attached to those going for affordable housing.
The rising trend to go for smaller loans could be indicative of a preference to go for smaller houses /flats and a diminishing inclination for bigger/ premium houses and apartments. It is mainly the first-time homebuyers who are driving this trend. The message put out to the market is also small and simple: Firstly, economic slowdown is not going to deter average, middle-class and lower-middle-class segments from making their home dreams come true; secondly, these homebuyers are preferring a pragmatic approach and are opting for a home loan that will not leave a big hole in their pocket. And with switchover between banks and top-up loans now no more a big deal, there is reasoning in starting with small loans, securing a basic house and upgrading it based on your increasing needs and your growing salary. Also, going by the available and announced income tax slabs, it is better to have a home loan to avail deductions and save on your income tax.
Apart from the fact that a budget home is easier on your pocket, other assorted benefits could be playing out in the minds of home loan buyers. Be it the stamp duty, registration charges, and GST, everything will be on the lower side. And a smaller home means even your water bill and power bill will be smaller. The monthly maintenance costs, which are often linked to your carpet area, will be lower compared to bigger flats and apartments. However, the main factor is that lower the down payment more affordable your home loan is. All this means your expenses, in the long run, will remain low.
Salaried class to benefit: The salaried youth in their 20s will find more sense in taking an early, affordable home loan. Their income could be on the lower side now but would increase with every passing year. However, the EMI they are paying will remain the same. Added to it will be the rupee depreciation. While this helps one to pay off the home loan early and enjoy an EMI free, rent-free life, some also prefer to keep the EMI minimal and keep it going to avail income tax benefits.
According to expert take, one should not be spending more than one-third of your take-home salary on all of his/her EMIs, including insurance, property taxes, society/maintenance charges etc. Above the one-third limit means there is every likelihood of you defaulting on your EMI on home loan due to financial stress that could be there at one point or other of one's life. If the EMI on the home loan exceeds more than 35-40 per cent of a person's income, then he or she may have little or no money left for anything else. Building a college fund for the kids, replacing a worn-out car, going for a health cover, and even buying furniture for your home or paying the monthly bills. It could turn out to be a pretty crummy way to live that turns going for that home loan into a mistake you regret every day. The reason why financial experts always advise borrowers to maintain a low debt-to-income ratio wherein a person's loan EMI is not above less than one-third of his or her income.
LTV Factor: When it comes to going for a home loan, buyers generally tend to first look at their finances and then bridge the shortfall through a home loan. For instance, if one is looking for a home loan of Rs 20 lakh to buy a house /flat worth Rs 40 lakh, he will approach more than one banks or other financiers. If the first bank he approached is offering him Rs 20 lakh at an interest rate of nine per cent for a tenure of 20 years and the second bank is offering Rs 15 lakh at an interest rate of 8.5 per cent for the same 20-year tenure, he or she will be forced to go for the first one simply because it will meet his fund requirement. The second option means he will have to arrange for another Rs 5 lakh and just for that reason, his overall purchase transaction could collapse. This means that you end up paying higher LTV (loan-to-home) ratio for the simple reason that you were not able to mop up that amount to make the huge down payment. A higher LTV implies a greater loan amount and therefore, a higher EMI.
It's here that the one-third rule again comes into play, and why families might be scaling down their dreams and going for smaller homes and smaller housing loans. On smaller homes, one will be able to get a higher LTV ratio, which is the percentage of the total cost a bank is willing to finance. Often banks will lend up to 90 per cent for smaller loans, compared to 75 to 80 per cent on larger loans. This means your out of pocket expenses are kept at the minimal. The monthly maintenance costs and property tax and other charges, which are often linked to your carpet area, will be lower compared to a big flat or apartment and your long-term expenses will be under control and affordable.Another advantage that could be luring homebuyers towards smaller home loans could be the lower interest rates. For instance, the State Bank of India is now offering home loans at around 7.9 per cent on home loans below Rs 30 lakh. But the same could be above 8.55 per cent when it comes to home loans above Rs 75 lakh. The criteria for availing home loans will also be more relaxed when it comes to smaller home loans. It means the requirements you will have to meet for such home loans, like co-borrowers and loan guarantors, will be less tiresome when it comes to smaller home loans.
Subscribe to Moneycontrol Pro's Annual plan for Rs 399/- for the first year. Use coupon PRO2020 (Available on Web & Android only).