4 Ways to Handle the Burden of Your Home Loan

4 Ways to Handle the Burden of Your Home Loan

M_Id_422344_Home_loan_burdenThe decision has been made and you are on the verge of signing the dotted line for the home loan of your choice.

Very soon, you may move into the house of your dreams and begin to pay for it with a part of your savings and income every month.

Things may seem to be going well in the beginning, till you gradually realize there are several factors in terms of household expenses that you had not taken into consideration.

Expensive schools for the children, annual holidays to exotic locations, monthly entertainment and social life expenses, unanticipated medical or legal expenses and much more.

Suddenly the home loan is a much bigger burden than you anticipated.

This is a common scenario for many home loan borrowers. Often, people realize, a little too late that they may have bit off more than they can chew.

If you find yourself in a similar position or feel you may be headed that way, here are some tips to help you make a few better choices and adjustments to manage your home loan and other financial commitments better.

Before you take up a loan ask yourself these two questions:

  • How affordable is the EMI you are opting for? Double income families believe they can take on a higher EMI simply because they are eligible for it. Calculate monthly expenses and ensure that you can stick to your current lifestyle, while taking on the burden of the EMI.
  • Can you pay a bigger down payment? Banks grant loans on net pay and not on savings – this is a fact, many don’t take into account. It is important therefore to take on an EMI of a value that you are comfortable paying. Choose to pay a large down payment, even if it means holding on for a while till you save enough. If a larger down payment is not a possibility, consider a home that costs less.

After this, once you have signed up for a home loan and begin paying it, here are some tips that will help you manage your existing and potential financial commitments, along with your home loan.

  1. Reduce Extraneous Expenses: Create a ledger to analyze your monthly expenses apart from your home loan EMI. Note down every expense to help you understand where your income goes. From these details, you will be able to decipher where a reduction in expenses is possible. Do you eat expensive meals outside often? Is retail therapy something you indulge in often? Do you plan to take on another loan for a big ticket purchase? Cut down on unnecessary expenses and put away this money in an account to service your loan.
  2. Create a Home Loan Servicing Account: Managing your monthly expenses as well as your home loan from a single account can be tedious. You will easily lose track of where you money is going and will find yourself in a crunch often. Instead, you may choose to do what Mr. and Mrs. Rao did with their home loan.

Since a bank loan is provided on net pay of both applicants based on statements provided, they decided to split expenses clearly between their two accounts. Mr. Rao’s account, with the higher income, would service the home loan and other everyday expenses. Mrs. Rao’s account would then be used for savings and the creation of a contingency fund. This helped the couple prioritize and ensure that there was no confusion in terms of liabilities.

  1. Make Plans for an Emergency: The couple also decided on the creation of a corpus fund to finance any emergency. They did this by creating a fixed deposit account in the same bank that financed their loan. They also invested in home loan insurance for their loan. This is the kind of insurance that cover the family’s liability to pay EMIs should anything happen to the principal borrower(s). It ensures that all future EMIs will be paid and a family’s future is secure.
  2. Channel Income Wisely: Annual bonuses, sudden windfalls may make you a happy person. Don’t spend this money frivolously. Instead, stash it away to pay your home loan. Alternately, collect the amount and make a pre-payment on your home loan if you are eligible it. This will help bring down your EMI and consequently reduce the burden on your household expenses. Should you suddenly face a financial crisis, approach your bank for a step down EMI where you may reduce the amount payable for the duration of your crunch and then bring it back on track.

Working out your finances when taking on a home loan is about anticipating current and future needs. Having contingency funds to balance your finances is always a good idea.

Take-aways

  • Double income households tend to take on a larger EMI than they can handle, simply because they are eligible. Rethink this approach.
  • Pay a higher down payment and attempt to pre-pay parts of your loan where possible
  • Have separate accounts to finance the loan and your everyday expenses
  • Always have contingency funds in place to ensure household expenses are not disrupted when you pay a home loan
  • Invest in home loan insurance to safeguard your investment and your family
7 Ways to increase your Home Loan Eligibility

7 Ways to increase your Home Loan Eligibility

Tips to raise your Home Loan Eligibility No doubt, buying a home is a huge decision. There are several factors to take into consideration, many of them related to finance. Once you have made the decision to buy a home, you have to look into your eligibility for a home loan – and this is a crucial first step to actually financing your dream home.

Here are the important aspects banks look into when assessing your eligibility for a loan. Check where you fare on these and work towards improving your eligibility. It will mean the possibility of a higher loan amount:

  • Good credit score of 700 and above. This is mandatory to be eligible for a home loan. If you already have a good credit score, then working to enhance it will not help your position in any way.
  • Past loan repayment track record, if you have availed of one
  • Current number of Non-EMI related credit you may have pending. This includes credit cards, loan against gold and overdraft facilities utilized
  • Track record with you as guarantor for any loan taken by others

Tips to Increase your Home Loan Eligibility

Here are some ways to increase your eligibility. Some may sound familiar and others will have you wondering why you did not think of it before.

  1. Clear all Pre-Existing Loans: It is important that you start on a clean slate. If you have any outstanding loans, especially on your credit card, clear them. This will work towards enhancing your CIBIL credit score. Once you have no-dues certificates on hand, it takes around 30 to 45 days for banks to update information with CIBIL. Plan the clearing of your debts so that you have a good CIBIL score when you apply.
  2. Check for Employer-Bank Relations: If your employer has a tie-up with a bank, usually for salary accounts, chances are you may be able to secure a lower rate of interest. This lower rate naturally increases your eligibility. Check with your employer on whether this is a benefit you may avail of.
  3. Consider a Step-up Loan: Eligibility increases in this kind of a loan. The basic premise is that you pay a lower EMI to begin with and this goes progressively higher into the tenure of your loan. If you are sure of your financial status going forward, this may be an easy way to secure a home loan.
  4. Consider Longer Tenures: Higher EMIs increases liability and brings down eligibility. If you opt for a longer tenure of loan, chances are you’re the strict norms for eligibility are also relaxed. This may be a good way of increasing your eligibility.
  5. Pool in Additional Income: If you have other sources of income such as high-yielding fixed deposits or rentals from properties that you own, these may be used to show a higher, steady income, thus increasing your eligibility.
  6. Apply with Your Spouse or Parents: Much in the same manner as the earlier point, you may consider applying for a loan along with your spouse. Pooling in your income enhances your eligibility to a large extent. The age of an applicant makes a small difference. Those in their late 20s and early 30s are preferred considering a home loan is a long term engagement. You may want to apply with your parents for a better chance.
  7. Include Bonuses and Perks: Many employers offer a range of monetary perks to their employees. Do be sure to include all of these when making out your application. This can go towards enhancing your eligibility.

Take-Aways

  • Work on improving your CIBIL score if it is below 700, as this will help enhance your eligibility for a home loan.
  • Look into your financial track record to understand your position
  • Explore avenues such as longer tenures, employer-bank relations and the inclusion of other means of income, when looking to enhance your eligibility.
Considering an NRI home loan? Bear These 5 Crucial Points In Mind

Considering an NRI home loan? Bear These 5 Crucial Points In Mind

NRI Home LoanAs a Non Resident Indian (NRI), you have migrated to a foreign country in search of better job prospects. Over the years, you may have earned enough to consider buying a home in your own country. Naturally your first step is to look for the appropriate NRI Home Loan in India. It is important to know and understand your eligibility, the kind of loan you may get and the repayment schedule involved. We will tell you all you need to know.

1. What Kind of Property Loans Can You Opt for?

As an NRI looking to invest in property in India, you can consider applying for a loan for the following kinds of homes:

  • A ready to move in property
  • Property under construction
  • Property to be constructed on a plot of land already owned
  • Upgrading a currently existing property

2. What Loan Amount Can You Look Forward to?

There are a couple of considerations based on which the loan amount provided is decided upon:

  • The educational qualifications of the loan seeker. Being a graduate or higher in terms of qualifications will allow an NRI applicant to be eligible for a loan.
  • The income of the NRI applicant. Here the Gross Monthly Income (GMI) is taken into consideration. In some cases, a comparison is made between the prospective Equated Monthly Installment (EMI) and the Net Monthly Income (NMI) of an individual.
  • Most banks have a few additional criteria based on job profile, country of residence etc. these are factors that you will have to research based on your individual case.

3. Loan Tenure and Rate of Interest:

NRIs may avail a home loan only for a restricted period of 5 to 15 years. In comparison, an Indian resident may apply for a loan with tenure up to 30 year. Any extension is based on the discretion of the bank. The margin of interest is also higher for an NRI loan and is usually around 0.25% to 0.50% more on the regular rates charged.

4. Documentation Requirements

The documentation for an NRI applicant is slightly different from that of a resident and may include the following:

  • Copies of passport
  • Valid work visa and permit
  • Employment contract
  • Work experience certification
  • Salary slips
  • Bank statements of NRE or NRO accounts
  • Applicant from the Middle East have to include employment card copies

Most banks have overseas branches in several countries and you are likely to find one close to you for submission of your documents. For a few other banks, you will even be able to make your submission online. You could also consider giving a local resident a Power of Attorney to help facilitate the process.

5. Loan Repayment

When you apply for a loan as an NRI, you will be able to repay it only from Non-Resident External (NRE) or Non-resident Ordinary (NRO) account. All repayment will have to be done in Indian currency.

During the course of repayment should your status change back to that of an Indian resident, the loan amount, tenure and interest rate will be reworked to fit your new status.

Though the process is relatively hassle-free, do note that every bank may have a few requirements that vary from the norm. It is advisable to chalk out things in advance, make essential enquiries and have the documents ready. It is best that you consult the bank that you plan to approach and have your documentation in place accordingly.

Summary

  • An NRI may apply for a home loan in India based on certain criteria
  • The tenure is lower than that provided to a resident and the rate of interest marginally higher
  • The loan may be repaid only through a NRE/NRO account in Indian rupees
  • Should the status of an NRI change to a resident, the loan will be reworked to match the new status

 

Repo Rate Revision to Make Home Loans Cheaper for Consumers

Repo Rate Revision to Make Home Loans Cheaper for Consumers

Home loan repo rate

Home loan repo rate

Earlier in January, when the Reserve Bank of India (RBI) announced a cut in the repo rate (rate at which the RBI lends money to commercial banks) by 0.25%, my friend was ecstatic. Looking to invest in a home in the coming fiscal year, he was excited to learn about the possibility of a lower interest rate on his home loan.

Last Wednesday, when the RBI announced repo rate revision by 0.25% basis points (BP) under the liquidity adjustment facility, it brought down interest rates from 7.75% to 7.5%. Now things look much better. Of course, he wanted to understand what this meant for him as a prospective home buyer.

Based on my discussions with Priya Sunder, co-founder of the award-winning wealth management company, PeakAlpha, this was the picture I was able to give my friend:

  • A reduction in repo rate technically means that banks are able to borrow at a lower rate and therefore in turn bring down interest rates at which they lend.
  • One thing that needs to be understood is the fact that reduction in repo rate takes a while to come into effect. This happens at 2 levels – home loan interest rate and deposit in bank interest rate. Banks may choose to implement the rate cut simultaneously on both products or only on a single one. It may take up to three months for it to feature in banks.
  • The reduction of repo rate by 0.25% basis points will not really make a difference to an individual and their loan rate right now, but it is significant in terms of things to come in the economy. This may be seen from the fact that there is already a second revision in rates and that too before the scheduled policy review meetings of the RBI.
  • For a person with a Rs. 10 lakh home loan, it simply means that there is a reduction of Rs. 150 on the EMI which may work out to Rs. 2000 a year in savings.
  • Considering all the market indicators right now, with inflation being under tight control, this double reduction in repo rates is definitely an indicator of better things to come.

With the cost of financing going down, the benefits will percolate down to the general consumer, allowing people like my friend to consider buying a home now.

Takeaways

  • Revision in repo rates means that home loans become cheaper to the prospective home buyer in terms of interest rates.
  • This may make a significant different to those with a larger home loan of Rs. 50 lakh and above.