Must Knows

Does it make sense to apply for a high loan amount?

[ecis2016.org] Banks offer up to 80% of the property value as home loan. Should you exhaust the upper limit when applying for a loan?

With housing finance, one need not wait to complete a large part of one’s working life, to save up for a property purchase. A home buyer can simply save up for a part of the home’ cost and get the remaining amount as credit from banks. Moreover, home loans are much cheaper than other loans and the buyer can also avail of tax benefits on the principal and interest payment.

You are reading: Does it make sense to apply for a high loan amount?

Positive as it is, this thinking could also encourage borrowers to exhaust the upper limit of their loan amount. If the bank has a loan-to-value ratio (LTV ratio) of 80%, this means that the borrower will be willing to loan 80% of the property’s cost as loan.

Does it make sense to apply for a high loan amount?

Should you use your savings to minimise the loan amount?

Read also : What is an E invoice and why is it important in 2022?

When you spend most of your savings to purchase the house, you are basically using up all your liquidity on an immovable asset. Even though there is no undermining the merits of realty investments, they do happen to be illiquid in character. So, if you need any cash or liquidity in future for personal use, you may be in a difficult position, in the absence of any ready liquidity. This scenario may force you to either seek help from family, friends or relatives or seek personal loans.

Money sought from family will have to be repaid along with the housing EMI. This may cause monetary stress. This stress will be much worse if you take a personal loan to meet the monetary emergency, considering that personal loans come with up to 20% annual interest.

Should you avail of a high home loan amount?

There are various disadvantages of exhausting the upper limit on your home loan amount.

Cost: Firstly, a high loan amount will increase the overall cost of the purchase. Although interest rates are comparatively cheaper for housing loans, the buyer will eventually pay up double of the borrowed capital.

Read also : All about Debt

Also read: Home loan interest rates and EMI in top 15 banks

EMI: A high home loan will also invite a heavier EMI. Financial planners advise against spending more than 40% of your take-home salary as home loan EMI.

Future needs: In case you plan to buy another home in future, the amount sanctioned as a home loan that time would be much lower, considering that you are already servicing a huge loan. The same applies to credit of any kind.

FAQs

How much home loan can a buyer get?

Banks generally offer 80% of the property value as home loan. It is the bank and not the sale amount that decides the property value, based on which the loan amount is decided.

What is LTV?

Loan to value (LTV) ratio is the percentage of the property value that the bank will be willing to provide you as home loan. It is the proportion of the property value that a bank can finance.

Can I get 100% property value as a home loan?

Banks do not issue loans beyond 90% of the property worth in any case. 90% home loan is also issued only for purchase of homes costing up to Rs 30 lakhs, to promote affordable housing.

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Source: https://ecis2016.org
Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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