Home buying is often a once in a lifetime transaction and it is one of the more significant investments we make. Most of the home owners in India would fund their home purchase by opting for any one of the many home loan products currently available in the market. The post-liberalized Indian economy home loans have become the preferred route to fund your home. In the erstwhile era, most home purchases would happen at the end of an individual’s work life, funded by savings or retirement benefits. This situation is now largely reversed with the profile of home buyers changing drastically.
Home buyers today are as young as even 27-28 year old who are happy to make a long term financial commitment backed by a favourable home loan. This allows them to settle down early in life, in the comfort of their own home. Before you sign off on the home loan term sheet there are a few factors that must be diligently considered.
Firstly, as stated above buying home is a long term financial commitment. It locks up your funds or EMIs for 15 to 20 year periods. You must be absolutely sure of being able to service the loan. This also means that in most cases you will not be able to make further financial outlay for any other big ticket expenses while servicing your loan without considerable duress on your income & expenses.
Home loans come in either fixed or floating interest rate options. Fixed rate home loans give you the comfort of knowing exactly what you’re EMIs would be for the period of the loan. This means that you are secure from unexpected interest rate hikes but will also miss out on any benefits of an interest downtrend. Floating interest rates however look to fluctuate based on the prevailing interest regime. There is also a mixed rate option, wherein you fix the interest rate for the first few years and then move to a floating structure later on.
The term of your home loan is also a vital component for you to consider. A longer duration loan might reduce your monthly EMI commitment but increases the term of your liability. You’re constrained under the EMIs for a lot long than you’d wish to be. On the other hand a shorter duration loan would free up your commitment earlier but places higher strain on your monthly income. The key is to find that balance that will allow both short term liquidity and long term viability.
Understand your income growth and projections over the longer term to understand the implications of having a home loan to service. Consistent growth in income levels is a prerequisite to being able to attain and service a home loan.