When should you apply for a home loan?

[ecis2016.org] Mentioned in this article are things to be considered that will help you decide when to apply for a home loan

Your financial health is the biggest deciding factor, when investing in a property. In addition to the cost of the property, there are other fringe costs that you have to bear, including the stamp duty and registration charges. Your finances also will determine other factors like location of the property, its configuration, amenities and developer. While using a portion of your savings towards your real estate investment makes sense, it also makes sense to apply for a home loan to maintain your overall financial health. After all, diversification of funds is important for your overall financial growth and you should not take the risk of investing all your savings in one asset class.

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However, when should you apply for a home loan? The timing matters, as it can impact your financial growth or completely damage it. While getting a home loan today is not a difficult task, with banks, housing finance companies (HFCs) and non-banking finance companies (NBFCs) offering home loans, you have to decide when to apply for a home loan.

Often, people seek clarity on the factors that determine when you should apply for a home loan. Mentioned below are instances when you can apply for a home loan, so that you get the desired financial help at the right time and can go ahead with your property investment.

Apply for home loan when you have no other existing loans/credit card repayment

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When you have no other existing loans to service, that is when you should apply for a home loan. If you are servicing existing loans in the form of personal loans, education loans, vehicle loans or credit card repayments, there will be an increased responsibility on you towards paying the home loan. Also, the loan amount that you will be sanctioned, will be lower as compared to what you can get at other times, only because you have more loans to service. With multiple loans at the same time, financial institutions would question your financial status and end up giving a smaller loan amount at a higher interest rate. On the other hand, you should apply for a home loan when you have repaid all your other loans. By doing so, your credit score will be high and the same will help you to avail of a bigger home loan amount at lower interest rates.

Apply for home loan when you have adequate savings for a down payment

You should apply for a home loan after you have accumulated wealth in the form of savings for paying the required down payment on a property. When you apply for a home loan, the maximum loan to value ratio (LTV) of the property is 90%. The amount sanctioned, will depend on various factors including your salary, eligibility and credit score. So, the difference is what you will have to pay as a down payment, which can be 10% or more, depending on the loan amount sanctioned. If you have enough savings to easily pay the down payment, then, it is the right time to apply for a home loan. It is a financial mistake if you are considering taking a personal loan to pay the down payment, as this will only increase your debt. Additionally, if you pay a higher amount as a down payment, you may need to take a smaller home loan, thus, reducing your dependency on loans.

For example, for a property worth Rs 1 crore, the bank sanctions a maximum home loan of Rs 80 lakhs. The down payment required is Rs 20 lakhs. In this example, if the interest rate is 7% per annum for 20 years tenure, the EMI works out to Rs 62,024 per month. Here you can choose to avail the full sanctioned amount of Rs 80 lakhs as a loan or a more prudent approach would be to reduce the EMI burden by stretching the down payment component to Rs 30 lakhs. The EMI then, will effectively reduce to Rs 54,271.

Apply for home loan when you have long work experience with a good pay package

You should apply for a home loan only when you can service the EMI on time and this can be done if you have a good pay package. You will be eligible for a higher home loan value if your number of years of service and monthly salary is on the higher side. Always remember that the EMI you pay should never be more than 40% of your monthly income. Anything higher than that is a recipe for financial disaster. If the financial calculation fits this golden rule, you can apply for a home loan. However, if it does not fit and you think a home loan is what you need at the moment, then, opt for a smaller home loan so that the EMI is under 40% of your monthly income.

For example, if Rs 1 lakh is your take-home salary, contain your EMI within Rs 40,000 per month.

An effective way to increase the loan amount without the EMI pinching your pocket is to utilise the maximum available tenure. This is especially applicable for youngsters who have a considerable amount of time left till their retirement.

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Apply for home loan when interest rates are low

Property investments are very enticing these days, owing to the low-interest rates offered by banks, HFCs and NBFCs. It automatically reduces your EMI, thereby, reducing a great deal of your financial burden. While applying for a home loan, you can choose either a fixed rate of interest or a floating rate of interest. In a fixed rate of interest, the interest rate remains the same throughout the tenure and you can calculate your EMI for the month accordingly. This way, if you are comfortable with the EMI outflow within your monthly salary, you can apply for a home loan. Alternatively, in a floating rate of interest, the interest will keep fluctuating according to market conditions. While it may go down sometimes, there are chances that it may go up, as well. Considering today’s situation of low-interest rates and the expectations that RBI may hike key benchmark interest rates as our economy emerges from the COVID-19 pandemic, these hikes can lead to a higher EMI burden over the tenure of a home loan. So, calculate your EMI and give sufficient cushioning against market fluctuations as per the floating rate of interest, before you apply for a home loan. As far as the choice of fixed vs floating rate of interest is concerned, most borrowers opt for floating rate loans as the interest rates are considerably lower.

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Apply for home loan when the due diligence is done

It is always a good idea to apply for a home loan while investing in any property, because, before disbursing the home loan, the financial institution carries out its own due diligence. So, in case there are any issues with the project that you may have missed or were not notified about, the financial institution may reject the home loan. Thus, it acts as a safety net for your investment.

Choosing when should you apply for a home loan is very important, because a home loan tenure is around 20-30 years and that amounts to a significant period of your lifetime.

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