When is the right time to take a home loan?
Feb 28, 2014
Source : The Times of India


PUNE: Due to the on-going economic uncertainties, many aspiring home owners in Pune are hesitant about taking a home loan. One of the concerns is whether it makes more sense to rent now and await a price correction.

For those thinking of renting a home in Pune, there are many aspects to consider. In the first place, the affordability of both rental and purchased property is highly location and project specific. To illustrate – someone in Pune who can afford to buy a home in Undri may not even be able to afford the rentals at Boat Club Road, Koregaon Park or Kalyaninagar.

Secondly, whether it makes more sense to rent rather than buy a property would also depend on one’s future plans in a particular locality. Does one wish to settle down there or is one also open to other areas? It definitely makes sense to rent a home while one is making up one’s mind about a particular locality.

If an individual is certain of a locality in Pune and is committed to settling down there, the right time to buy a home is now. There are many projects available in the new residential areas that have come up in Pune and the prices are still competitive. There will not be a correction in real estate prices in Pune, as there is healthy demand for residential properties in the city.

The watch-and-wait policy is only valid if there are reasons for anticipating a correction in a certain locality. On the whole, property rates in Pune will either remain stable or appreciate, depending on the area. Also, there are no prospects of home loan interest rates rationalizing over the mid-term. Economic indicators suggest that inflation will continue to drive up costs.

Given that it is the right time to avail a home loan and purchase property in Pune, one still needs to consider the financial implications. As a thumb rule, an individual’s home loan EMI should not exceed a rational percentage of his or her net monthly disposable income. Generally, EMIs can amount to 50 per cent of monthly income.

However, home loans are not the only cause of debt in the contemporary context. People take personal loans and have pre-existing debts too. In other words, even a ‘fair’ EMI percentage could prove unaffordable. The ‘ideal’ EMI component can only be calculated vis-à-vis a debt-free person’s salary. This would be between Rs 1,000-1,200 per lakh.

People availing home loans sometimes forget that they are under legal obligation to repay. There are numerous cases where borrowers have neglected to undertake a due diligence with regard to their financial capabilities and the suitability of the loan of which they have availed. As a result, they find themselves in debt traps and sometimes default on their repayments. Borrowers should stretch themselves only to the extent that they realistically foresee their financial position improving in a given time frame.

No home loan strategy should ever be based on anticipated financial windfalls as a means to pay off the loan. It should be based on realistic factors such as reasonable salary hikes and maturing insurance policies and investments. If one anticipates a salary hike, even if this amounts to only a certain annual increase, one can consider a ‘step-up’ option for the existing home loan. Here, the borrower pays a lower EMI initially and steps up the repayment of the home loan in proportion to the assumed percentage increase in income.

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